Income Gap Narrowing

A year into the economic downturn, the much decried income gap has narrowed.

The deepest downturn in the U.S. economy since the Great Depression may finally shrink the gap between the very best-off Americans and everyone else.

If so, it won’t be by lifting up the bottom. It will be by pulling down the top.

Over the past 30 years, chief executives, Wall Street bankers and traders, law-firm partners and such amassed ever-greater incomes, while the incomes of factory workers, teachers, office managers and others in the middle grew much more slowly. In 2007, the top 1% of U.S. families accounted for 23.5% of all personal income in the U.S., according to economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics. That was a level not seen since the Roaring Twenties.

The top 1%’s share appears to be falling fast. Mr. Saez and other economists expect income going to the top 1% of taxpayers — currently, those with about $400,000 a year — will drop to somewhere between 15% and 19% of all income by 2010. That still would leave income distribution more top-heavy in the U.S. than in many other countries.

One early indication: Median chief-executive pay at companies in the S&P 500 fell 15% in 2008 (to $7.3 million), according to University of Southern California pay expert Kevin Murphy.

“Based on past experience, it looks like inequality will go down and change the long-term trend of America becoming a less egalitarian society,” says Ariell Reshef, a University of Virginia economist and another student of the equality issue.

Since many of the gains from the fast growing economy of previous years were realized by the top income tiers, it only makes sense they would see the quickest and largest drop. One of the things that often goes unappreciated in discussions of income inequality is that there is actually a lot of turn over of who is in the top 1% of earners. Most people don’t sustain those levels of earning for very long.

Many have eagerly hoped for the day when the incomes of the top income tiers will fall and inequality will begin to reduce. No word on whether they’re enthusiastic about the progress so far, but if we manage to preserve the recession for another 5-10 years, we might acheive levels of equality not seen since FDR’s time. One can but hope.

8 Responses to Income Gap Narrowing

  1. S.B. says:

    Thanks! We’ve all got to look on the bright side.

  2. Zak says:

    I wonder if the percentage of total wealth controlled by the wealthiest Americans declines too? It seems like house prices might make up a smaller share of their wealth than most people’s. On the other hands, equity and more exotic assets haven’t performed very well either.

  3. Blackadder says:

    I wonder if the percentage of total wealth controlled by the wealthiest Americans declines too?

    Most likely. The wealth of millionaires in the U.S. declined 30% during 2008. Estimates I’ve seen for the U.S. overall are around 20%.

    At the end of the day, it looks like much of the increase in inequality in the U.S. over the last decade or two only existed on paper.

  4. c matt says:

    Let’s see – chief executives, Wall Street bankers and traders, law firm partners, “and such”.

    How come they never name some of the biggest money makers in these lists – physicians?

  5. To make it into that rarified atmosphere you need to make above 400k, which very few doctors do.

  6. restrainedradical says:

    If you look at the top 5% (~$150K+) instead of the top 1%, the gap is still growing. So the super-rich lost their bonuses. The doctors, lawyers, and non-Fortune500 executives are doing quite well.

    And assets do matter. Not having to pay a mortgage means a lot more discretionary income. Then there’s the comfort of knowing that you don’t really have to work if you don’t want to. And these benefits follows your heirs.

  7. Big Tex says:

    I found this policy analysis over at the Cato Institute rather interesting.

  8. c matt says:

    Funny, I know more physicians (to clarify – not talking about Ph.Ds in philosophy, etc) in the 400K range than lawyers. In fact, percentage-wise, doctors do much better than lawyers (because of the strict supply-side limits).

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