Network News

X My Profile
View More Activity

The conehead economy in one graph

10-21-10inc-f3-infocus.jpg

You occasionally hear people say that the average American's consumption has continued growing over this period (though a lot of that was due to an unsustainable, and ultimately catastrophic, credit bubble), or that the way we measure inflation understates the improvement in the average American's living standard. But none of that explains away this graph.

Source.

By Ezra Klein  | October 22, 2010; 11:09 AM ET
Categories:  Charts and Graphs, Inequality  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: China's Ben Bernanke
Next: Does confidence matter?

Comments

Man, what happened in 1980? I blame Ordinary People winning the Best Picture Oscar.

Posted by: MosBen | October 22, 2010 11:25 AM | Report abuse

Tax cuts for the rich benefitted the rich and did little to nothing for everyone else? That's weird.

Posted by: youwillfindchris | October 22, 2010 11:29 AM | Report abuse

Average income failed to grow from 1965 through 1980 for pretty much everyone. The wealthy were barely better off in the late 1970s than at the end of World War II.

Average income for the top 1% finally started growing after 1980, though it's lamentable that not everyone else's did.

By the way, not to imply (nor deny) causality, I note that the bottom 90% hasn't really seen any improvement since the Great Society days.

One last thought - a per capita view rather than a per household view probably shows a better picture for the bottom 90%.

Posted by: justin84 | October 22, 2010 11:34 AM | Report abuse

I believe that around 1980 was when "trickle-down" economics was initiated by the Great Communicator wasn't it? Well, it does look like it lived up to its billing with only a tiny trickle of wealth leaking out to the masses ...

Posted by: muggleduffy | October 22, 2010 11:40 AM | Report abuse

Trickle down sure worked well, didn't it? Thank goodness Obama is bringing it back. Give money to banks and brokers, and they will fix our economy for us out of the kindness of their hearts! Any second now.

Posted by: B405 | October 22, 2010 11:42 AM | Report abuse

Justin84, the way I read that graph, roughly everyone doubled their income, slowly but steadily, from the end of WWII to the end of the 70s. Beginning in the 80s, the bottom 90% flatlined at late 70s income levels while the top 1% slightly-more-than tripled their income levels.

Posted by: MosBen | October 22, 2010 11:47 AM | Report abuse

This is the Volcker-Reagan economy. Freeze wages for the middle class in order to control inflation. Consumer spending is made up on credit. The Debt-to-Income ratio was 124% just before the bubble burst. This is private debt, mind you. The government's debt is nowhere near this high. And yet all we hear is that the government has to somehow "tighten its belt like the average consumer". But the problem was that the average consumer has not tightened their belt despite flat wages for nearly 30 years. When the did tighten their belts - 10% unemployment.

The only way forward is higher taxes on the wealthy (to induce companies to invest in the people at the bottom), with the expectation that inflation will be 5-7% in good times instead of 1-4 % in good times.

The Reagan bubble is over.

Posted by: klautsack | October 22, 2010 11:57 AM | Report abuse

I'd be interested in seeing what happened to the people in the 91% to 99% category. It appears that they are missing from this chart.

Posted by: jnc4p | October 22, 2010 11:59 AM | Report abuse

Note to all of you saying that lower taxes caused this, these are pre-tax income numbers. This seems more to play into the nature of the incentives of actually recognizing income. The total taxes paid by the top 1% have risen substantially, even as the rates fell. They pay around 40% of the total of Federal individual income taxes paid, which is sort of mind-boggling. People now sell assets they would previously have just held to avoid recognizing income. The massive drop in 2000 makes clear the prominence of cap gains in the numbers. There is nothing to suggest that the highest 1% in 2007 are the same people as in 2008. Assets and income are very different things. You might be in the top 1% for one year only, when you sell off a business, a farm, etc. These graphs create the false impression that there is some group called the "top 1%", when they don't really exist.

In reality, what we saw in the 1980's was the emergence of significant Asian competition to the manufacturing sector. A billion people absolutely ecstatic to do a job for less money than you as replacement for a subsistence farming lifestyle tends to keep the demand for that skill set low.

The time of America as the world economic leader is nearing its end. Let's not destroy it faster by stealing (sorry, is it supposed to be called redistributing?), money from rich people and pretending like it's not happening.

Posted by: staticvars | October 22, 2010 12:00 PM | Report abuse

@justin84: I suspect we'd see a worse picture for the bottom 90% if it were shown per capita rather than per household. After all, the historic norm of one breadwinner per household has changed to a norm of two. Hasn't it?

