2 Questions About Income Inequality

[TellyKNeasuss]

Since income inequality in the USA has been in the news lately, I have a couple of questions about it:

1) Since it is generally accepted that intelligence is normally distributed and presumably ability is also normally distributed, if income inequality were primarily the result of differences in intelligence and ability should it be expected that income should also approximate a normal distribution?

2) If income inequality is primarily a result of the higher income earners working harder than the lower income earners, should income inequality remain stable, or only have a slight trend, over the long term? This question is based on the reasoning that an increase in income inequality implies that the financial reward for working harder is increasing, which would be expected to motivate more people to work harder with the result that there would be more people sharing the increased reward for working harder which in turn should cause the income inequality to decrease. This is analogous to what happens when demand pushes up the price of a product and leads to more producers producing the product, which in turn puts downward pressure on the price of that product.

 

[Loss Leader]

Since income inequality in the USA has been in the news lately, I have a couple of questions about it:

1) Since it is generally accepted that intelligence is normally distributed and presumably ability is also normally distributed, if income inequality were primarily the result of differences in intelligence and ability should it be expected that income should also approximate a normal distribution?

You're treating income as a property, like brown hair or left-handedness. There is no reason that income inequality cannot feed back on itself - widening the gap between rich and poor. This, of course, assumes that income has anything to do with intelligence and ability. It would appear that you don't believe the equation is that simple.

 

[The Don]

Since income inequality in the USA has been in the news lately, I have a couple of questions about it:

1) Since it is generally accepted that intelligence is normally distributed and presumably ability is also normally distributed, if income inequality were primarily the result of differences in intelligence and ability should it be expected that income should also approximate a normal distribution?

I'm not aware that there are many experts out there who think that the primary causes of income equality are a lack of intelligence or ability in those with lower income.

The causes of income inequality are complex but those countries with lower levels of income inequality have a few common factors:

• Lower barriers for access to education and a consistently good education system
• Universal healthcare
• Societal mores which encourage modest behaviour
• A strongly progressive tax regime where the richest are taxed disproportionately severely

My own observation from a country like the U.K which is riddled with centuries of inequality, class strife and inherited privilege is that while, in theory, anyone can succeed, it's much easier to do so from a successful and well established family. A rich family will be able to afford to send their children to the best public (private) schools where they will receive an excellent education and perhaps more importantly give them a network of peers and old boys they can use in the future. I worked in the City of London for a few years and while many of the top traders have dragged themselves up by their bootstraps, most of the British senior executives shared a similar background.

Good private school --> Oxbridge (and/or army) --> join the bank your Dad worked at --> ££££££

Not much space their for the council house kid from the North of England who went to a comprehensive school and started work at 16 to bring much-needed money into the family.

2) If income inequality is primarily a result of the higher income earners working harder than the lower income earners, should income inequality remain stable, or only have a slight trend, over the long term? This question is based on the reasoning that an increase in income inequality implies that the financial reward for working harder is increasing, which would be expected to motivate more people to work harder with the result that there would be more people sharing the increased reward for working harder which in turn should cause the income inequality to decrease. This is analogous to what happens when demand pushes up the price of a product and leads to more producers producing the product, which in turn puts downward pressure on the price of that product.

I'm reminded of the poster which says something to the effect that "if hard work ensured wealth then every African woman would be a millionaire". I'm not sure if anyone has demonstrated a correlation between hours worked or how hard someone works and the rate at which they are paid (though obviously if you're paid by the hour, the more hours worked, the higher your income). Some of the lowest paying jobs in the UK (care assistants) have the longest hours and some of the best paying work "bankers' hours".

Of course this is a sweeping generalisation, there are plenty of executives working themselves into an early grave and plenty of manual labourers leaning on their shovels.

Income (and wealth) disparity thrives in the "devil take the hindmost" society which I increasingly see in the UK where individuals are expected and encouraged to fend for themselves. While the most able of us are perfectly able to do this, there are many others who require the support of unions, the nanny state and their local community to get by.

