The Great Debate

Income inequality is increasingly “permanent”

March 21, 2013

We’ve heard about rising income inequality for years — it’s become a post-recession rallying cry. Even Jamie Dimon seems to think inequality is bad.  

The hope, however, was that this was a cyclical problem — when the economy got cranking again, those of us hit hard by the downturn would start earning more and income inequality would fall.  

A new paper, however, looking at male and household earnings, finds that income inequality is increasingly permanent. (The study didn’t break out women’s income.) “Rising Inequality: Transitory or Permanent?,” which was submitted as part of the Brookings Papers on Economic Activity, looks at pre- and after-tax incomes from 1987 to 2009 and finds some disturbing trends.

Take a look at the chart below, which shows that men’s earnings have become increasingly volatile over two year periods. This has big implications for the economy: It’s one thing to lose your job, get a new one, and get by on a slightly lower income. It’s an entirely other thing for your income to swing wildly from year to year.


The study’s authors find that the effects of this variance are increasingly lasting. They differentiate between “transitory inequality” and “permanent inequality.” The former might come from getting laid off in a bad economy or from people moving up the economic ladder by pulling in higher salaries. Permanent inequality, the authors find, is the key driver of the growth in income inequality for men.  Worse, “for household income, both before and after taxes, the increase in inequality over this period was predominantly, although not entirely, permanent,” the study’s authors find.

What does this mean? It could lend credence to the idea that American men simply don’t have the skills that economy needs right now. “Our data would imply stories such as skill-biased technical change or globalisation that has increased the inequality of lifetime incomes,” one of the study’s authors told the FT.  

It could also mean that a key component of the the way we think about the U.S. economy could be broken. We tend to think that America is a pull-yourself-up-by-the-bootstraps economy. Lose your job? Just work harder, move or get new skills. This study — and the 4.8 million Americans who are officially considered among the long-term unemployed — suggest that it’s much harder to get back on our feet economically than we think. As University of Michigan economist Justin Wolfers said: “The rich are getting richer and staying richer. The poor are getting poorer and staying poorer.”

26 comments so far | RSS Comments RSS

Thanks for bringing more attention to this critical topic. The last sentence says it all: “The rich are getting richer and staying richer. The poor are getting poorer and staying poorer.” The problem is, our government has devolved in such a way where only the wealthy, the plutocrats, have any real sway with our government, and they don’t want things to change. It’s nice that Mr. Dimon has gone on record stating that inequality is bad, but what’s he, or anyone else, doing about it? Nothing. In the meantime, the chattering heads of the new conservatives are teaching millions of Americans that doing anything to address economic inequality is tantamount to declaring war on capitalism in favor of socialism. A lot of Americans, without thinking, will recognize that income inequality is bad but so is anything to address the problem.

We have to get over our irrational fears of addressing this issue. Remember, the new conservatives chose Mitt Romney as their standard bearer and he stated that the topic of income inequality and wealth distribution should be reserved for “quiet rooms”.

Posted by flashrooster | Report as abusive

“The rich are getting richer and staying richer. The poor are getting poorer and staying poorer.” this prof should walk to the near building where there are biology profs as well.

Those profs will tell him, the rich are marrying people with better genes and are making better offsprings and the poor are marrying people with worse genes and making worse offspring.

The economic inequality is simply the symptom.

I don’t know what to do, so I will just agree with the socialists, let’s try it again already to see what happens this time. Of course, the useless opportunists will become the new elites as usual but then who cares? Let it be…

Posted by trevorh | Report as abusive

Let’s have the government mandate that everyone earns exactly the same. Problem solved. (please note sarcasm)
Also, how many people in this study? No one asked me.

Posted by tougar | Report as abusive

Income inequality, or rather, the narrowing distribution of income, is responsible for the economy not “cranking again”. When there is less money being distributed to the largest chunk of the population, the economy shrinks. This is caused by the hoarding of profits, which would normally be recycled back into the economy, and by a smaller percentage of revenue being allocated to employee compensation.

It’s great that profits have recovered from their depths of 2008/09, but they have done so largely at the expense of individual income for most of the nation. So those people have less money to spend. The economic system is dependent on money going round and round, from one party to another. When some of it gets put aside because they don’t know what to do with it, there is less of it in circulation. Something has to give, and while the government has responded with lots of deficit spending, it hasn’t made up for all of the hoarding.

