Long-form Articles I’ve Been Reading Lately

The Man Who Killed Osama bin Laden…Is Screwed – Esquire account of the Seal Team 6 member that shot OBL and who, now out of the Navy, is struggling with the transition to civilian life and a U.S. government that offers little support.

Ewing Theory Revisited – Why have the Boston Celtics fared so well without star point guard Rajon Rondo?

Google Glass – Joshua Topolsky takes Google Glass out for a spin.

Christmas Abott is the first female NASCAR pit crew member. And see this video for more.

Michael Jordan Has Not Left the Building – The much discussed ESPN piece by Wright Thompson, part of ESPN’s coverage of MJ’s 50th birthday.

Bitter Pill: Why Medical Bills Are Killing UsTime magazine’s cover story this week. I did not care much for the article’s length (it was far longer than needed), writing style, structure, or approach. Too much of the story focused on repetitive stories of exorbitant billing and its conclusions seemed to rediscover what we already knew, or to leave out important policies altogether (tax deductibility of employer-provided healthcare, for instance). For a much better look at the complexities of America’s healthcare system I recommend the two-part This American Life series that aired in October of 2009 (Part 1, Part 2).

Generation Kill: A Conversation With Stanley McChrystal – An insightful interview with the former head of operations in Iraq and Afghanistan. You may remember that McChrystal was forced to resign from his post in Afghanistan after this 2010 Rolling Stone piece (another long-form article worth reading). This article is gated, you must have a subscription to Foreign Affairs to read it.

Capitalism and Inequality – The subtitle is, What the Right and the Left Get Wrong. It is one of the best written essays I’ve read in a while, though the content itself is a different story (I did enjoy it, however). I suspect that in the end both the Left and the Right will disagree with its conclusions. Or maybe not; it is, in fact, underwhelmingly radical in its thesis: we need to respect the dynamism of the capitalist system while employing social welfare for those that lose out. The article’s boldest claim is that equality of opportunity will not reduce inequality in general since deep familial and communal structures undergird various groups’ abilities to utilize opportunity when it is offered to them. This article is gated, you must have a subscription to Foreign Affairs to read it.

Harper High School – This is not a written piece, but still one of the best pieces of journalism I’ve ever encountered. Produced by This American Life, the two part series (Part 1, Part 2) follows the students, staff, and parents at Harper High School in Chicago for an entire semester. Last year 29 current or recent students were shot, 8 of them fatally. This was not a another school shooting that you happened to miss, these deaths took place in many separate incidents around the Harper community over the course of the academic year. The two-hour special is suspenseful, heart breaking, hopeful, inspiring, engaging, enlightening, and entertaining; simply put, everything that journalism should be. The two-part series can be fruitfully paired with the 2011 documentary The Interrupters (PBS version here) or Terry Gross’s interview with the film’s director Steve James and Ameena Matthews, one of the “stars” of the film who works with Chicago’s CeaseFire to “interrupt” youth violence in the city.

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The Chick-fil-A Situation and an Economics Lesson

The economics lesson will come in a moment, but first I want to talk about the situation more generally. But before doing so let me quickly reveal my biases. I am decidedly in favor of same-sex marriage. I have a lot of gay friends. I walked in Seattle’s Gay Pride parade this year. I follow George Takei on Facebook. It’s pretty much the only issue that informs my vote — not the economy, or healthcare reform, or foreign policy. I’ve never heard an argument anywhere near cogent for denying this right to same-sex couples. I also don’t remember having ever eaten at Chick-fil-A — I don’t even know where one is if I wanted to. I will certainly not be eating there in the future.

But as always our discussion of the situation lacks the clarity and precision I prefer. First, let’s state what is obviously true. Chick-fil-A did not donate money to anti-LGBT organizations. “Chick-fil-A” is an abstract human conception. It cannot donate money, just as the table in my dinning room cannot. The idea of Chick-fil-A is useful as a shorthand in many discussions and analysis, and, indeed, has specific meaning and importance in the area of law. But let’s not kid ourselves by conjuring up imagines of everyone at Chick-fil-A gathered around a drumstick shaped conference table one Monday afternoon to determine where this year’s donations would be sent. Undoubtedly, a very small group of people somewhere relatively high up, if not at the very top, made the decision about how to distribute these funds.