 

[TellyKNeasuss]

You're treating income as a property, like brown hair or left-handedness. There is no reason that income inequality cannot feed back on itself - widening the gap between rich and poor. This, of course, assumes that income has anything to do with intelligence and ability. It would appear that you don't believe the equation is that simple.

What I attempted to do here was to solicit thoughts and opinions on 2 propositions that are frequently used by people who are defending the increasing income inequality in the USA and to get feedback on my reasoning why there are problems with both of the arguments.

 

[Belz...]

Since income inequality in the USA has been in the news lately, I have a couple of questions about it:

1) Since it is generally accepted that intelligence is normally distributed and presumably ability is also normally distributed, if income inequality were primarily the result of differences in intelligence and ability should it be expected that income should also approximate a normal distribution?

2) If income inequality is primarily a result of the higher income earners working harder than the lower income earners, should income inequality remain stable, or only have a slight trend, over the long term? This question is based on the reasoning that an increase in income inequality implies that the financial reward for working harder is increasing, which would be expected to motivate more people to work harder with the result that there would be more people sharing the increased reward for working harder which in turn should cause the income inequality to decrease. This is analogous to what happens when demand pushes up the price of a product and leads to more producers producing the product, which in turn puts downward pressure on the price of that product.

3) If someone is born rich, he's more likely to be rich. If someone is born poor, he's more likely to be poor.

 

[The Don]

3) If someone is born rich, he's more likely to be rich. If someone is born poor, he's more likely to be poor.

True, and it's worse in some countries than others:

The United States had about 1/3 the ratio of mobility of Denmark and less than half that of Canada, Finland and Norway. France, Germany, Sweden, also had higher mobility, with only the United Kingdom being less mobile.

Source: http://en.wikipedia.org/wiki/Economic_mobility

Study: http://www.brookings.edu/research/papers/2007/05/useconomics-morton

 

[TellyKNeasuss]

3) If someone is born rich, he's more likely to be rich. If someone is born poor, he's more likely to be poor.

[DEVILSADVOCATE]Perhaps this is because people from rich families are brought up to work hard while people from poor families are brought up to be lazy.[/DEVILSADVOCATE]

 

[The Don]

[DEVILSADVOCATE]Perhaps this is because people from rich families are brought up to work hard while people from poor families are brought up to be lazy.[/DEVILSADVOCATE]

One word riposte - trustifarian.

If you can provide evidence that poor people are lazier then please present it.

 

[Ziggurat]

Since income inequality in the USA has been in the news lately, I have a couple of questions about it:

1) Since it is generally accepted that intelligence is normally distributed and presumably ability is also normally distributed, if income inequality were primarily the result of differences in intelligence and ability should it be expected that income should also approximate a normal distribution?

Only if the relationship was linear. A non-linear relationship between intelligence/ability and income would produce a non-normal distribution, even if this was the sole factor in determining income (which it isn't).

2) If income inequality is primarily a result of the higher income earners working harder than the lower income earners, should income inequality remain stable, or only have a slight trend, over the long term?

Perhaps, but since I don't know anyone who thinks that "income inequality is primarily a result of the higher income earners working harder", I don't really see what this has to do with anything.

For the vast majority of people, if you work harder then you will earn more money, often a significant amount more. This is a very important point since the effort one exerts is perhaps the most immediately controllable factor in income, and many people who are unsatisfied with their income are not working as hard as they could. But you cannot earn the salary of a CEO at a large corporation by doing janitorial work no matter how hard you work at it. Other factors such as ability (of which intelligence is just one factor) matter a hell of a lot too.

Furthermore, in regards to my above comment that the relationship between ability and income many not be linear, it's worth pointing out here that it may not be constant over time either. Technological innovation and even changes in the law may alter the ability-income curve.

 

[RandyN]

This guy has been talking about it for years. Pretty good documentary actually. It answers your questions and more you haven't thought to ask yet.

http://inequalityforall.com/

 

[Ziggurat]

This guy has been talking about it for years. Pretty good documentary actually. It answers your questions and more you haven't thought to ask yet.

http://inequalityforall.com/

A single top income could buy housing for every homeless person in the U.S.​

Homelessness in the US is largely a problem of mental illness, not economic injustice.

