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Income Inequality and the Death of Trickledown

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By Hugh, who is a long-time commenter at Naked Capitalism. Originally published at Corrente.

On September 12, 2012, the Census issued its report on Income, Poverty, and Healthcare Coverage in the United States: 2011. While the full report has some nice charts, one that was conspicuously missing was on income inequality. The data for such a chart was in the tables, and so I was able to construct the chart above from them. Mean household (not individual) income for each quintile (20%) is expressed in real (inflation-adjusted) dollars.

One feature that jumps out at you are how relatively flat mean income has been for the bottom 80% over the last 45 years and how much it has grown for the top 20%, from an already high baseline. I thought this merited some further investigation.

If you look at the far left, in 1967, the income difference between the quintiles of the bottom 80% was remarkably similar, less than $17,000 between each group ($16,679 between the 1st (lowest quintile) and 2nd; $15,572 between the 2nd and 3rd; and $16,631 between the 3rd and 4th). But even in 1967, we see significant income disparity ($46,619) between the 4th and 5th (top) quintile. The top 20% have an income difference nearly 3 times as great as the other quintiles.

In the succeeding decades, difference between the 4 lower quintiles showed some moderate spreading. For 2011, they are $17,965 from 1st to 2nd; $20,638 from 2nd to 3rd; $30,238 from 3rd to 4th; and $97,940 from 4th to highest 5th). What we see in this is a movement of the top 20% from around 3 times the initial 1967 spreads between quintiles (~$17,000) to something over 5 times them ($97,940).

What is interesting is that the mean income of the top 20% increased $73,100 from 1967 to 2011. About $20,000 of this increase occurred during the Reagan years, but what often gets overlooked is that about $43,000 of it happened during the Clinton years.

Because the first 4 quintiles are so flat, it is worthwhile to look at their averages over the 45 years of data.

For the bottom 20%, their average mean income was $11,618.
For the second 20%, it was $29,425.
For the third 20%, it was $48,938.
For the fourth 20%, it was $74,183.
For the highest fifth 20%, it was $146,693.

Now compare these to the 2011 mean income numbers.

For the bottom 20%, it was $11,239.
For the second 20%, it was $29,204.
For the third 20%, it was $49,842.
For the fourth 20%, it was $80,080.
For the highest fifth 20%, it was $178,020.

The lowest 40% are essentially unchanged, actually slightly worse, than their 45 year average. The middle 20% is also not much changed, but slightly better than its average.
The fourth quintile is doing modestly better, about a $6,000 increase.
The highest 20% is doing about $31,000 better than its average.

You can see this effect in the chart where dramatic rises in the income of the top 20% are reflected in smaller and smaller rises as we go down from one quintile to the next until we arrive at the bottom 20% where there is almost no change at all.

If you think about it, this chart completely refutes trickledown economics. As I said, the periods of greatest income growth in the top 20% correspond to the Reagan and Clinton Administrations. But what we see is that great increases in income at the top have only modest effects on the incomes of the nearest quintiles and have almost no effect at all on the lowest quintiles. That is very little trickles down, and almost nothing trickles down to the bottom.

The chart shows in easy accessible terms much of what we already knew. Wages have been flat for most of us our whole working lives even as the rich have been making out like bandits. But it also shows that theory so near and dear to neoliberals: trickledown aka supply side economics aka Reaganomics aka “job creators” doesn’t work, has never worked.

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39 comments

  1. Nell

    Interesting juxtaposition between the conclusions of this article – supply side economimic aka job creators doesn’t work for the majority – and the conclusion of the DOJ article – we don’t prosecute because to do so would jeopardize jobs.

    1. indio007

      Funny how that works aye?
      With all these deferred prosecutions we should be awash in jobs.

      With all the tax cuts we should have serious pressure in the form of not having enough workers to the point we would have to expanded work visas.

  2. Ruben

    Another observation from your chart is that the top quintile has flatened out after 2000. This probably reflects the fact that inside the top quintile, top earners have a much higher rate of increase than the other earners but they are less and less numerous so the whole quintile is dragged down but the more numerous lower earners of the top quintile. There might be a kind of fractality in that no matter how much you zoom in inside the top quintile, top decile, top centile, and so on, you still find the same picture that we are observing on the whole population. It is also interesting to think of the limit of this process.

    1. Jim A.

      ISTR that I’ve seen other charts that illustrate the continuing rise of the top percentile, or even .1%(millile?), but they didn’t cover as long a period of time. Reagan and Carter? I wonder what role the high inflation rates of the time had in the growth of the top quintile.