I say this only because I fear a certain amount of persecution for those individuals unfortunate enough to be on the front lines of the company’s franchises. I know from first hand experience that many of us know relatively little about the companies for which we work. I would not be surprised if the fry guy, or the checkout guy, or the chicken girl knew nothing of these donations before the recent brouhaha. I say this realizing that the company is outwardly religious in its mission statement. But even if employees were aware of the donations perhaps we should still cut them some slack. I doubt they were attracted to low-level positions at Chick-fil-A because of the company’s questionable values. More probably these employees have relatively few options for employment and are doing the best they can to carve out a living. Sometimes people make tough choices when their livelihood is on the line, and I for one am not going to blame them for that. Sure, some employees share the views put forward by the company’s mission statement, but I’m keeping an open mind as to which employees these might be.

On the other hand, it does seem fairly clear that these donations went to organizations that are openly hostile to same-sex marriage. You can view a complete list of Chick-fil-A recipients here. With a little poking around it seems that promoting traditional family structures is one of the core missions of these organizations. And it is troubling that their budgets are now thousands or, in one case, a million dollars richer.

Opponents have reacted just as they should — protesting, sure, but more importantly not purchasing Chick-fil-A food products. People purchase items when the price of the product is less than the expected value (or utility) they receive. But value is not utilitarian in the strict sense. Embedded in value are all kinds of non-traditional forms of utility like aesthetics, the importance of the brand, and the moral principles of the company compared to the those of the purchaser. (That’s why Apple products can garner a premium despite having nearly identical hardware components). So clearly, using this all-encompassing definition, Chick-fil-A products have lost value in light of recent events. Some have pointed out that Chick-fil-A’s values have not changed for years; but, again, what has changed is the information available in the public forum about these values. Behavior, aptly, responds to new information.

Social movements are an underappreciated aspect of capitalism, but just as surely are part of the modern capitalist system. What is unrecognized by most participants in social movements, however, is that these movements can be very good for the corporations at which they take aim. I don’t mean in some vague sense relating to free publicity and so on, I mean in a real economic sense.

Remember that $5 ATM fee Bank of America proposed charging late in 2011? An online petition against the fee was started by Molly Katchpole, a part-time nanny, and quickly gained over 300,000 signatures, causing BofA to cancel the planned increase. This seems like a victory for consumers, and in some sense it is, but it’s also a victory for BofA because they learned something about the elasticity of their ATM services. The term “elasticity” is used by economists to denote the relationship between quantity and price. If the price increases do consumers cut back a lot, a medium amount, or not at all? A high elasticity means consumers cut back a lot when price goes up. I suppose something like chocolate would be a good example because there are so many substitutes for those who have a sweet tooth. A low elasticity implies the opposite. We might think of cancer drugs as falling into this category. You’re likely to make sacrifices in other areas of your life in order to continue purchasing your cancer medication even if the price, say, doubles. In this second case, there really are no substitutes.

Firms want to charge the highest price possible without losing customers — the price that maximizes profit. But figuring out what that prices is isn’t so easy. Sure, you could do focus groups, but nothing beats 300,000 consumers collectively screaming out, “That’s too much!” “No problem,” says the bank, “we won’t charge that much.” The information embedded in these social movements is extremely valuable. Now there’s a bigger question about why a company is raising prices in the first place — maybe they are losing money or have a poor business model more generally — but elasticity information about particular services can help steer structural reforms in the business and guide executives’ decisions about the best overall method to reduce costs.

The same holds true for Chick-fil-A and the information they were able to garner. The company now has all kinds of demographic data by region (based on franchise location) showing customer loyalty and political beliefs, and can adjust local marketing campaigns accordingly if they so choose. The company also now knows roughly what percentage of total product value is due to their corporate values.Turning to the macro scale, Chick-fil-A now knows how consumers at large will respond to future charitable giving.

Overall technological improvements have caused collective action to work more quickly. Now social movements can easily garner support in days and weeks instead of months and year. But increased technology has also sped up the response time of businesses and likewise increased the sophistication with which firms can analyze the inevitable stream of data that occurs when masses of consumers willingly reveal their preferences and elasticities for particular services.