Now I usually save this for Felix’s page, but since you brought up this issue, I’ll say it here as well: the best way to address the income inequality problem is to have a tax system that rewards investment (after it’s been made, not before, in hopes the money might get invested) and distribution of profits, and penalizes hoarding. It won’t require a major overhaul of the tax code (although that would be nice), just a few simple tweaks:

1) Allow companies to deduct dividends they pay to shareholders from profits, and tax it at the individual level as ordinary income. Let multinational corporations bring profits home without taxing them if they distribute them to shareholders or invest them in the U.S..

2) Allow individuals to defer dividend income if it is invested in new ventures (buying stocks of publicly traded companies or existing buildings is not investing in new ventures).

3) Increase corporate income tax to 50%, but give generous tax credits for capital expenditures, R&D, training, and health care – all investments that will have long term benefits for the economy, and will broaden the base of individual income, and increase the average.

Every dollar that is reinvested by a business or individual is a dollar that the government will not have to print or borrow to keep the economy from shrinking.

Posted by KenG_CA | Report as abusive

trevorh and tougar (same person?): Your comments show a myopic unwillingness to even admit that there’s a problem. If rational, common sense doesn’t reveal it to you, there’s all sorts of evidence demonstrating how the nation as a whole is hurt when there is such disparity in income distribution. It’s been a problem whenever it’s occurred throughout history, worldwide, and it’s occurred many times. Man tends to be a selfish and greedy animal.

I really don’t think the problem is in who we’re choosing to marry. That sounds fatuously absurd, but if you have evidence supporting your claim, I’m sure we’d all love to see it. And recognizing that gross disparity in wealth and income is a problem doesn’t mean that those of us equipped to understand it want to end capitalism and become a socialist or communist state. Who’s promoting that? Not me. Not Ryan McCarthy, the author of this piece. Not KenG_CA, who posted a very rational and thought provoking comment worth discussing. So just who are you guys addressing? An imaginary strawman? You seem to be supporting Mitt Romney’s position that this topic is only fit to be discussed in quiet rooms. I think most Americans patently disagree with that position. Americans enjoy exercising their freedom and this topic should be discussed freely, because it’s important.

If you consider yourselves patriotic, then you should educate yourselves enough to understand that gross disparity of wealth hurts the country. It makes us weaker. Our wealth distribution is more in line with that of a banana republic, not other democratic, capitalist nations. I mean that literally.

And don’t think that this is just a natural outcome from capitalism. There is no such thing. Capitalism, like any other economic system, is a system designed by man and is easily manipulated by man, so that a few reap the most benefits, which is what is happening now. It hasn’t always been this way here in the US, and don’t think that we just started practicing capitalism. But there’s a lot of man-made change that has taken place with our system of capitalism since it was practiced by our Founding Fathers, and it’s been by design.

Posted by flashrooster | Report as abusive


You don’t understand my point.
I am not saying that inequality is not a problem.

I was simply saying inequality is only the surface symptom.

Now that I am a liberal and socialists entirely due to humane reason, just do whatever you and your liberal fellows see fit. Why? because I just don’t see any other options other than… sigh

When you get cancer, you ask yourself: do you want to die now (nuclear wars and violent revolution) or do you want to die slowly later and live another day?

I pick ‘slowly later’ because there might be ‘magic’… We can always hope that maybe God exists and help us because there is nothing in science we know right now that can help us. All the empirical evidences are against it.

me, your new fellow liberal
Keep the optimistic hope

Posted by trevorh | Report as abusive

flash: I’m not at all on the same page as trev. my point is that the article seems to suggest that the country must force this “goal” of equality in income on society for all to prosper. We all have different levels of income potential based on our intelligence and fortitude. There are many that come from low income environments and succeed and there are many that are handed the keys to wealth and fail. That’s nature and life. Not always fair and equal.

Posted by tougar | Report as abusive

I am surprised no one recalls and has mentioned that their historically are reveolutions that are a result of wealth inequality.

We do not want a society were every ones income is equal.

However, what is happening now is that executive pay has been sky rocketing, while hourly wage earners are not being rewarded for productivity gains.