  3. David Lentini

    All very true. But the rich had only to get the public to buy the argument once. Now they don’t have to care anymore.

  4. run75441

    Lambert:

    Taking the upper 20% and comparing it to the rest of the Household Wage Earners, I believe only mutes the real picture. Someone making $100,000/year is most certainly middle income and not amongst those who have enjoyed the full impact of the 2001/2003 tax breaks. You need another couple of charts (similar to the Tax Policy Center) which shows those making >$500,000 AGI and those making >$1,000,000. Not a complaint by any means; but everyone looks to making $100,000 as being rich in income when it is not.

    1. chris

      Doesn’t your point require defining what “poor” is before your point has any palpable meaning? A family of 4 making $25,000 is considered (by both political parties) as “not poor” i. e. middle class – and if that’s true than putting the guy who makes $100,000 in the category of “not rich” looks suspect to me. I don’t entirely disagree with your point but I tire of income categorizations that refuse to consider the lower extremes while defining down the upper ones.

    2. Carla

      So maybe the bottom two quintiles are poor, the middle two quintiles are middle class (how neat–the middle class is in the MIDDLE!) and the top twenty percent is, like it not, comparatively speaking, rich. This is the point where those who are financially “comfortable” become socially very uncomfortable.

      Or we could parse this further and say that the bottom 20% are poor, the next 20% are lower middle class, the third 20% are middle class, the next 20% are upper middle class and guess what? The top 20% still winds up being wealthy, or rich, or well-heeled.

      What they should be, at the very least, is grateful.

  5. patricia

    Thanks! How about individual income? “Household income” in the 60s was usually 1 wage earner whereas now they often include 2. How much is this offset by the fact that many households are now single-parent? And has anyone calculated the additional costs associated with single-parent householding?

    Also, has there been any work-up re households with adult children?

  6. jake chase

    All this focus on income gives a very distorted picture of inequality. Wealth is what really matters. Although statistics are difficult to develop, roughly 95% of the wealth is owned by 10% of the population, and more than 50% of the wealth is owned by the top 0.5%. Getting rich means accumulating wealth. It is achieved largely by monopolization, looting and speculation, and it is maintained by usury, monopolization and looting. A large majority of those included in your top quintile are chumps whose income is plundered by taxation, debt, divorce and largely futile efforts to maintain a luxury lifestyle. Most of their incomes depend upon toadying to the truly rich and their corporate fiefdoms, and the desperation of their existence is not enviable even though they appear willing to do nearly anything to maintain it.

    1. Mickey Marzick in Akron, Ohio

      And most of that wealth is inherited!

      Equally important is the “insider information” for those already in the club which becomes a perpetual motion money-making machine. Yes, there are isolated instances of where their progeny often blow through their “inheritance” but the vast majority do not as their money is set up in trusts managed by the aspiring wanna-bees from the ranks of the middle classes who work for well established money management firms. But even then it takes a generation or two for the parvenus – new rich, recently arrived – to become a true blue-blood with the “proper” education [elite] and social connections.

      Mitt Romney is not typical in this regard. While he started off at the 50 yard line, he doubled down on trickle down – LBO – to make more. But does anyone believe the contacts afforded Mitt at Harvard and later at BCG [Boston Consulting Group] had nothing to do with it? And lest I be accused of partisanship let’s not forget the Kennedys… Rockefellers.

      This is an aristocracy in every sense of the word riddled with different factions whose views largely control the political agenda in this country. INCOME therefore depicts earnings over time but as Jake points out NOT the accumulated results of those earnings – both monetary and social – WEALTH – with which power is accumulated and wielded.

      Without any restrictions on inheritance, the notion of equal opportunity is problematic, or at minimum, a two or three-tiered layer cake depending on where one begins his/her race for the gold.

      Hats off to Hugh for taking the time to compile this table and show that incomes under Clinton actually increased for the upper 20%. I suspect this had more to do with policies already in place – policy lag effect – coming to fruition more than Slick Willie’s political acumen. But to pretend that NAFTA and the repeal of Glass-Steagall did not exacerbate this income gap is wishful thinking. Funny thing, didn’t hear any mention of either by the former President at the convention, wonder why?

      1. Bert_S

        Inherited wealth is more important than most realize. I read an article recently that claimed for someone to be in the 1% based on net worth (not income)you need to have $6 million by the age of 40!

        Now 1% is roughly 3 million bodies in the US. But there is almost no one in the working world that can accumulate $6 million by age 40. Sports stars, entertainment stars, wall street types, the occasional entrepreneur that goes public, and maybe a CEO that was on the very fast track and that’s about it.