Posted by: QuiteAlarmed | October 22, 2010 12:02 PM | Report abuse

Best thing to read on why the lower 90% are stuck is this:

http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

I would submit that Andy Grove is a better candidate for Obama's revamped economics team than the people Ezra has recommended.

http://voices.washingtonpost.com/ezra-klein/2010/10/column_the_five_people_obama_s.html

Posted by: jnc4p | October 22, 2010 12:04 PM | Report abuse

staticvars-

You hit the nail on the head, but (I think) draw the wrong conclusion from it. Income at the top rose because the incentives changed. If a corporation finds itself with profits at the end of the year and they need to figure out what to do with those profits, they have a few options - shower wealth upon the people at the top, reinvest in R&D, upgrade capital investments, invest in working training, or (heaven forbid) raise wages for those at the bottom. If taxes are high on the people at the top, the corporation would essentially be donating excess profits to the Treasury. I doubt a corporate board would think that's a good use of their money. So, they'd look to put their profits elsewhere. But, if taxes are low for the people at the top (as they are currently), then it's a better deal to shower wealth upon the wealthy. Meanwhile, wages stagnate for the people lower on the food chain, worker training dries up, R&D dries up, and less money goes toward capital investment. There you have it. The Reagan-Volcker economy.

Posted by: klautsack | October 22, 2010 12:10 PM | Report abuse

Another fine graphic depicting a phenomenon that has been well-established by economists. After the oil shock and stagflation of the 1970s, and a shift to more laissez faire economic policies beginning in 1980, household income improved only for the top income tiers (the higher the tier, the greater the improvement). Excepting the top tier, wage rates declined, but many wives went to work; thus, income declined for most single-earner households; consumption increased primarily as a result of a large rise in borrowing and large decline in personal savings rates. It doesn't take a rocket scientist to figure out that our economic policies since 1980 have failed to benefit people who are not at the upper-level of the economic ladder. And that there should be political consequences.

Posted by: pjro | October 22, 2010 12:14 PM | Report abuse

I think that when you wrote "the average American" you meant "the median American" or "the typical American." The equivocation of pretending that the average American is typical is the trick used by Conservatives and Republicans to distract people from the information in the graph. "Median" is a scary word. Using "average" to refer to something other than an average is ordinary English and very tempting. However, the confusion caused by normal sloppy use of the word average is extremely damaging. I think you should use the word average as statisticians do. It is not just intellectual snobbery -- normal English as used by normal people makes it impossible to understand what is happening.

Just to go on at eccessive length.

The graph shows nothing about the average American, since it excludes the 90-91% quantile and only shows percent increase which could be used to calculate the average excluding that quantile only if information on the ratio of the income to the top 1% to the bottom 90% in some year were given.

Posted by: rjw88 | October 22, 2010 12:16 PM | Report abuse

I think the more interesting question is why for thirty years the dominant public philosophy has been that we can't and shouldn't do anything about this.

Why, for example, did we stop pursuing a social minimum, even when private sector wages and benefits stopped growing?
http://realignmentproject.wordpress.com/2010/10/21/21st-century-social-minimum/

Posted by: StevenAttewell | October 22, 2010 12:23 PM | Report abuse

You mean Reagan's policies favored the few over the many? I am shocked, SHOCKED I tell you!

Posted by: AMviennaVA | October 22, 2010 12:28 PM | Report abuse

"@justin84: I suspect we'd see a worse picture for the bottom 90% if it were shown per capita rather than per household. After all, the historic norm of one breadwinner per household has changed to a norm of two. Hasn't it?"

Average household size has fallen over the past several decades. On a per worker (rather than per capita) basis, you could well be right.

http://www.calculatedriskblog.com/2010/09/economist-expanding-household-size.html

"Justin84, the way I read that graph, roughly everyone doubled their income, slowly but steadily, from the end of WWII to the end of the 70s. Beginning in the 80s, the bottom 90% flatlined at late 70s income levels while the top 1% slightly-more-than tripled their income levels."

The top 1% had about 70% or so of their 1979 income back in 1945. During the mid 1970s, it looks like they had 80%-90% of their 1979 income. Not quite a doubling, though the top 1% had a few good years in the late 60s/early 70s.

From 1945-1977, I'd say the income growth of the top 1% roughly mirrored the bottom 90% from 1982-1999.

If I had to guess, if you started in 1929, and set the 1929 value for each group at 100, the 1929-2009 performance would be a lot closer (taking into account the great compression and all).

Posted by: justin84 | October 22, 2010 12:45 PM | Report abuse

And of course, the wicked top 10% are exactly the same people now as they were in 1980.

Looks like the longest, steepest rise was between 1990 and 2000. Hmmm, now who was our President during most of those years? In fact, it looks like the top 10% took two hits during the Bush years. And the chart stops right about the time they took the third.

Posted by: bgmma50 | October 22, 2010 12:50 PM | Report abuse

1%

Posted by: bgmma50 | October 22, 2010 12:53 PM | Report abuse

One thing I find interesting is that the normal conservative commenters around here don't have any fundamental rebuttal to the basic facts. Everyone knows this is the case, but why is nothing done about it? Wealthy envy, I suppose.

bgmma50 - 1990-2000 Tech Bubble; 2002-2006 Housing Bubble. I guess the best thing you can say was that Clinton's bubble was longer. But I suspect there are a lot of things on Clinton that were longer than they were on Bush.

Posted by: klautsack | October 22, 2010 1:07 PM | Report abuse

That 10 year period where the yellow line is below the blue one in the '70's really explains the Reagan Reaction, doesn't it?