What should be considered is a method to controll the gap of executive compensation to hourly wage earnings to ensure that hourly wage earners participate in productivity gains, e.g. tax modification.

We need to recognize that as the gap widens between executive compensation and hourly wage earners it is an increasing threat to our capitalism and our democracy!

Posted by Flash1022 | Report as abusive

There are a number of critical factors that are promoting this in equality:
- the overwhelming influence of government in the workplace, and
- the entitlement mentality of many of the “college educated” who think that anything other than a desk job, in their preferred location, on day one, is beneath them
- taxing success

We have pushed well-paying manufacturing jobs out of the country with more regulations (e.g. environmental, overwhelming and conflicting work and wage rules, mandated benefits) all which increase the costs of doing business.

When you add that to the NCG’s (new college graduates) who are not motivated to learn the business from the bottom-up, then options become extremely limited.

When you combine the items above with the new equality(?) of the successful paying even more taxes (the “success penalty”) you then place limits on both the motivation to create additional wealth and the willingness to assume risk at all levels –which trickles down through the entire economy.

These are structural issues that will need to be resolved. But, few wish to studies the real costs to business of adding one additional employee, especially when the costs exceed the value the new employee can provide.

The idea that one should place artificial constraints on the wealth created by others, which also manifests itself in limiting the ability to create new businesses via licensing and other rules, runs counter to the core foundation of this country. It only serves to reinforce the new mentality (as noted in many of the comments above) that this is a zero sum game–that wealth can only be created by diminishing that of another person. Nothing is further from the truth. The net result is that we have allowed government to change the rules to the detriment of the next generation.

Interesting, too, that the article does not raise the issue of how we continue to “import poverty” due to our unenforced immigration laws. When one notes that the least educated and least skilled individuals are allowed to enter this country, adding to it via chained immigration, who then become consumers of public benefits, the income gap is only exacerbated.

Without a doubt, the problem is structural. But you are looking under the wrong rock.

Posted by COindependent | Report as abusive

Regarding the selective mating argument see, among others, Murray’s “Coming Apart”.
There are other forces, but they are too disturbing and
hence are avoided by most.

Posted by ddccc | Report as abusive

What does it mean to “merit” some reward? Doesn’t it have to mean that you took some action that was of benefit to more than yourself? In what other way could you be deemed to “deserve” some reward? In tougar’s world, whatever you can get your hands on is what you “deserve”, but this is the law of the jungle, might makes right. We have societies like that (Somalia), but pretty much no one wants to live there.

Instead, societies try to establish ground rules for the distribution of output that motivate people to take actions that are beneficial to the larger society at the same time that they benefit themselves. This builds social cohesion and stability because if those getting the most reward are those providing the greatest benefit to everyone else, then there is a sense of justice in spite of inequality. About 30 years ago, the wealthy started re-writing the rules so that their gains no longer provide any benefit (often actual harm) to the larger society. It is this increasing distance between reward and social benefit that is so unhealthy. In the end, it does no good even for the wealthy. This is why people don’t in general attack Bill Gates and Warren Buffet for their wealth — it is clear that they have provided a lot of benefit to society as they got wealthy. But Jamie Dimon? Carl Icahn? Donald Trump? Robert Rubin? The Bush dynasty? Mitt Romney? It is clear to most of us that these people contribute less than nothing in their pursuit of wealth. For some, it is enough that they are very good at using the current rule set to their own advantage, and in this way they “deserve” their rewards. For most of us, though, their wealth only demonstrates that the rules are whacked.

Posted by Sanity-Monger | Report as abusive

Sanity-Monger claims: “About 30 years ago, the wealthy started re-writing the rules …”. Hmm … The top 5% pays more than 50% of the income tax. The bottom 47%(?) pays no income tax. 25% of children depend on food-stamps. 60% of the children in CA have free/ subsidized school lunches. The bottom 50%’s share of the
nation’s income is decreasing for decades – check the IRS site please.
Instead of blaming frivolously the top 1-10%, please stop ignoring the collapses of the bottoms in the welfare societies. We need draconian interventions … but …

Posted by ddccc | Report as abusive

Coindependent, manufacturing jobs have not left the country because of regulations. They left because people in other countries are willing to work for a lot less than people in the U.S., which means they are willing to accept a far lower standard of living. If you think people here should accept that lower standard of living, then you are advocating that we should strive to win the race to the bottom – that a great nation should create an economy where as many people as possible work for as little as employers can pay them.