        But my gut tells me that doesn’t add up to anywhere near 3 million Americans.

        1. Bert_S

          Just realized I mixed up households and per capita. I’m sure the article was referring to households, and my 3 million is per capita. So maybe it’s more like 1.5 million households. But still…

    2. Hugh

      I agree with you about wealth. Inheritance, luck, and/or the cumulative effect of income over time are what counts. But we also talk about decades of flat wages and the chart chronicles this. It also shows the failure of trickledown in that the top 20% are the investment and supposedly job creating class, but as their incomes (and by inference wealth) have gone up, these rises have not been transmitted downward as proponents of the various manifestations of trickledown predict. IW knew this but the chart provides clear proof of it.

  7. jake chase

    Your bot just torched a very good and balanced comment. I resent wasting time over these and then having some electronic as*hole snuff them out. You have never posted any standards for your censorship and it is hight time that you do.

    1. Lambert Strether Post author

      Any time you want to handle the spammers and trolls manually, do feel free to drop me a line. It may be incredibly time-consuming and soul-destroying, but if the personal touch counts that much….

      * * *

      Here’s what I think you meant to say: “My comment went into moderation. Will you check, and get it out?”

      To which I respond: “Why yes, certainly.” Adding, I found “All this focus on income gives…” and approved it. Sh*t happens!

      NOTE WP seems to have rare, intermittent, and very-hard-to-track bug that does actually eat comments. No rhyme or to it. The tech guys are looking into it.

      1. leftover

        If WP is WordPress, I’ve experienced that commenting eating bug before. Personally, I think it has something to do with cut-and-paste, but occurrence isn’t consistent enough to be sure.

  8. krb

    Hugh, Lambert,

    Excellent piece, thanks! I’m saving the link to refer to in the future. However, an observation and a request…..

    Observation….if 2/3 of the income gain of the top earners came under Clinton’s watch and 1/3 under Reagan, why do you summaraize it all as the failure of “Reaganomics”. Your data suggests “trickle down” must not have been exclusively a Reagan belief, and the damge done from it may have been worse in other eras, and its possible are far worse use of it is going on as we speak……with almost all our govts’ resources ($4 trillion plus to date and rising) being funnelled to a handful of tbtf banks in the hopes it will trickle down to the rest of us. Stick to and advise us of the facts, only, and you will remain credible with both ends of the spectrum……there is a severe shortage of such writers, forcing centrist people like me to have to read 2 papers and 6 blog sites a day, 4 lib and 4 con just to get at the “truth”…thanks.

    And my request….would it be possible to take your research a step further. Your data stops at incomes, and I think this can over- or under-state the real consequences to differenet classes of people, low middle, retired, elderly, etc. For example, I believe under current bank-centric, bank-supportive QE polices of the current Fed chair, your data actually understates the difficulty low and middle class earners face. Bernanke and his minions (Brian Sack) have both stated publically that the goal of his gifting money to banks is to “raise asset prices higher than they otherwise would be”, in the hope (flawed thinking in my view, read on) that the “wealth affect” will cause more spending and therefore more job growth. He can gift money to the banks but he has no control over how they speculate with it. So food and energy commoddities sky rocket right alongside equities as a result of the fed handouts to banks. This policy EXXAGERATES the income gap, because lower earners spend a FAR HIGHER percent of their income on food and energy, and have a FAR LOWER percent of their wealth in the stock market.

    Your thoughts? Thx, krb

    1. krb

      Hugh, Lambert,

      Sorry…..Upon re-reading my comment I realize I gave more attention to my “bias” comment than I intended. You fairly pointed out twice as much damage occurred under Clinton’s watch than Reagan’s, and clearly used the “aka” when calling it Reaganomics. My point was meant to be this…..

      You were fair and even handed by including the observation that……”About $20,000 of this increase occurred during the Reagan years, but what often gets overlooked is that about $43,000 of it happened during the Clinton years.”…….its possible that it is overlooked because commentators, usually with a bias, persistently refer to it is as “Reaganomics” instead of “Clintonomics” or simply “trickle down”. Thanks, krb

  9. Susan the other

    I’m surprised incomes didn’t crash more after 2003. Teachers have been squeezed that long; others. And the fight to keep minimum wage (and near minimum wage) depressed has been going on forever too. If the trickle down “theory” was ever intended to work, why on earth was minimum wage kept so low? Theoretically, trickle down implies that the market functions to raise everyone’s standard of living. Thanks for the proof Hugh.