On net it’s unclear whether the companies or consumers benefit. Perhaps the loss in customers more than offsets the value of the information firms collect. Or perhaps the lost revenue from not being able to implement a $5 ATM fee will lead to more devastating cuts in other areas. Because of technology customers were able to come together and quickly bridge the information gap. Within days, millions of BofA customers knew about the proposed fees and had their outrage validated by strangers across the country. On the other hand, perhaps in the absence of a social movement there would have been a steady leakage of BofA customers away from the bank, with a policy reversal coming only after many more customers had left. The quick response from customers allowed BofA to respond equally quickly, perhaps keeping many customers that would have otherwise left.

But even if particular businesses don’t benefit the industry as a whole surely does since, for example, other major banks can us the BofA experiment to infer information about the elasticity of their own ATM services. In the case of Chick-fil-A, consumers gave a signal to businesses throughout America about the consequences of certain types of corporate giving. BofA and Chick-fil-A were “first movers” in their respective business policies. The widespread response of consumers articulated all kinds of important information to firms throughout America. This information may even counteract the reasons behind the social movements in the first place.

The State of America’s Retirees

Via Economist’s View, a new study presented at a National Bureau of Economic Research conference examines the wealth of Americans 70 years old and older between 1993 and 2008. It uses data from the Health and Retirement Study, which gives retirees surveys every two years until their death.

On the bright side:

Between 1993 and 2008, it found, unmarried older individuals had median wealth of about $165,000 roughly a year before they died — a figure that includes current and future Social Security income, job-related pension benefits, home equity and financial assets. In the same period, the median wealth for continuously married senior citizens, roughly a year before they died, was more than $600,000.

Not bad you might say. But on the other hand:

[A]bout 46 percent of senior citizens in the United States have less than $10,000 in financial assets when they die. Most of these people rely almost totally on Social Security payments as their only formal means of support…

More than a little depressing. And as the article notes, this doesn’t provide much of a cushion to protect against a wide variety of shocks. Co-author James Poterba frames the policy implications like this:

“There is a lot of divergence in how people are doing,” Poterba says. Those disparities also complicate the public-policy issues relating to the new findings.

“One of the clear messages is that it is very hard to do a one-size-fits-all retirement policy,” Poterba says. “We need to recognize that, for example, if we were to substantially reduce Social Security benefits for those later in life, that there is a share of the elderly households for whom that would translate very directly into reduced income, because they seem to have accumulated little in the way of financial resources.”

Which Country Spends the Most on Social Welfare?

As is often the case the answer depends on how you define and measure “social welfare spending.”

I recently came across this 2010 post by University of Arizona economist Price Fishback.

By the traditional measure of gross public welfare spending as a percentage of GDP in 2003, for example, the situation looked like this:

In 2003, Sweden spent 37 percent relative to GDP, Denmark 32 percent, Norway 28 percent, Finland 26 percent, and the U.S. lagged behind at 17 percent.

The picture looks slightly different after accounting for differences in national tax structure.

The Nordic countries collect income taxes on the cash payments made to social welfare recipients at rates that are four to five times the rates paid by American recipients. Then when the Nordic recipients go out to make purchases, they pay consumption tax rates on their purchases that are 4 to 5 times the rate paid by the poor in America. Furthermore, the U.S. government offers a series of tax breaks to promote social welfare that are not found in the Nordic countries. After adjusting for the differences in taxation to get net public social spending relative to GDP, Sweden’s figure falls by 8 percentage points to 29 percent, Denmark falls to 24 percent, Norway to 23 percent and Finland to 20 percent. The U.S. figure rises to 19 percent.

With further adjustments for non-governmental welfare spending and a conversion to per capita numbers, the United States jumps to the first position.

By this metric, the U.S. then leads the way at $7,800, followed by Sweden at $6,700, Norway at $6,300, Denmark at $5,800, and Finland at $4,900.

This isn’t the whole story, however, because healthcare spending in the US is much higher than the Nordic countries.

If we cut all U.S. health care costs by one-third, the U.S. figure falls to $6,700, equal with Sweden.