There are actually recent stories about big companies moving manufacturing jobs back to the U.S., in spite of the wage imbalance, and they wouldn’t be doing that if the regulations were so onerous.

The wealthy are not “paying even more taxes”; taxes on the wealthy are at their lowest rate in decades, even lower than when Reagan was president.

Posted by KenG_CA | Report as abusive

@ddccc — might you be confusing effect for cause?

Posted by Sanity-Monger | Report as abusive

Great article.

The rich man’s son. The rich man’s daughter. Attention.

The fact is that most of the people who have wealth today inherited it to begin with. It’s that way in America, Europe, and every banana republic.

I went to college with them. Almost certainly most rich people who come to this Reuters forum to lobby for the status quo originally received some capital from their parents.

Thus they were freed from the day to day struggle for existence that dominates the everyday life of the children born to poor parents. Thus the rich kids could network at the country club, and engage lawyers to form joint ventures. This they consider to be hard labor. And they grow up to despise and hate the real laborers and workers.

The vast majority of the wealthy people in the US did not earn their wealth. The wealth was passed to them by parents doling it out to them, or by inheritance. That is a fact of life that is easy to verify. How?

If one examines the property tax map and tax roll in any county in any state in America, the data clearly tells the same story: 95% of the wealthy people in America today obtained their wealth from parents or by inheritance. They did NOT earn it themselves.

The sad part is, it is that same 95% of the wealthy, who are NOT self made, that despise the poor and are often heard accusing the poor as being lazy, and chanting that the poor are poor because they have a bad attitude.

The rich brat, now in his 60′s, a true, wasteful parasite on society who travels to Aspen, spending money by the bucketful, diverts our attention by pointing his finger at a poor man who spends nothing. He accuses the poor man, who spends nothing, of being a parasite on society! What will heaven say about that? Can a camel fit through the eye of a needle?

In this online forum, I can only guess that it is that 95% of the wealthy – the spoiled kids who inherited money from parents, those 95% of the wealthy who are NOT self made men – who probably complain most loudly about taxes.

And they hire lobbyists and tax attorneys to minimize the inheritance taxes.

What does America need to re-build itself?

America needs to re-instate its former INHERITANCE tax, and make it a SIMPLE, powerful inheritance tax, of 100% of anything over $500,000. Period. Yes, a 100% inheritance tax.

That way, the spoiled inheritance-money wealthy, living their comfortable lives, complaining about the laziness of the poor, can finally see what it feels like to be a SELF-MADE man, instead of a spoiled rich, wasteful leech, parasite on society.

A competitive society thrives the best.

Posted by AdamSmith | Report as abusive

Flash1022 is exactly right. No one, at least not here, is advocating that everyone should get paid the same regardless of their talents, the amount of work they do, or how much they contribute to society’s greater good. Tougar, I think you’re confusing the meaning of “income inequality. If you take it literally, you’re right. Equal is equal, right? But unless stated otherwise, when people use this term they’re talking about a MORE equal income distribution, rather than literally being equal. The difference is critical. It’s the difference between capitalism and communism. The whole reason people are discussing this topic, income inequality, is because things have gotten SO unequal that it’s harming American society. IF your position is to advocate for fairness and a strong American Middle Class (and thus a stronger America), then you should also be advocating for laws that champion a MORE equitable distribution of wealth through income and tax policy (among other things.) KenG_CA has some good recommendations worth discussing, as does AdamSmith.

I would argue that the single biggest thing we could do immediately is to end lobbying, get outside money out of our government, and adopt a system of public financing of our elections. That’s the only way some of these other ideas will see the light of day. Then, and only then, can we reclaim the clout to enable us to make government serve the best interests of American society as opposed to just the wealthiest individuals.

I think one of the biggest mistakes I see made most often by people on the right is the idea that somehow capitalism is an organic system, a natural economic structure that sprang magically out from the Garden of Eden, and that any time government passes a law affecting the economy or any industry it’s running interference in capitalism’s natural process. No economic system is natural. They’re all man-made with man-made rules, and how those rules are designed will determine who they work best for.