  10. Hugh

    Hugh here, the chart is based on the data the government provides. The report breaks income down by quintile and by household. So that is what I went with.

    It is a good point about the shift from single earner households to multiple earner ones. With real household incomes largely flat or only modestly rising over the 45 year timeframe, it could well be that real individual income decreased for many.

    Along these lines, it is important to remember that American households in their losing battle to maintain a middle class lifestyle have not only had to shift to multiple earner households but have also taken on huge mountains of debt.

    I had thought about mentioning that the data being expressed as a median the contribution of ultra high net worth individuals would have no effect on the numbers for the top 20%. The data for this report come from a 100,000 person supplement to the Current Population Survey. The CPS is the survey used to report employment and unemployment, for example, in the monthly jobs reports. I somehow doubt that Soros, Buffett, or some hedge fund manager filled out the form. Also unlike most Americans who can look to a W-2 or similar form for what their income was, the income of ultra high net worth individuals is more what they say it is, and they not only have the incentives but the means to understate it as much as possible.

    Because this report comes from the CPS, I assume household income would include the income of all adults 16 and older living in a single residence with the following stipulations, some of which come from the CPS, some of which are modifications of it:

    1) Homeless, not living in a shelter, are excluded from the survey
    2) Those in prison, nursing homes, or long term care are excluded
    3) Students in dormitories are excluded unless interviewed at a parent’s home
    4) Members of the armed forces are excluded unless they belong to a household with at least one civilian adult in it

    If you want to understand the data, you need to understand the definitions. That last one about the armed forces is not so odd when you consider that the Non-Institutional Population over 16 which is the basis of the Household survey (as opposed to the Establishment/business survey covering jobs, not people) in the monthly jobs report also excludes those in the armed forces (as well as all those in 2))

    1. readerOfTeaLeaves

      Nice work, Hugh!

      I keep wishing that someone would overlay the data in your chart with the data shown in this graph, via Ritholtz, on Marginal Tax Rates from 1916 – 2011. I think it adds more fuel to the ‘trickle down doesn’t work’ analysis.
      http://www.ritholtz.com/blog/wp-content/uploads/2012/08/dfadf.png

      Your graph shows the top quartile taking off steeply just around the time that top marginal tax rates under Reagan were cut in 1981, then again in 1986. By that time, the ‘feedback loop’ of wealth concentration was building up into Clinton’s era, and the feedback loop gained even more traction when George W Bush dropped Capital Gains in 2003 – at the very time Cheney told us that ‘oil revenues’ would pay for overseas wars.

    2. colinc

      Nice work, Hugh. I downloaded the 2011 XLS files available at this Census-site and have found the following…

      There were 95.664 million households with incomes less than $100K/yr and account for $4.005 billion of all income reported, or about $41,864 each.

      There were 25.421 million households (~21% of total households) with incomes of $100K/yr or more and account for $4.432 billion, or about $174,339 each, or more than 4 times the individual average of the larger, poorer group.

      Another aspect of potential interest, the bottom 4/5 of households earned 47.5% of the $8.437 billion in total income while the top 1/5 accounted for 52.5%!

      1. Hugh

        Yes, and if you look at those households earning $200,000 and more, they account for 5 million households or 1/5 of the 25 million households of the upper 20% and their aggregate income is just over a billion or a little less than 1/4 of the $4 billion this quintile earned. So while they made a little more than others in the upper 20%, they did not make that much more. What this is an indication not of the homogeneity of this group but that the survey misses the ultra high net worth individuals (and their households): the Buffetts, Waltons, Kochs, Gates, Soros, the hedge fund crowd, etc.

        In other words, if we added even a few of these individuals and families into the mix, both the segment making over $200,000 and the top 20% would look very different and the income inequality between these groups and all the others would be even more extreme.

        1. colinc

          I’m pretty sure I understand what you are saying and I concur completely (i.e., the top quintile, or any subdivision thereof, in your graph would be exponential if not hyperbolic). Those of us below that 100K/yr qualifier would REALLY look like muppets and chumps! ;) We’ve got’em right where they want us.

          Nonetheless, I think in all “fairness” to those between 100K and 250K, it would be nice to see some geographic distribution data/plots. That is, a $150K/yr income looks (and feels?) quite different in downtown NYC, Dallas or LA, for example, than it does in some podunk junction in the middle of a prairie state. I know if I had that kind of scratch in this user.dumbshit village I’m stuck in, a few dozen miles W of CLE, I’d definitely feel “rich.”

          1. Carla

            Why is does there always seem to be so much more concern about “fairness” to the very well-off, than about being “fair” to those in the first, second and third quintiles–millions of whom live in the expensive metropolises of LA, NYC, and DC by the way.

