Monday, September 5, 2011

Ninety-Five Percent Left Behind?

What does it mean to be "left behind?"  By one simple definition, you have been left behind if the economy as a whole is growing faster than your own income.  A discussion of the actual numbers is after the jump.  But by that measure, those people in the 95th percentile income bracket easily qualify (as a quick definition, if you are in the 95th percentile, you made more money than about 94 percent of the population), at least in the period 2001 - 2008 (during the George W. Bush administration).

What has been happening is that the lion's share of the growth in the U.S. economy has been captured by a very small percentage of the population, leaving no benefits of growth for anyone else.

It was not always this way, and it is not this way in other advanced countries.  Most income groups did better during the Clinton Administration (1993-2000), for example, as will be discussed after the jump.  Thus, claims that this is a natural consequence of how economies work, or that it has to be that way because of international competition, do not withstand scrutiny.

It is quite possible to quibble with the numbers, but if you are left with resorting to quibbling (as in, "Ha!  You're completely wrong!  Only 94 percent of us have been left behind!"), then you must concede the basic thrust.

How often are we told that there is very little that the government can do for the economy, by the very people who are simultaneously working furiously to get the government to benefit them (and succeeding in a spectacular fashion)?  There are in fact many policy choices that a government makes that can have profound impacts on how the economy does, and how equitably growth is distributed.

That is what this blog will explore.

The Numbers

I was intrigued by this chart that was put together at the Economic Policy Institute, using U.S. Census Bureau data.

What is shows is that wages for the bottom half of wage earners declined in the Reagan/Bush years, and did not increase until the second Clinton term, when they increased significantly.  Then during the Bush 43 years, they were stagnant again.  For those in the top 20 percent of income earners, wages rose slowly during the Reagan/Bush years, then began rising in Clinton's first term, accelerating during his second term.  During Bush 43's years, even their wages began to increase more slowly.

To try to calculate the highest percentile for which income earners were "left behind," I looked at the years 2001 through 2008, basically the George W. Bush years.  EPI is good about having the underlying spreadsheet available for download.

Using this spreadsheet, we can calculate that "real hourly wages" on an inflation-adjusted basis rose 7.7 percent for those in the 95th percentile between 2001 and 2008.  This is better than the 0.8 percent that income increased during that time for those in the 50th percentile, and certainly better than the -1.5 percent decline for the bottom 10 percent of wage earners.  But how much did "the economy" as a whole grow from 2001 to 2008?

To make GDP growth comparable to individual wage growth, we cannot simply use the raw GDP figures.  First, they must be adjusted for inflation, and second, they need to take into account population growth.  So we needed to calculate inflation-adjusted GDP per capita figures.  The U.S. Census Bureau provides "GDP in billions of chained 2005 dollars" for each each, and it provides total population figures for each year.  From this information, we can calculate that GDP per capita in 2005 dollars rose from $39,769 in 2001 to $43,242 in 2008 (somewhat lower than the $43,791 in 2007, by the way, as the Recession was already underway).  That translates into an increase of 8.73 percent from 2001 to 2008--not a particularly impressive increase during the George W. Bush years, but nevertheless greater than the 7.7 percent increase "enjoyed" by those in the 95th percentile (not to mention greater than the 0.8 percent experienced by those in the 50th percentile).

The methodology may not be perfect, and I'd welcome demonstrations of  better ways to calculate the same point, but I think the basic thrust is as accurate as the data allow.  (One possible consideration is that, by using income growth as a percentage of one's starting income, rather than an absolute dollar amount, those in the 95th percentile, for instance, saw their income grow by more than the $3,473 increase in GDP per capita experienced from 2001 to 2008, while those in the bottom 10th percentile would see a small dollar amount raise even if they had gotten a good raise percentage-wise.  But most people view their improving situations by considering how much more they are making compared to what they made before, as opposed to viewing the dollar amount as a stand-alone figure.)

What this means is that most of what economic growth we've had so far in this millennium was captured in corporate balance sheets and in the pockets of the very wealthiest, at the expense of the overwhelming majority of Americans.

Now let's compare the performance during the Bush 43 Administration years to the performance during the Clinton Administration years, 1993 through 2000.  Using the same methodology, we find that the inflation-adjusted GDP per capita increased by 9.2 percent during the Clinton years, somewhat better than during the Bush years.  But the growth was shared much more equally among the income groups, as the following table shows:

During the Clinton years, you were not left behind if you were in the 90th or above percentiles, and also if you were in the 10th and 20th percentiles.  The middle earners did the worst, but every income group did much better in the Clinton years than in the Bush years.  Everyone except for the very wealthiest did far worse during the Bush years.  Unfortunately, from the way the GOP is behaving in Congress these days, it is apparent that they regard this not as a bug, but as a feature.

How does income inequality in the United States compare to other countries?  There is a formula used to measure inequality, known as the Gini coefficient, where 0 equals total equality and 1 equals total inequality.  This map shows that while the United States is not as bad as Central and South American countries, or China, it is on a par with Russia, and more unequal than Canada or most of Western Europe.

A chart from this article shows that income inequality is lowest in the Scandanvian countries, although both Sweden and Finland in particular have shown a trend of increasing inequality.
Norway and Denmark both have relatively low inequality, and have so far managed to more or less stay that way.  Lest it be argued that countries with lower inequality mean that everyone is worse off, it may be noted that Norway, Denmark, and Sweden all have a higher GDP per capita than does the United States.  It is likely that the top one percent in the United States is better off than the top one percent in Norway, Denmark, or Sweden, but most Americans, if they were in the same income percentile as someone in those countries, will not be better off than their counterparts in those other countries (e.g., someone in the 50th percentile in Denmark is better off than an American in the 50th percentile).


  1. Thanks, many useful comments here. One point: small homogeneous societies do find it easier to reach a social consensus about redistribution. Large multicultural societies find it harder. Are you suggesting that the US can be compared to Norway or Denmark, or is this just a red herring?

    Second point: Economics does not suggest there is any "right" Gini coefficient. It is just a measure, like how long your nose is. The decision about what is "right" is purely a value judgment. What is your judgment?

  2. Interesting question as to whether either smallness or homogeneous-ness are major factors about "redistribution." Japan, for example, would be a "large" homogeneous society that has a relatively low Gini coefficient. How "unhomogeneous" is Paraguay, for instance, among the high-Gini countries? I'll have to think about that one.

    Additionally, when income inequality increases, as it has in the United States, isn't that "redistribution" as well? Just going the other way than how the term tends to get used (in a pejorative sense of taking money from hard working job creators and giving it to the less deserving). And if policies managed to bring income inequality trends back to where they were 30 years ago, is that redistribution or the amelioration of redistribution?

    On your second point, the discussion on inequality does note the un-sustainability of economic growth when only a small proportion of the population is seeing their incomes increase. While Robert Reich is not exactly an economist, his point in Sunday's NY Times does capture economic thinking on this: So I'm not sure that the "right" level of inequality is solely a value judgment. Less inequality produces better overall economic results in the long run.