Some of the differences in social welfare spending structures are evident in income distribution:

The differences in the systems have implications for different parts of the income distribution. In all of the countries, taxes and transfer payments lead to a substantial increase in the equality of income after taxes and transfers are incorporated. Comparisons of incomes after taxes and transfers show that Americans at the 10th percentile of the American income distribution (9 percent have less, 90 percent have more) fare about the same as Nordic people at the 10thpercentile of their distribution. Americans have more opportunity to reach higher incomes because Americans in the upper half of the distribution have much higher incomes than Nordic people in the upper half of their income distributions. On the other hand, households below the 10th percentile in America fare much worse on average than the lowest group in the Nordic countries. Despite a large array of poverty programs, people in the U.S. are falling through holes in the safety net. We know that a substantial number of people eligible for a wide range of benefits in the U.S. don’t receive them, either because they don’t apply or the U.S. delivery of services is not that good.

Inequality in America – Who Are the Rich?

Would you believe the answer to that question is “We don’t know.” It sounds strange, but details on any group of individual income earners is, for the most part, non-existant, and the rich are no exception.

We do know a little about the occupations of the very top income earners (those at or above the 0.1% bracket), which I’ll come to later. First, though, I want to take a bird’s eye view. From US Census Bureau data we do have a rough estimate of American demographics by income quintile. You can see that some reasons for income inequality are simply a result of these demographics. For instance, in the lowest quintile there is only .42 income earners per household while in the top fifth there are nearly two (1.97 to be exact). This fact also hints at the importance of adjusting for household size when tracking changes in income inequality. You can read my previous post here for the broad trends in income inequality, which adjust for these, and other, important demographic factors.

The data above was compiled by Mark Perry.

It’s also clear that a much higher percentage of high-income households are likely to be married (78% for the rich versus 17% for the poor); are in their prime working age between 35 and 64 years old (74% for the rich versus 43% for the poor); are more likely to be working full-time (77% for the rich versus 17% for the poor); and are much more likely to have at least a bachelor’s degree (60% for the rich versus 12% for the poor).

Note that based on this demographic data some of those in the bottom quintile are merely there because of the employment life cycle, while other at the bottom because of structural factors (though I will not attempt to speculate in this post on the exact mix of each). On the life cycle side, the poor might consist of a widowed retiree who — although once in a higher income quintile — is now making little or zero income while drawing down on savings. Likewise, it might contain a young unmarried couple with only the male member of the household working while his partner is at home pregnant. After the woman reenters the labor force and both members of the household gain job experience they may well climb into higher income brackets. Undoubtedly, the poor also consist of single parents working part-time while trying to raise a family or others who are in the bottom quintile long-term. The structural side of income differences results from a variety of factors like educational opportunities for particular groups, cycles of poverty, geographic constraints, culture and norms, various types of mental, social, and physical pathologies, and particular types of government regulation (e.g. occupational licensing), to name just a few. Commenting on the particular details of these structures would be pure speculation and is undoubtedly as deep a topic and robust a discourse as exists in the social sciences. Nevertheless, I will address some of these structural factors in brief in a later post when I discuss income mobility.

Now, on to the more specific data we have. Thanks to a 2009 paper by Steven Kaplan and Joshua Rauh, both of the University of Chicago Graduate School of Business, we know something about the occupations of the top 0.1% of income earners. Note that in this case we are no longer talking about households, but rather about specific income earners. Kaplan and Rauh used a variety of data sources and estimates to try to categorize the occupations of those at the very top of the income ladder.

They examined the percentage of top income earners who fell into one of the following four categories:

  • The five highest ranking executives of each of the non-financial firms listed in the S&P 500, S&P Midcap 400, and S&P Smallcap 600.
  • “Financial service sector employees from investment banks, hedge funds, private equity (PE) funds, and mutual funds.”
  • Lawyers (partners) at major legal practices.
  • Celebrities (such as actors and actresses) and professional athletes in the NBA, NFL, and MLB.

