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Tag Archives: income distribution

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“What then is the American, this new man?…He is an American, who, leaving behind him all his ancient prejudices and manners receives new ones from the new mode of life he has embraced, the new government he obeys, and the new rank he holds…Here individuals of all races are melted into a new race of man, whose labors and posterity will one day cause great changes in the world.”  (J. Hector St. John De Crèvecoeur, U.S. visitor, 1782)

Today, asked “What then is the American?” we would probably answer, “Middle class.”

In an August Pew Research survey of 2508 adults, almost one-half said they were middle class. It seemed not to matter that dividing the number of US households into fifths and then looking at the middle fifth, income ranged from $38,040-$61,720 (2010). Moving beyond any valid income definition, people with more income and less said they were middle class.

Why?

This takes me back to a blog I wrote in 2010:

In a recent NPR interview, a painting contractor, an employee of Healthy Montana Kids, a man who runs a hi-tech robotic firm, and a hospice worker, all earning between $25,000 and $100,000 annually, said they were middle class.

Sort of like “Goldilocks and the Three Bears,” most Americans prefer identifying themselves as the middle class: “They don’t want to seem {too} poor, they don’t want to seem {too} rich-they want to seem like everyone else.” Why? Probably because middle class means more than income. Also, it connects to our values, our aspirations, our education, our jobs.

In a wonderful column, David Brooks identifies “middle class” as the key to our American identity. But then, he asks, as the rest of the world becomes more like us through a gigantic global middle class, how will we perpetuate our leadership and distinct identity? The answer, he says, are our middle class values. Our middle class values fuel our achievement, our innovation, and our sense of community that everyday activities like Little League embody. While Brooks cites Ben Franklin as a model, I like to remember that John Winthrop, governor of Massachusetts Bay Colony said we can be, “A city on a hill.”

Whereas we all agree that people like to identify themselves as middle class, the disagreement starts when we ask what is happening to the middle class. I hope you will take a look at these 2 links. While one focuses on whether middle class income has stagnated and the other looks at the changing size of the middle class, both show that your conclusions depend on how you interpret the statistics. Also, the August Pew Research on the middle class is here, my census statistics come from here, and the Crèvecoeur quote is from here.

Who is middle class?

 

 

 

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Ranking Surveys Typically Are Subjective and Have Unintended Consequences.
  • Ranking income distribution, the Organization for Economic Cooperation and Development (OECD) says that Denmark is one of the most equal countries the world while Mexico is one of the least.
  • For overall well-being, Gallup selects Virginia, Wisconsin and New Jersey as the top 3 states in the U.S.
  • U.S. News ranks Harvard and Princeton #1 for 2011.

Yes? Malcolm Gladwell says not necessarily.

Explaining in the New Yorker why ranking is flawed, Gladwell emphasizes that subjective variables are tough to define.  Yes, you can choose a valid list of categories on which to base a list. Then though, it gets tricky. For the colleges list, how to quantify student engagement? Is faculty quality really about degrees and salaries?

Our bottom line: Health care, corporate responsibility, national debt, life expectancy…we see ranks everywhere. When should we be skeptical?

The Economic Lesson

When economist Robert Whaples discusses income inequality (#7) in an excellent Teaching Company series on contemporary economic issues, he first has to define income. And that, he says, is not easy.

  • Collecting data, the Census Bureau does not necessarily recognize noncash public benefits.
  • Retirement and health insurance packages are excluded.
  • Households tend to “underreport nonwage sources of income.”

In addition, changing household size is relevant. We could even debate whether we would learn more from money spent than money earned.

This returns us to the OECD’s income inequality list. Would we agree with their definition of income?

An economic question: For movies or songs, create a list and define your variables. Are they tough to quantify?

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Astoundingly, the country in which we are born determines 60% of our income. And then, the next 20% relates to our parents’ affluence.

Here are some answers to other interesting questions we never knew we wanted to ask. All are from The Haves and the Have-Nots.