A can of soup for a black or Hispanic woman, a mansion for the businessman

That’s literally true. For every one dollar of assets owned by the typical single black or Hispanic woman, a member of the Forbes 400 has over forty million dollars.

Minority families once had substantial equity in their homes, but after Wall Street caused the housing crash, median wealth fell 66% for Hispanic households and 53% for black households. Now the average single black or Hispanic woman has about $100 in net worth.​

Not only is the lead sentence meaningless on its own, it's still a lie even given the followup context. First, cans of soup aren't counted as assets. From their own source, "Assets include items such as real estate, bank account balances, stock holdings, retirement funds (such as 401(k) plans), and individual retirement accounts (IRAs)." Household goods don't make the list. Second, they appear to have conflated assets and wealth. The figures for assets would be significantly higher than the figures for wealth, since wealth is assets minus debt.

This is propaganda, not useful analysis.

 

[stevea]

The main premise is massively false. The guys who invented the fishing net, or the spear or the wheel became massively more productive as a result of a small increase in skill and effort. Income in the private sector is not directly related to IQ, nor ability, nor to effort put into a job; it is precisely related to demand-for/value-of the work (value add) product. So it's common that a TV comedian may earn many times more than a top surgeon, despite our (very wrong) intuitions of the objective value produced.

Income is a measure of the value you provided to others according to the POV of these others who are willing to pay. I wouldn't pay to see Robert Downey Jr as Ironman, but enough ppl do s.t. RDJr is worth a reported $140M. I think Twitter is stupid but enough ppl disagree st the company is worth ~$36B, and the CEO worth ~$2B. Note that all of these are free-market exchanges so each party believes that are receiving net value in the exchange. The buyers or advertisers see their cost as less than the value produced, so these exchanges create net value.

Low income is a strong signal that your product doesn't have sufficient market value and need to do something else if you want more income. This it true whether you are a subsistence farmer in the 3rd world, or a mid-level executive with no prospect for advancement.

The basis for this recent progressive campaign, and this thread is language distortion, economic fallacies and uncritical listeners often powered by class envy rhetoric. "Income inequality" per se has never been a problem anywhere at anytime; that makes no sense. Demands that some ppl are too wealthy to tolerate is as pure a statement of envy as is possible. It's nonsense to imagine that you are poor b/c Bill Gates is rich; just the opposite - we've benefited from MS products. A lack of a living income amongst the poorest is always a problem, but the fact that Downey and Doyle and Gates are massively wealthy actually increases net GDP and average wealth and creates employment. The only reason most people go to work is to purposely create income inequality ! This is a policy that negates centuries property rights - it presumes that the government has any right to take property for purposes other than to pay for the legitimate and limited role of government. It breaks the social contract.

This is just another socialistic redistributionist effort to gin up class warfare. It's based on a failed central planning model of economics; that government needs to redistribute income rather than property. The arrogant proponents feel they have some omniscient power to tell ppl what their efforts are worth that better suits outcomes then does a free market. Attacking income is just another socialistic error of economics. At one time the Soviets set market prices on 12000 items by committee, and the Chinese were involve in similar foolishness. Government committees setting income limits isn't any different. At least, "from each according to ability, to each according to need" is an open and honest statement of this ridiculous and disproven economic position.

==
Let me make two exceptions where I can tangentially support the argument:

1/ I believe that government granted monopolies (patents, copyrights) and crony capitalists arrangement have lead wealth accumulation, but more importantly to inefficient markets. Our laws in this respect need revision, and the removal of nearly all protectionist and market-entry-barrier laws.

2/ Wealth per se is not a problem, however some wealthy companies have used their market power toward anti-competitive ends. MicroSoft squashing small companies for example. Companies that enforce overly broad patents (Apple vs Samsung on icon shapes). This is very negative for markets.

Taking money away from the highly productive for the sake of envy is insanity.

