American Exceptionalism Part 5 Income Distribution (Part 1 the data)

The United States has the worst income distribution of any advanced country and it is getting worse.  Is this a feature or a bug? As noted in our last post the United States never developed the broad safety net that can be found in almost all advanced countries. I argued that there are three reasons for rejecting a safety net: 1) racism, 2) a belief in the American Dream which says that you can get ahead if you want to, and 3) a two-party political system makes it difficult to pass universal legislation.

More than that, the United States commitment to unbridled capitalism has led to an exceptional growth in the income of the very richest segments of the population. Let’s look at some data and then try to understand why our economy is trending toward greater inequality. I first explored this in a post of August 28, 2019. I want to look again at one chart from that post. These data are for pre-tax income distribution.

Income distribution in the United States is more unequal than that of other advanced countries. The chart below presents Gini coefficients for selected advanced countries (The Gini is the standard measure of income inequality; the higher the Gini, the more unequal the income distribution). The U.S. (in red) has the highest inequality of all of the countries presented here.

The following chart presents much of the information on income distribution in the United States in one picture.  The horizontal axis represents household income in $5,000 increments.  Poorer households are on the left; richer households on the right. The height of each bar represents the proportion of each group in the total population. If the two highest income bars (on the right) were divided into $5,000 increments, the tail would continue to decline.  Several facts should be emphasized:

1. This is not a normal distribution; if it were, the median income would be in the middle, and the tails would be mirror images of each other.
2. These incomes are after taxes and transfers, so the poorer groups have incomes supplemented by welfare payments, food stamps, etc.
3. The bottom 20% of families have incomes below $20,000; the top 20% have incomes above $100,000.

U.S. income distribution over time. The following two graphs (which present the same information in different ways) show how U.S, income distribution has changed over time. The first chart presents the share of U.S. pre-tax income going to the bottom middle 40%, the top 1%, and the bottom 50% respectively. There are two distinct periods shown in this graph: the first period lasts from 1913 to 1970, in which the top 1% of households see their share of total pre-tax income fall from 21% in 1919 to 11.5% in 1970 and the bottom 50% of households see their share of pre-tax income rise from 14.5% in 1919 to 20.8% in 1970. The second period runs from 1970 to 2019 during which the share of the top 1% increases to 20.5% while the share of the bottom 50% falls to only 12.7%, the lowest of any time in the last 100 years. The share going to the middle 40% jumps about some, but ends up a just a little lower in 2019 than it was in 1913. The second graph shows the same information in a different way (by showing the difference between the pre-tax income of the top 1% and the bottom 50%). Note that the difference in shares of the richest and the bottom decreases to 1975 and increases after that.

Shares of pre-tax national income going to the middle 40%, the bottom 50% and the top 1% of American families (1913 to 2019)

Difference between the share of pre-tax income of the top 1% of American families and the bottom 50%

Another look at income inequality can be found in the graph below from the Center on Budget and Policy Priorities using US Census data. This chart examines income growth after 1979 for four income groups: the top 1%, the next 19%, the middle 60% and the bottom 20%. The income of the top 1% grew by 226% between 1980 and 2015, or 3.4% per year, while that of the broad middle grew by 47%, or 1.1% per year. The income of the poor grew faster than that of the 2-20% group at 85% or 1.8% a year. 

Two other points need to be made here: First, wealth is distributed much more unequally than is income (see figure below).  The top 1% have 24% of the pre-tax income but 43% of all financial wealth. More important the bottom 90% have 50% of the pre-tax income but only 15% of the financial wealth. In fact, the bottom 50% of the distribution have less than 1% of the financial wealth.

Second, redistribution of income through taxes and transfers has made the post-tax distribution more equal than the pre-tax, and has led to a substantial decline in the poverty rate from 25% in the 1960s to 15% today. The chart below shows the differences between pre-tax and transfer levels and post-tax and transfer levels.

Our next post will try to answer the question as to why the income and wealth distribution in the United States is so unequal, and what, if anything we can do about it.