  • Who was the richest person ever to have lived? Probably John D. Rockefeller. Looking at average income figures, the ratio of Rockefeller to the average was 116,000 to 1.
  • Compared to the world, how high is your income? Calculating Purchasing Power Parity (PPP-The Haves and the Have-Nots, p. 166), to be in the world’s top quintile, your PPP, $5,000. The top 1%? PPP is $34,000.
  • What was Anna Karenina’s upward mobility? Having had modest origins, marrying a successful civil servant elevated her to the top 1% of Russian society. Continuing to climb, her relationship with Count Vronsky took her to a man at the very top. Whereas her husband’s annual income was probably close to 9,000 rubles a year, her lover’s was 100,000.

The Economic Lesson

Through the scholarly side of The Haves and the Have-Nots, economist Branko Milanovic suggests using 3 questions to assess the impact of inequality.

  1. Identify the cause of inequality. For example, determine whether income inequality increases or decreases as the economy grows.
  2. Identify the impact of inequality. For example, does inequality create positive or negative economic incentives?
  3. Identify the ethical implications of inequality. For example, are there good and bad ways to have ascended to affluence?

An Economic Question: Being aware of your bias about income inequality in the US, how would you answer Milanovic’s 3 questions?

 

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A quiz:

  • Looking at the top 1% of earners, how many are in financial services?
  • Close to 75%, 50%, 25% or 10%?
  • The answer: 10% (or precisely 13.9%)

Next…

  • How much does the top 1% earn?
  • The 1% threshold is close to $350,000. $200,000, top 5%; 150,000, top 10%; $100,000, top 25%.
  • Here, you can identify your income group. (Stats are for adjusted gross income, 2009.)

And finally, with Occupy Wall Street expressing anger about money moguls, do most people agree? This Gallup survey concludes that more of us blame government than Wall Street for our economic difficulties.

These Occupy Wall Street interviews from NPR’s Planet Money provide an unfiltered look at individual protestor’s goals. They let us form our own opinion of the group’s objectives.

The Economic Lesson
Saying that education is crucial for income mobility, a 2010 study from the OECD concludes that U.S. intergenerational mobility is relatively low. In other words, fathers and sons, mothers and daughters remain close to the same rung on a social mobility ladder.

By contrast, this 2007 report from the U.S. Treasury indicates that there is considerable income mobility in the U.S. Describing a hotel with luxurious rooms and shabby rooms, they say that, “…those in small rooms have an opportunity to move to a better one, and that the luxurious rooms are not always occupied by the same people. The frequency with which people move between rooms is a crucial aspect of the trend in income inequality in the United States.”

An Economic Question: Explain why you would accept income inequality as a consequence of a market system or support more government redistribution of income through taxes.

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Any family that earns less than 3 times the annual cost of a nutritionally adequate diet is below the poverty line.

But should we agree with the placement of the line?

If we say that poverty is “relative deprivation, ” then a definition could take us to those who have less than the average household. In 2010, the U.S. average household had 2.3 cell phone subscriptions and 2.9 TVs.

Other considerations could raise or lower household income totals. Maybe we should include in the annual income total such lower income entitlements as housing subsidies, tax credits, and food stamps. Or, we could subtract childcare. In addition, how do we recognize income mobility and the temporary character of poverty for most households? According to a measure from the late 1990s, 2% of the population was poor for 2 years or more.

The Economic Lesson

The highest since the early 1990s, according to the US Census Bureau, during 2010, 46.2 million people lived in poverty. A family of 4 earning less than $22,314 was below the poverty line while for a family with 3 children under 18, the number was $26,023. Looking at someone over 65 living alone in 2010, the poverty line was $10,458.

Slicing the US income pie, the bottom 40% earned 11.8% of all pretax income. By contrast, the top 20% had a 50.2% share of the nation’s pretax income. Is income inequality good or bad? You might look at this article.

An Economic Question: Why is it important for the United States to identify a poverty line?

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