The reason democracy and capitalism make such a successful partnership, in my opinion, is that the majority of people can continuously get government to tweak the system in ways that benefit the greater good. Unfortunately, here in the US a small group of plutocrats have recognized this dynamic and have decided to organize and use their financial clout to hijack our government and force it to pass laws that favor the plutocrats. (See Hedrick Smith’s great book Who Stole the American Dream.) We’re just now beginning to see the people push back against this. This is why Romney’s 47% speech was so toxic to his campaign. We’re waking up. We get it, and if the plutocrats decide to hunker down and resist any change they view as disadvantageous to their accumulation of wealth, they risk a much more disruptive backlash. But that’s the way it usually goes. Greed is a hard habit to kick.

ddccc: Sanity-Monger is right; you’re confusing effect for cause. If I may, I’d make this recommendation to you. Anytime you discuss who pays what in taxes, also include the percentage of incomes made by the different entities you’re referring to. Look at your argument in the extreme. If the 5% you claim are now paying 50% of all the taxes were making 100% of the income, they’d be paying 100% of the taxes. So who is getting shafted in that scenario, those paying all the taxes or those who paying none? Would you be willing to sacrifice all your savings and income to avoid paying any taxes, or would you rather make a lion’s share of the money and pay a lion’s share of the taxes? Or to put it another way, I’m sure the 47% that Romney and others look down on would love to have the tax “problems” of the top 5%. Am I making my point clear? In other words, the top 5% pay the most taxes because they have the most money. If income distribution was more equitable, then everyone would have to be required to pitch in more than they already are. As it is now, those making below a certain amount don’t pay INCOME taxes (they pay plenty of other taxes) because they don’t make enough money.

Posted by flashrooster | Report as abusive

Sanity-Monger wonders whether cause and effects were changed in my list of disasters at the bottom. Certainly not. Please explain otherwise, for example, how “About 30 years ago, the wealthy started
re-writing the rules …” caused current parents having kids they cannot feed. There are many causes for the “Great Divergence” among which:
- IT automation (the next round of the industrial revolution)
- Inability to up-school the population
- Relentless population growth and non-scaling of good jobs
- Global per capita resource constraints that cannot be compensated any longer with process improvement
- Public education (!)
Let me explain the surprising last one. There was plenty of hidden smarts in the 1900 population. (You were stupid because you were poor.) Public education has fished that out these cognitive resources
and pushed them upwards. Cognitive resources inherit and in combination with more selective mating we obtain now: you are poor because you are stupid. Very unfortunate indeed.
There are additional forces at work, but this should be enough …

Posted by ddccc | Report as abusive

Sure flashrooster! Every one can agree with you that:
- the top 5% pay the most taxes (actually more than 50%) because they have the most money (actually they >earn< the most money)
- those making below a certain amount don’t pay INCOME taxes because they don’t make enough money.

What is your point? The issue here is: WHY do we have now a bottom majority that consumes more in social services than what they pay in taxes? Why does this majority not have enough marketable skills?

No flashrooster! It is NOT the case that “they pay plenty of other taxes”. Payroll taxes are not taxes; they are co-payments for the premiums of government run pension and healthcare insurance services (often heavily subsidized by employers who have been forced into
‘solidarity’ – yet another free social service).

Posted by ddccc | Report as abusive

Final comments.

Ryan McCarthy’s article is just out many of the ‘stirring the pot’ variety. It confuses at the end the key topic (divergence of income) with the decades old refrain “The rich are getting richer …. The poor are getting poorer …”. Rich or not is marginal in what the
Great Divergence discussion is about: why are bottom majorities in welfare states not able to earn their fair share so that they must depend on a wide array of government transfers?

Most contributions above are hardly a dialog and are just venting of opinions (“I really don’t think …”) without substantiating arguments with as exceptions: selective mating, immigration of ‘wrong’ people/ importing poverty, globalization/outsourcing and the unfortunate side-effect of public education.

