By Ron Knecht
In recent policy debates, current income trends and disparities among Americans have been a major concern. Courtesy of economist John Mauldin and River Financial, a comprehensive set of data and charts is now available to shed new light on the subject.
The most notable point raised by people about income disparities is that adjusted for inflation, incomes of high earners have increased rapidly over the last half-century while those of middle- and lower-income folks have increased slowly or even stagnated. Or, the rich get richer and the poor get poorer.
There are two problems with this account. First, it conveniently focuses on the last half-century and ignores the trend before 1971. Indeed, the income share of the top one percent of earners relative to that of the bottom 90 percent rose greatly from 1971 to the Great Recession to a level it maintains today. That is, the total incomes of the top one percent as a group today is nearly 75 percent of the total income of the bottom 90 percent group.
Fifty years ago, however, the top one percent made just over 40 percent of what the bottom 90 percent did. Moreover, the high point before 1971 for the highest one percent was reached at the end of the Roaring 20s – at the same relative level as today. The very rich were very damaged by the Great Depression of the 1930s and World War II (WWII). After the war, their incomes rose somewhat slower than income for “The Rest of Us” until the 1970s.
So, the analyses covering only the last 50 years are not reflective of longer American history. Thus, they’re not very convincing for claims that policy or the economic system is broken. That’s not to say the current trend doesn’t indicate problems or legitimate concerns, just that it’s an incomplete and unrepresentative snapshot.
The second problem with this trend account is even more notable. Namely, the income measures include only income and not the effect of taxes and government transfers (e.g., food stamps and tax credits).
When the incomes series are modified to incorporate these effects of government, the overall distribution of total incomes (i.e, including taxes and transfers) are roughly the same as in 1971, or perhaps slightly more equal. Beginning in the 1980s, the inequality in the total incomes rose, as it did in the following two decades. After the Great Recession, however, incomes became more equal.
In sum, the basic claim about the rich and poor is false.
When we don’t adjust for taxes and transfers, the following data and trends remain.
First, wages rose in line with the gross domestic product (GDP) per person after WWII to the early 1970s – a condition we think of as being normal. However, from 1972 to 2017, productivity gains far outran workers’ compensation. The phenomenon causing this trend was that capital equipment and new innovations and inventions (technology) began to claim more of firms’ earnings. And returns to capital and from inventions and innovations accrue to the wealthy and high-income folks.
Also, the incomes of Black people relative to White people after WWII rose rapidly until the early 1970s. From then until now, that gap has been closed at a much slower rate.
From the end of WWII, the median incomes of women in the workforce grew slightly slower than the economy until the Great Recession. The income of men, however, rose with economic growth until the early 1970s. After that, they flat-lined up to the present day.
Overall, people’s income gains after WWII were shared widely among income classes. But since the early 1970s, the income gains have accrued much more to higher-income classes than to middle and lower classes.
Further, costs of some goods and services, especially housing, have risen much faster than others and the overall measures of inflation.
Monetary inflation and deflation kept prices generally comparable from America’s founding until World War I, the income tax, and the Federal Reserve. Since then, and especially after 1971, inflation has driven price levels ridiculously high.
Finally, U.S. government debt held at reasonable levels, with upward excursions after wars, until the end of the 20th Century. It has been sky-rocketing since then, especially in recent years.
Ron Knecht has served Nevadans as state controller, a higher education regent, economist, college teacher, and legislator. Contact him at [email protected].