Posted by: zimbar | October 22, 2010 1:26 PM | Report abuse

"But I suspect there are a lot of things on Clinton that were longer than they were on Bush." Posted by: klautsack

Like his nose? :)

Posted by: bgmma50 | October 22, 2010 2:02 PM | Report abuse

The statistics on the "upper 1%" would be a lot more meaningful if there was some context as to who they are. I suspect that a lot of them, particularly those in the upper and highest reaches of their percentile are business owners who took their company public or were bought out by private equity groups. If that's the case, they got their money the old fashioned way and created a lot of jobs in the process. Plus, they are likely only members of the exclusive 1% of top earners for one year. After that, while they are undoubtedly wealthy, they are not necessarily in the top 1% of earners.

Posted by: bgmma50 | October 22, 2010 2:22 PM | Report abuse

bgmma50-

I think this is the kind of "jackpot" mentality that keeps the American public from really wanting to do anything about this. i.e. "Next year might be my year".

I don't begrudge people their financial rewards, but after some point it just becomes a pissing contest. And as the crash of 2007-present shows us, the most highly compensated weren't necessarily doing the best job anyhow.

Posted by: klautsack | October 22, 2010 2:31 PM | Report abuse

"You occasionally hear people say that the average American's consumption has continued growing over this period"

Ezra, can you check on what happened to non-healthcare consumption? If you take health care out, did consumption actually go down?

Also, what if you take out education -- as that's largely an input for consumption, rather than net consumption.

And what if you take out daycare, and eating out, and housekeeping, and elder care, as a generation or two ago families got that predominantly from only needing one earner?

I suspect that if you take these out typical families have actually gone backward over an entire generation -- an entire generation! the generation of Republican dominance.

And if you look at consumption per hour worked, with both spouses working, and a lot more hours, I suspect that's plummeted.

And very importantly, there are positional/context/prestige externalities -- typical families stagnate while the wealthy, and especially super-rich, make massive gains.

Posted by: RichardHSerlin | October 22, 2010 3:10 PM | Report abuse

staticvars failed to point out in his/her comment that it's entirely justifiable that "The top 1%...pay around 40% of the total of Federal individual income taxes paid..."

That is NOT saying that the top 1% are paying 40% of their gross income in federal income tax. Hardly. Someone like Bill Gates doesn't even miss the federal income tax he pays, no matter what percentage it is. And on top of that, he donates millions upon millions to various philanthropic causes.

It's quite a different story for the wage earner with a family who brings in $75,000 before taxes. That person has to budget every 2 week paycheck, just to meet obligations, and at that pay rate he's probably lucky enough to be a full time employee -- so many aren't.

Posted by: kayjay503 | October 22, 2010 3:23 PM | Report abuse

I believe health care spending is also a big part of the "extra consumption" that makes consumption inequality less than income inequality. (Since I don't think premiums paid by employers counts as income, but it's certainly consumption.)

Of course, health care spending isn't particularly sustainable either, and hasn't even necessarily been that much of a good deal for those receiving such health care, since it's so much more expensive than in other countries.

Posted by: usergoogol | October 22, 2010 5:35 PM | Report abuse

"Ezra, can you check on what happened to non-healthcare consumption? If you take health care out, did consumption actually go down?"

This should help you out. Consumption less medical care stayed roughly constant as a percent of GDP, and so it grew along with GDP.

http://www.leftbusinessobserver.com/Consumption.html

"I suspect that if you take these out typical families have actually gone backward over an entire generation -- an entire generation! the generation of Republican dominance."

You take out enough categories with growth and inflation and sure, you'll see lower consumption on net. That said, I wonder how many people would choose 1970 health care at 1970 prices over 2010 health care at 2010 prices.

Not sure how you'd determine who is buying (top 1% or bot 90%), but here are some expenditure data. Real consumption less health care grew 2.9% annually from 1995-2009, or 2.0% per capita, as opposed to 3.0% during. Health care only grew at a 3.5% pace during this time (remember this adjusts for rapid health care price increases).

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=75&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1995&LastYear=2009&3Place=N&Update=Update&JavaBox=no#Mid

The U.S. tends to have a huge lead in terms of consumption on international comparisons, though again there is less variance in Euro numbers - given the large aggregate lead, my sense is that it is unlikely the typical American consumes less than the typical European, and most likely the typical American consumes more.

http://www.nytimes.com/2005/04/17/weekinreview/17bawer.html?_r=1&ex=1271390400&en=44ea05b3e068feb5&ei=5090&partner=rssuserland&emc=rss

The Heritage Foundation has also documented consumption patterns of the poor in particular, and I'm certain that some of these spending categories are a bit higher than in 1970 (how many middle class families owned two cars in 1970 - 1/3 of poor families did in the 2000s).

http://www.heritage.org/Research/Reports/2007/08/How-Poor-Are-Americas-Poor-Examining-the-Plague-of-Poverty-in-America

Posted by: justin84 | October 22, 2010 6:09 PM | Report abuse

while i appreciate the graph...i'd venture to guess that it is still skewed...

Posted by: undrgrndgirl | October 22, 2010 6:47 PM | Report abuse

how much of the top 1% income is financial sector monies?

Posted by: jamesoneill | October 23, 2010 9:05 AM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge washingtonpost.com's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.




characters remaining

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company