 

[TellyKNeasuss]

The basis for this recent progressive campaign, and this thread is language distortion, economic fallacies and uncritical listeners often powered by class envy rhetoric. "Income inequality" per se has never been a problem anywhere at anytime; that makes no sense.

The claim that income equality is bad was neither stated nor implied in the OP. The thread is targeted toward the rapid long-term trend towards increasing income inequality in the USA. Right-wingers love to create a strawman argument by substituting concern about income inequality in place of concern about rising income inequality.

The people who invented the fishing net may have become more productive and increased their share of the income, but that should have motivated other people to create fishing nets which should have allowed them to share in the rewards of the increased productivity, thereby reversing the increase in income inequality.

Demands that some ppl are too wealthy to tolerate is as pure a statement of envy as is possible. It's nonsense to imagine that you are poor b/c Bill Gates is rich; just the opposite - we've benefited from MS products. A lack of a living income amongst the poorest is always a problem, but the fact that Downey and Doyle and Gates are massively wealthy actually increases net GDP and average wealth and creates employment.

That Gates' company was enormously successful might have increased the GDP and created employment but the fact that Gates is massively wealthy does not. Wealthy people direct a relatively small amount of their wealth towards consumption and therefore do not efficiently stimulate the economy.

The remainder of your post was a rant directed at the strawman that you created.

 

[Corsair 115]

I would just like someone to explain why, from 1947 to about 1979, income growth in the U.S. in constant dollar terms was nearly identical across all the quintiles and top 5%. But after about 1979, income growth between the quintiles and top 5% begins to diverge markedly. When one graphs the data the similarity in the first thirty years is striking, as is the highly evident divergence which follows over the subsequent thirty years.

 

[anglolawyer]

I would just like someone to explain why, from 1947 to about 1979, income growth in the U.S. in constant dollar terms was nearly identical across all the quintiles and top 5%. But after about 1979, income growth between the quintiles and top 5% begins to diverge markedly. When one graphs the data the similarity in the first thirty years is striking, as is the highly evident divergence which follows over the subsequent thirty years.

Assuming this is not the result of some weird divergence in work rate or intellect, what has caused this striking and socially divisive phenomenon? Are there any decent theories out there? Did somebody pass a tax law or was some previously existing barrier to divergence taken down? What?

 

[lupus_in_fabula]

I would just like someone to explain why, from 1947 to about 1979, income growth in the U.S. in constant dollar terms was nearly identical across all the quintiles and top 5%. But after about 1979, income growth between the quintiles and top 5% begins to diverge markedly. When one graphs the data the similarity in the first thirty years is striking, as is the highly evident divergence which follows over the subsequent thirty years.

Financialization.

For example, credit market instruments/GDP:

 

[anglolawyer]

Financialization.

For example, credit market instruments/GDP:
[qimg]http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=TCMDO_GDP&scale=Left&range=Max&cosd=1947-01-01&coed=2013-10-01&line_color=%23006600&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a%2Fb&fq=Quarterly&fam=avg&fgst=lin&transformation=lin_lin&vintage_date=2014-02-04_2014-02-04&revision_date=2014-02-04_2014-02-04[/qimg]

I love pretty graphs but why did this thing take off in or about 1980? We have had financial markets for a lot longer than that.

 

[The Don]

I love pretty graphs but why did this thing take off in or about 1980? We have had financial markets for a lot longer than that.

Here's the Wikipedia article on Post-1980 increases in income inequality. As with any Wiki article, it's only as good/accurate as the contributors make it.

http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States#Post-1980_rise_in_inequality

In summary the rise is apparently due to a combination of factors including

• An economy which is more skills and technology driven. The comparatively small number of people who can acquire those skills are very well rewarded but the average working person is no longer as much in demand so pay has dropped
• Immigrants are providing even more competition for lower skilled jobs. Immigrants have always been a factor but now competition is much harder
• Shareholders have seen fit to reward executives very generously for moderate performance. In the past a few stellar performers would be in line for a big payday, nowadays it's all executives. For example, CEO pay has apparently grown by 2500%
• Marginal tax rates have decreased for the very wealthy which means they get to keep a greater proportion of their income
• The growth of the financial sector - countries with the largest financial sectors tend to have greater income inequality. The financial sector tends to reward senior people very generously. This does not have to be supported by performance

There are dissenting voices. The Cato institute (independent but IMO right wing) says that there is no increase in inequality and it's all down to the way the figures are calculated. I personally feel that this runs counter to my experience.


edited to add....

