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McArdle: Inequality Is So Five Minutes Ago

Megan McArdle of the Atlantic writes:

“Income inequality has been rising for so long that people have started to assume that it has just kept rising, even when the data show otherwise. We don't want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.”

No, we don’t. Nor do we want to spend years trying to cure cancer, only to learn that the financial crisis fixed it for us. The likelihood of that happening would be roughly the same.

McArdle bases her speculation on the irrefutable fact that the top 1 percent (i.e., people currently making more than $368,000) took a hit during the 2007-2009 recession. These are the folks the Occupy Wall Street crowd is pissed off about. Before the recession the top 1 percent was gobbling up 24 percent of the nation’s income. The 2008 subprime crash knocked that down to 21 percent in 2008, according to the online database maintained by Thomas Piketty and Emmanuel Saez, the leading researchers on this topic. McArdle has new data from Steven Kaplan of the University of Chicago’s Booth School of Business that, if I’m reading the chart she drew from it correctly, says the top 1 percent’s income share dropped further in 2009 to something like 17 percent. (I’m not sure whether that’s supposed to include income from capital gains, as my calculations do.)

Let’s accept McArdle’s 17 percent at face value. What does it mean? It means that there was a recession. Recessions and major wars always lower income share for the top 1 percent. In every instance we know of (i.e., going back to 1910) the effect was fleeting, with one very big exception: The Great Depression and World War II ushered in a half-century during which the top 1 percent saw its income share decline and then level off. These decades also happened to be (measured by GDP growth) far more prosperous than any we’ve seen since, which has led a lot of people to conclude that income inequality gets in the way of economic growth.

Starting in 1979 incomes resumed growing increasingly unequal and what Paul Krugman has called the "Great Divergence" began. Income share for the top 1 percent doubled. But even though the one percenters’ income share increased after 1979, it didn’t increase every year. It fell off after the 1987 stock market crash, then bounced up and down for a few years, then increased again during the latter half of the 1990s. It fell off after the tech bubble burst but climbed again during the Dubya administration, until it fell off again when the subprime crisis hit. Two or three times before the most recent recession McArdle would have had an opportunity to pronounce the income inequality problem solved. She would have been wrong every time.

It’s also worth remembering that the income inequality trend isn’t one single trend. It’s really two.

Trend One: People at middle incomes have lost ground to people at higher incomes. As I explained in a Slate series last year, there were multiple causes for this. Inadequate K-12 education and the decline of private-sector labor unions were major reasons; trade was for most of the period irrelevant, though it became more relevant as trade with China and Mexico increased during the  aughts; immigration had a negligible effect; race and gender had no effect at all; and government policy had an enormous impact (though weirdly mostly not through tax policy, which intuition would suggest would be the principal driver). If you don't like income inequality then don't vote Republican.

Trend Two is the huge increase in income share for the top 1 percent. This appears to be far less complex in its causation. The principal reasons were almost certainly dramatic changes in the way Wall Street did business and runaway pay increases for top executives in non-financial industries.

These two trends have both worsened during the past three decades, but not always at the same time. Median income stagnated in the 80s, recovered a little in the 90s, then declined in the aughts. Income share for the top 1 percent went up overall but, as noted, fell whenever the economy stumbled. The Gini index, the most common metric for income inequality, is better at following Trend One than it is at following Trend Two. The Gini index therefore worsened after the recession hit, even though the one percenters were hurting. The reason was that middle- and especially lower-income people were hurting more. (Relatively speaking, lower incomes crept up a bit during the aughts thanks in part to runaway health care spending, which created a lot of unskilled and low-skilled jobs.) The Gini index eased a bit in 2010, even as (I suspect) life got better for the top 1 percent. I don’t have data to support it but I would guess that 2010 and 2011 halted or reversed the downward trend in income-share for the top 1 percent (based on the casual evidence of resurgent Wall Street bonuses, unprecedented corporate profits, etc.). McArdle herself concedes that income share for the top 1 percent “may well rebound considerably” in 2010 and 2011. Though judging from the current state of the economy the top 1 percent may lose income share again in 2012.

But don’t you fret for them. Barring major changes in government policy (changes I would welcome even at the expense of book sales!) I see no reason to believe that the 32-year trend in income inequality will end anytime soon, and every reason to believe the precise opposite: It will get worse.

Correction. This entry earlier made erroneous reference to U. of Chicago's "Baker" School of Business. It's "Booth."