More on Income Inequality

Key excerpts from the top White House economic adviser's presentation on the "mindboggling" magnitude and increasingly negative consequences of growing income inequality (via Ezra Klein):

Klein - This morning, Alan Krueger, the chairman of the President’s Council of Economic Advisers, gave a speech on inequality at the Center for American Progress. Prepared remarks here. Charts here. These are the parts that caught my eye:
 
- “I used to have an aversion to using the term inequality. The Wall Street Journal ran an article in the mid-1990s that noted that I prefer to use the term ‘dispersion’. But the rise in income dispersion – along so many dimensions – has gotten to be so high, that I now think that inequality is a more appropriate term.”

- “As the Congressional Budget Office noted in a recent report, the top 1 percent of families saw a 278 percent increase in their real after-tax income from 1979 to 2007, while the middle 60 percent had an increase of less than 40 percent.”


(Alan Krueger) 
 
- “We were growing together for the first three decades after World War II, but for the last three decades we have been growing apart. Here at CAP, I should point out that the pattern in the post-1970s period is not monolithic. . .the period from 1992 to 2000 was an exception, when strong economic growth and the policies of the Clinton administration led all quintiles to grow together again. Indeed, all income groups experienced their fastest income growth in years. I could also note, parenthetically, that there is no sign in these data that the tax increases in the early 1990s had an adverse effect on income growth.”

- “The magnitude of these shifts is mindboggling. The share of all income accruing to the top 1 percent increased by 13.5 percentage points from 1979 to 2007. This is the equivalent of shifting $1.1 trillion of annual income to the top 1 percent of families. Put another way, the increase in the share of income going to the top 1 percent over this period exceeds the total amount of income that the entire bottom 40 percent of households receives.”


- “The correlation between parents’ and their children’s income is around 0.50. This is remarkably similar to the correlation that Sir Francis Galton found between parents’ height and their children’s height over 100 years ago. This fact helps to put in context what a correlation of 0.50 implies. The chance of a person who was born to a family in the bottom 10 percent of the income distribution rising to the top 10 percent as an adult is about the same as the chance that a dad who is 5’6” tall having a son who grows up to be over 6’1” tall. It happens, but not often.”

- “Our income tax system is less progressive than that in other countries. This chart shows the Gini coefficient for OECD countries, with the blue bars indicating inequality in before-tax income and the red bars inequality in after-tax income [Figure 10]. The difference in the height between the bars is a measure of how much the tax code reduces inequality. Of all the OECD countries, only Chile, Korea, and Switzerland have tax systems that reduce inequality by less than the U.S.”

(Alan Krueger; Data: OECD) 
 
- “The macro evidence is clear that the economy did not perform better after last decade’s tax cuts than it did after taxes were increased on top earners in the early 1990s. I already showed you evidence that income growth was stronger for lower and middle income families in the 1990s than it was in the last 40 years overall....There was more job growth in start-ups in the 1990s than in the 2001 2007 period. Across all businesses, job growth was much weaker in the 2000s than in the 1990s. So there is little empirical support for the claim that reducing the progressivity of the tax code has spurred income growth, business formation or job growth.”

- “According to research by Karen Dynan and coauthors, the top 1 percent of households saves about half of the increases in their wealth, while the population at large had a general savings rate of about 10 percent. This implies that if another $1.1 trillion had been earned by the bottom 99 percent instead of the top 1 percent, annual consumption would be about $440 billion higher. This would be a 5 percent boost to aggregate consumption.”

- “An active line of research examines the connection between inequality and longer term economic growth. In a seminal paper, Torsten Persson and Guido Tabellini argued that in a society where income inequality is greater, political decisions are likely to result in policies that lead to less growth. They provided evidence supporting this conclusion. A new IMF paper also finds that more equality in the income distribution is associated with more stable economic growth.”

- “We can’t go back to the type of policies that exacerbated the rise in inequality and threatened economic mobility in the first place if we want an economy that builds the middle class. This means that we must adequately regulate excess risk-taking and corrupt practices in financial markets. It also means that we can’t go back to tax policies that didn’t generate faster economic growth or jobs, but rather increased inequality. Instead of going backwards, we should adhere to principles like the Buffett Rule, which states that those making more than $1 million should not pay a lower share of their income in taxes than middle class families. We should also end unnecessary tax cuts for the wealthy, and return the estate tax to what it was in 2009.”

- “Restoring more fairness to the economy would be good for all parts of American society. This is not a zero-sum game. The evidence suggests that a growing middle class is good for the economy, and that a more fair distribution of income would hasten economic growth. Businesses would benefit from restoring more fairness to the economy by having more middle class customers, more stable markets, and improved employee morale and productivity.”