INCOME AND WEALTH INEQUALITY IN AMERICA

The problem is not some income inequality. We have always had that and done well enough with it. The problem is the extreme income inequality that has developed over time since about 1970. That is the problem.

The Gini Coefficient for the US

Researchers usually measure income inequality using a statistic called the Gini coefficient. The Gini coefficient runs from a minimum of 0 (perfect equality in incomes across all households) to 100 (one rich household gets all the income for an entire country).

A recent report places the US Gini coefficient at 47.7, or almost half way toward the extreme where one rich household gets everything and everyone else gets nothing. Here is how the Gini coefficient looks for other developed or advanced countries by rank from best to worst:

Country/Overall Rank Gini Coefficient

1. Sweden 23.0
2. Norway 25.0
8. Austria 26.0
10. Germany 27.0
17. Denmark 29.0
25. Australia 30.5
34. Italy 32.0
35. Canada 32.1
37. France 32.7
42. Switzerland 33.7
43. United Kingdom 34.0
61. Japan 38.1
93. United States 45.0

By comparison, the levels of inequality in the other 25 developed advanced countries studied all fall in a band between 20 and 35. Even worse, in America inequality is not only high but rising. The Unites States is one of only three developed countries where income inequality rose during the recession of 2008-2009, then continued rising through the lackluster recovery of 2010-2011.

The Percentages on Who Gets What

Put differently, the top 1 percent get about 21 to 23.5 percent of all income. That's up from 12.8% for the top 1% in 1982 and an even lower number for 1970. The top one-tenth of one percent have more combined pre-tax income than the poorest 120 million people in the US. In 2007, the top 400 richest people in America averaged $344.8 million per person, up 31% from an average of $263.3 million just one year earlier. That is how fast the skewing has become.

The top 10 percent now get 50 percent of all income. The bottom 50 percent, which spends the most of what it receives, only gets 12.3 percent of all income.

Income Has become Badly Skewed and Redistributed since 1970

So how was the distribution of income in say 1970, before the skewing really got going to give us what we have now. In 1970 --

the bottom 20 percent got 5.6 percent of the income;
the bottom 40 percent, 18 percent of the income;
the bottom 60 percent, 35.7 percent;
the top 40 percent, 64.3 percent; and
the top 20 percent got 40.6 percent of the income.

A much better skew and one less injurious to the economy. The top 5 percent in 1970 got 15.6 percent. Now, just the top one percent get 23.5 percent. A big shift.

Why Has Income Become So Badly Skewed in Favor of the Rich?

Why? The matter is somewhat complicated, but the truth of the matter can be distilled out and stated succinctly, one of my specialties in economics.

Without going into detail, these are the key causes of the shift income to the top: (1) the federal government pandering to the rich and granting them favors (a substantial factor); (2) the federal tax system and not just on income; (3) the emasculation of the inheritance tax; (4) closing plants and factories and firing workers in the US and building plants and factories and hiring workers abroad; (5) the mechanization of production in the US, including with robots to replace workers; (6) the superior education received by the rich; and lastly and least popularly, (7) the better intelligence and capabilities of the rich (a significant factor).

The Skew in the Distribution of Wealth in the US Is also Bad

If we look at current data on net worth, the situation is equally troubling, but the impact on the economy is arguably less, although wealth correlates highly with political power, which is not surprising. Here is the spread on wealth, using quite current mean data:

Top 1 percent $16,439,400
Top 20 percent $2,061,600
60th-80th percentile $216,900
40th-60th percentile $61,000
Bottom 40 percent [$10,600] (negative net worth = in debt)

Americans Are Badly Out to Lunch on these Matters

A remarkable study (Norton & Ariely, 2010) reveals that Americans have no idea that the wealth distribution is as badly skewed as it is. Americans from all walks of life were also united in their vision of what the "ideal" wealth distribution would be, which may come as an even bigger surprise than their shared misinformation on the actual wealth distribution.

They said that the ideal wealth distribution would be one in which the top 20% owned between 30 and 40 percent of the privately held wealth, which is a far cry from the 85 percent that the top 20% actually own. They also said that the bottom 40% -- that's 120 million Americans -- should have between 25% and 30%, not the mere 8% to 10% they thought this group had, and far above the 0.3% they actually had in 2009).

The Consequences of the Badly Skewed Distribution of Income

This new skew in income has destroyed growth of the economy in the US and with it, employment opportunities in the country as well. The skew is also destroying the economy by placing it in a permanent depressed rut or state from which we cannot emerge without income redistribution in one manner or another.

Socially, the country is being torn asunder between the haves and the have nots, those who blindly and unknowing support the status quo and those who do not. Those who abhor taxes and those who do not.

To be sure, the rich like the status quo and support the politicians of both parties who work to maintain it against progressives who oppose the status quo and work for change. Ignorance abounds in most groups, but not among the rich nor among the progressives. Those groups are well informed and at war. The political parties are too much bought off by the rich. For that reason, a major fissure is developing between progressives and the Democrats.

However, there is a huge income defense industry to maintain the status quo and the politicians have been bought off by the rich who are winning that war. Worse, the rich and the politicians they support are pushing and promoting even more income and wealth inequality by various policies and practices. Washington has now become the enemy of the people and growing numbers of Americans sense that.

But once again, Americans are the "out to lunch" crowd. Just a part of our abysmal economic literacy.