Some Serious Thinking About Income Inequality: It’s A Political Issue In the End

Economist Robert H. Frank writing in the NYTimes yesterday tackled the politically sensitive issue of income inequality and described what’s been happening the past 30 years—and the impact of it. Read his analysis here, and get the NYT if you appreciate the writing.

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

10 Responses to Some Serious Thinking About Income Inequality: It’s A Political Issue In the End

  1. JoeS says:

    Due to the nature of funding for the Social Security system, where the revenue is nil as income rises above $107K, the shift in total earnings to the top has in itself created over 1/3 of the 75-year deficit in Social Security.

    In the past 30 years, 55% of the income growth has been with the top 1% of the populace, 29% with the next 9%, and only 16% for the other 90% of Americans.

    When the subject of income disparity is raised, the defense is the accusation that you are inciting class warfare, but the real aggression is how those with money have the power to shape the rules so that they benefit most. And usually the “work” that they do to “earn” that money has no benefit to society as a whole, such as their winning bets on stock price declines.

  2. Andrew says:

    One doesn’t even have to make normative statements to argue that the current state of income inequality is bad. It’s not good from an economic sense either. Prior to the financial collapse, consumption was artificially inflated because everyone had mortgaged their homes in order to keep their standards of living from declining. When the economy is done recovering, consumption rates won’t be as high as they were in early 2007. Probably a good thing for the planet, but not a good thing for our economy.

    And from a historical perspective, rising income inequality isn’t a good thing either. It just promotes instability, something no one wants or benefits from.

  3. Righty Bulger says:

    What am I missing here? I thought the point of Social Security is you get what you pay in. Shouldn’t those who make the most, hence pay the most, get back the most?

    Now if we want to discuss how to make sure those making the least see an increase in their wages, that’s a discussion worth having. But the class warfare isn’t being waged by those making the most money. It’s being waged by those who are envious of them.

  4. Jack Mitchell says:

    Justice does not derive from envy, Righty.

    The deck is stacked. The middle class is gambling and the elites own the House. We lose. They win.

    What? We get cake?

  5. JoeS says:

    “Shouldn’t those who make the most, hence pay the most, get back the most?”

    Ahh, there’s the rub. Those who make $1M, even $1B, pay no more into the system than does the person making $107K. As a greater percentage of income earned goes over $107K, a lesser percentage of total income goes into the Social Security Trust Fund.

    And as for the Social Security Trust Fund, that money has all been paid out to the higher income people with the series of Bush tax cuts. And now that the payments must come from the General Treasury, the “Rightys” of this world decry the deficits in that fund, not knowing the money was given out in large tax breaks for the past 7 years.

  6. C R Krieger says:

    I think Social Security long ago stopped being a system where you get back what you pay in.  It is now just another entitlement.  Thus, the point made by Joe S is a good one.  While the maximum amount a salary is taxed for Social Security is slowly creeping up, it should be seen as what it is, a tax on income to build a trust fund that should wholly or partly pay out Social Security Retirement Benefits.  I think it is time to take the cap off of the Social Security tax bite in terms of wages against which it is paid.  At the end of the day there is no free lunch and the sooner we realize that, on the left and the right, the sooner we can get back on track.  I desire that almost as much as I desire a “Print Preview” for comments on this blog.   :-)

    Regards  —  Cliff

  7. Righty Bulger says:

    Whatever rate they’re taxed at, they’re still paying more into the system and should therefore get more back. That was the original point, to show you that faulty statistics were used in the discussion.

    BTW Joe, why aren’t you as concerned about those who don’t pay anything into the system yet somehow miraculously benefit from the middle class and the rich who do?

  8. JoeS says:

    “BTW Joe, why aren’t you as concerned about those who don’t pay anything into the system…”

    I am concerned, at least with those who could afford to pay into the system. And it is not just the Social Security system, but the income and sales tax evaders.

  9. C R Krieger says:

    Here is one study, from way back in 2005 that showed that Massachusetts was getting $0.82 back for every $1.00 collected in taxes by the Federal Government.  The relationship between paid and received is not all that clear-cut.  Social Security is not a personal savings account.  It is a form of lottery in which one can draw money up until one passes away.  The very rich may not need the money, but they get it.  Those who paid in a lot and died early don’t get a special check to distribute to the heirs.  The program needs more money and there are, it seems to me, basically three ways to get more money.  It can raise the retirement age, it can raise the tax rate or it can tax longer into the tax year of the well off.  In the end it will likely be all three.

    At least we are not having riots in the street over this, like we were living in Paris.

    Regards  —  Cliff