Let me zoom out and give you folks one more cause for the indeed sorry state of affairs in our welfare states. Survival of the fittest has been bad news. The 20th century can be characterized as doing everything possible to compensate for its unfairness with a whole slew of generous, sympathetic, social welfare programs. The bottom 50% has repeatedly over several generation disproportionally benefited and has out breaded the top 50%. The genotypic IQ bell curve has shifted to the left as a result. The magnitude of this shift is still under discussion in academic circles. Combine this effect with the planet’s shrinking per capita resources – of which the US is a very greedy customer. One can keep arguing over the fair distribution of a shrinking pie for a growing number of consumers, but why not
discussing that our >>>unconditional

Posted by ddccc | Report as abusive

Tougar: “There are many that come from low income environments and succeed and there are many that are handed the keys to wealth and fail.”

No, no there’s not. That’s the whole point of this article, which I’m guessing you ddin’t even bother to read. If the situations you describe actually existed then we would not be where we are today. We “liberals” have never and will never ask for everyone to earn the same, only for the opportunity to move up that socioeconomic ladder. But with the worst socioeconomic mobility amongst all developed nations in the world that opportunity no longer exists, despite Ted Cruz and Marco Rubio’s best efforts to convince us otherwise.

Posted by 4ngry4merican | Report as abusive

Middle income jobs – those paying $13+ per hour – have decreased by 60%. Lower-income jobs have increased by 58%. Way back when (I am 76) people worked in companies for their entire working lives, the SAME companies. Now it is increasingly common for someone to work for a number of companies before retirement.

Insecurity = fear. Fear can = desperation. Grab any job available for fear of not being able to pay your bills, support your family.

Posted by AZreb | Report as abusive

Regarding 4ngry4merican’s “But with the worst socioeconomic mobility amongst all developed nations in the world that opportunity no longer exists”, Please note that trevorh explained already in the beginning the root cause of the decreased socioeconomic mobility:
“… the rich are marrying people with better genes and are making better off springs and the poor are marrying people with worse genes and making worse offspring.
The economic inequality is simply the symptom.”
The 20th century created a society stratified by (heritable) cognitive skills. Desperate attempts to fix this with additional education efforts fail. Can’t fix the genes yet. Sorry.

Posted by ddccc | Report as abusive

Many relevant points have been made in this discussion.

Though many of us feel fear and worry about our future, and keep on working harder and harder within the system, few of us realize the extent to which the people have been enslaved. Getting on in life has consisted of adopting beliefs about society, taking a position in that society and accepting the ‘rules’ for advancement, without questioning who made those rules. This behaviour has progressively distracted us from understanding who we really are.

Perhaps some of us have wondered why humans are the only creatures on this earth that have to work to stay alive. Perhaps you have spent some of your ‘free time’ investigating our true life’s purpose. Perhaps some of us have started to wake up to what is actually happening, through watching films such as Thrive: What on Earth will it take? http://www.thrivemovement.com

We may have wondered why we feel so powerless against so many actions taken by authorities. For those of you in this space, I would like to bring to your attention the status quo with regards to the system:

We are better off taking full personal accountability for ourselves and for our actions.

Please take a look at The Peoples Trust 1776 http://peoplestrust1776.org
and the One Peoples Public Trust http://oppt-in.com

Review the information posted there and check in with your true self.

In love and light.

Posted by BEandDO | Report as abusive

As usual with you putzes, nothing is ever the government’s fault. Nothing more needs to be said, because you fools are hopeless.

Posted by KyleBecker | Report as abusive

KyleBecker’s attack on the Government can be improved with a circular blame game. Non of these parties: Government, the press/media and the public is willing to even articulate the root cause of the growing difference in cognitive skills between the top and bottom 50%: the
system’s century long unconditional generosity to help survival of the un-fittest. No doubt you must have recoiled in disgust when you read the previous sentence.

Posted by ddccc | Report as abusive

‘“The rich are getting richer and staying richer. The poor are getting poorer and staying poorer.” this prof should walk to the near building where there are biology profs as well.

Those profs will tell him, the rich are marrying people with better genes and are making better offsprings and the poor are marrying people with worse genes and making worse offspring.’

These Biology Phd’s must have some of the worst genes then as they have been among the hardest hit by recent economic trends. Tenured jobs are very hard to find for recent PhD’s, and many that do find jobs are working as associate professors for under 30k per year.

Posted by MarkRittman | Report as abusive

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