            Perhaps the reason these comparisons are always so “relative” can be attributed to our rigid economic class structure.

            In other words, while some folks in continguous quintiles may actually know, work with, or live near each other, those in the lowest quintile for example are unlikely to fraternize with those in the fourth quintile. And those in the top twenty percent may know those in the bottom 3/5ths only as servants or lackeys, but not as equals worthy of decent human concern.

            So if I’m earning $100,000 a year (which I’m not, but just saying), I feel positively impoverished compared to those I WISH to be associated with: those with incomes of $250,000 to $1 million, say. In this circumstance, it’s hard to wrap my mind around millions and millions of households with annual incomes one-quarter of mine, so I don’t.

            But generally, I agree, wealth is a more important indicator than annual income.

          2. colinc

            I pretty much agree with everything you said, Carla, which is why I put quotes around the word. However, having never made more than ~$50K/yr, myself (and that was only a few yrs), I still found myself in some form of communication with many people (both genders) in the upper quintiles more than a few times over the years. By and large, I found them as ignorant and incompetent as any ‘sample population.’ The ONE thing they could do better than most, manipulate anyone and everyone, through deceit and duplicity, with a smile on their face and a smooth, ‘trust-inducing,’ delivery. Yet, just as cost-of-living varies from one region/community to another, so do wages/salaries for any given position/occupation. However, I’d wager that the latter variability is much less than the former.

      2. James Cameron

        There were 95.664 million households with incomes less than $100K/yr and account for $4.005 billion of all income reported, or about $41,864 each.

        That’s $4.005 trillion, no? Otherwise, no wonder we have endless deficits. :)

        1. colinc

          YES! Thank you, Mr. Cameron. It is indeed Trillions, perhaps this will teach me not to compose comments after “too much” Cuervo Gold! ;) Still feeling a bit fuzzy now. Nonetheless, after generating several analyses and a couple charts from the Census files, I really, really needed that soothing juice.

    3. James Cameron

      It is a good point about the shift from single earner households to multiple earner ones. With real household incomes largely flat or only modestly rising over the 45 year timeframe, it could well be that real individual income decreased for many.

      Along these lines, it is important to remember that American households in their losing battle to maintain a middle class lifestyle have not only had to shift to multiple earner households but have also taken on huge mountains of debt.

      And it is also important to remember – points Patricia above alludes to – that along with the shift to multiple wage earners we’ve had the addition of child care costs, and especially this decade the expense of adult children. It would be very interesting to see an analysis of these factors on household finances.

      That’s a very compelling census report that goes well beyond income trends.

  11. James Cameron

    I didn’t find this data:

    For the bottom 20%, their average mean income was $11,618.
    For the second 20%, it was $29,425.
    For the third 20%, it was $48,938.
    For the fourth 20%, it was $74,183.
    For the highest fifth 20%, it was $146,693.

    in the charts for 1967. Instead I found this:

    9,419
    26,098
    41,670
    58,301
    104,920

    The numbers are from Table A-2, Selected Measures of Household Income Dispersion: 1967 to 2011, correct?

    1. Hugh

      I calculated the “average” for the means over the 45 year period. Those are the numbers in the first part of your comment.

      The second group of numbers which you cite is the mean income for the year 1967 alone.

  12. Roland

    1. Significant trickle-down has happened–internationally. Globally, I suspect we would also see widening inequality, although with significant real gains by lower qunitiles.

    None of the politicians selling Americans on the virtues of globalist liberalism bothered to say that the American working would have to bear the whole brunt of helping to raise global living standards. Nor do the members of that American working class ever get any credit for the sacrifices they made.

    Unfortunately we cannot test how rapid, say, Chinese development would have been,if our current type of globalization hadn’t happened, or what American domestic income inequality would look like under such circumstances.

    2. It’s perfectly fair to blame Reagan. Without Reagan, Clinton might never have happened. In the same way, it’s fair to blame Bush Jr., since Obama could never have achieved so much, without the sure leadership of the Great Decider who preceded him.

    3. An individual making $100K is upper income. I know that the chart in this post deals with household income. As the saying goes, I’m “just saying.”

    4. A really cool chart would feature individual actual or anticipated lifetime cumulative earnings, since it would control for an individual’s migration across income bands over the course of their lives. Bear in mind that a changing population age pyramid might have implications for income distribution. Of course, it’s not practicable to compile such a chart, but you’d think that some think tank wonker would arse himself about to do it, just for kicks.

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