The article linked by lupus_in_fabula provides an overview of financialization. In summary, the finance industry skews the economy and concentrates wealth in the financial sector rather than the broader "real" economy. This debases labour and influences government policy.

 

[Random]

I love pretty graphs but why did this thing take off in or about 1980? We have had financial markets for a lot longer than that.

Well, a quick guess would be capital gain tax rates in the US. From the Wikipedia article on Capital_gains_tax_in_the_United_States^WP:

From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7 percent. In 1921 the Revenue Act of 1921 was introduced, allowing a tax rate of 12.5 percent gain for assets held at least two years. From 1934 to 1941, taxpayers could exclude percentages of gains that varied with the holding period: 20, 40, 60, and 70 percent of gains were excluded on assets held 1, 2, 5, and 10 years, respectively. Beginning in 1942, taxpayers could exclude 50 percent of capital gains on assets held at least six months or elect a 25 percent alternative tax rate if their ordinary tax rate exceeded 50 percent. From 1954 to 1967 the maximum capital gains tax rate was 25 percent. Capital gains tax rates were significantly increased in the 1969 and 1976 Tax Reform Acts. In 1978, Congress reduced capital gains tax rates by eliminating the minimum tax on excluded gains and increasing the exclusion to 60 percent, thereby reducing the maximum rate to 28 percent. The 1981 tax rate reductions further reduced capital gains rates to a maximum of 20 percent.

The Tax Reform Act of 1986 repealed the exclusion of long-term gains, raising the maximum rate to 28 percent (33 percent for taxpayers subject to phaseouts). When the top ordinary tax rates were increased by the 1990 and 1993 budget acts, an alternative tax rate of 28 percent was provided. Effective tax rates exceeded 28 percent for many high-income taxpayers, however, because of interactions with other tax provisions. The new lower rates for 18-month and five-year assets were adopted in 1997 with the Taxpayer Relief Act of 1997. In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, into law as part of a $1.35 trillion tax cut program.

If you look at the chart, you see that a huge upswing starts around 1981, when the capital gains tax rate was dropped to 20%. You further see a sharp reduction in the growth rate around 1986, when it went back up to 28%.

 

[lupus_in_fabula]

Here's the Wikipedia article on Post-1980 increases in income inequality. As with any Wiki article, it's only as good/accurate as the contributors make it.

http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States#Post-1980_rise_in_inequality

In summary the rise is apparently due to a combination of factors including

• An economy which is more skills and technology driven. The comparatively small number of people who can acquire those skills are very well rewarded but the average working person is no longer as much in demand so pay has dropped
• Immigrants are providing even more competition for lower skilled jobs. Immigrants have always been a factor but now competition is much harder
• Shareholders have seen fit to reward executives very generously for moderate performance. In the past a few stellar performers would be in line for a big payday, nowadays it's all executives. For example, CEO pay has apparently grown by 2500%
• Marginal tax rates have decreased for the very wealthy which means they get to keep a greater proportion of their income
• The growth of the financial sector - countries with the largest financial sectors tend to have greater income inequality. The financial sector tends to reward senior people very generously. This does not have to be supported by performance

There are dissenting voices. The Cato institute (independent but IMO right wing) says that there is no increase in inequality and it's all down to the way the figures are calculated. I personally feel that this runs counter to my experience.


edited to add....

The article linked by lupus_in_fabula provides an overview of financialization. In summary, the finance industry skews the economy and concentrates wealth in the financial sector rather than the broader "real" economy. This debases labour and influences government policy.

Yeah, we should probably also add globalization and trade liberalization into the mix.