To get a sense of how difficult it is to really know who the top income earners are, consider that even after careful study, Kaplan and Rauh estimate that the groups they consider comprise at most 26.5% of income earners at or above the top 0.1% (and at least 15%). They note that:

While our estimates represent a substantial portion of the top income groups, they clearly miss a large number of high-earning individuals. We suspect that some of the missing individuals are trial lawyers, successful entrepreneurs, owners and executives of privately held companies, highly paid doctors, and independently wealthy individuals who have a high AGI [Adjusted Gross Income]. While some of the missing individuals may also be non-top five executives of publicly traded companies, the pay of the fifth highest paid executives suggests that this number is negligible for the top 0.01% and above.

One primary reason that the data is so hard to come by is that companies that are not publicly traded have different Securities and Exchange Commission reporting requirements  and thus don’t have as stringent a set of publicly release requirements.

Some interesting results from their research (all results are from 2004, the last year data was available):

  • The top five executives at non-financial firms comprised just over 2.5% of the top 0.1% income bracket. The percentage of law partners in the top 0.1% of income earners is roughly the same.
  • Professional athletes comprise only 0.8% of the top 0.1% of income earners.
  • Data for financial professionals is more coarse, but the authors estimate that “the professionals in hedge, VC, and PE funds include roughly the same number of individuals in the top 0.1% of the AGI income distribution as the top nonfinancial executives.”
  • The top 25 hedge fund managers combined earned more income than all S&P 500 CEOs combined. The authors estimate that in 2007 the top five hedge fund managers will earn as much as all S&P 500 CEOs.

As for why there has been increasing skewness in top income brackets relative to lower income earners, the authors quickly cite the substantial literature on the matter. A variety of explanations have been offered by economists across dozens of studies. These explanations include trade or globalization theories, increasing returns to generalists rather than specialists, theories of managerial power, social norms, greater scale, skill-biased technological change, and superstars. Like in the case of determining who the highest income earners are, it is somewhat surprising that there isn’t more of a consensus on why top earners have increased their incomes at a rate so much faster than the rest of us. I think the lack of knowledge in both cases speaks to the complexity of the issue and suggests a degree of humility that is missing from public discourse from those who are both sure who the richest Americans are and how they got that way.

Inequality in America – Alternative Measures of Economic Well-Being: Consumption

Although differences in income is the most commonly discussed type of economic inequality, there are two other important measures: consumption and wealth. Each type of measure – income, consumption, and wealth – have both advantages and disadvantages relative to the others.

The disadvantages of using income as a measure arise from a phenomenon known as “income smoothing.” A concept that is familiar to all of us, if more commonly under the pseudonym of “budgeting.” Families at different stages of their lives use debt and savings to provide a relatively stable level of economic well-being, thus “smoothing” their total lifetime income over the course of their entire period of employment (and retirement).

Therefore, as the CBO states:

[A] household’s consumption might be a better measure of its economic well-being than its income is. For households whose spending tracks their annual income, the distinction does not matter. But a young family may spend more than its current income, relying on borrowing to finance current consumption, while an older family may also spend more than its current income, drawing down assets in retirement. In contrast, a household in its middle years may spend less than its current income while saving for future needs.

Consumption data itself is also flawed since the Consumer Expenditure Survey (CEX) measuring consumption are not as wide spread as those that cover income, and there is poor coverage of consumption patterns at the top of the distribution. Nevertheless, it is clear that using consumption based measures of well-being, inequality looks much better.

For instance, two economists, Michael Cox and Richard Alm – using data from 2006 – show that although income inequality between the top and bottom fifth stood at a ratio of 15-to-1, consumption inequality was only 4-to-1. (You can read their op-ed in the NY Times along with critiques from Paul Krugman and Mark Thoma here).

In a separate study James Sullivan and Bruce Meyer reconstructed consumption poverty rates from 1963 through 2009 using different types of measures. The dark blue line shows the official poverty rate using the standard income measure, while the dark brow line shows consumption data including health insurance. (This later measure also uses a different deflator, but I will save the details of measuring inflation for another post). The difference in the two measures is not trivial. Poverty drops from 14.5% to around 8.5%.

A separate, but related way to measure inequality is by the number of modern conveniences in the average poor household. Using US Census data some economists have constructed tables showing the percentage of US households that have a varying degree of common appliances and household technology. Mark Perry, for instance, constructed the chart below that shows the poor in 2005 seem to be significantly better off in basic material terms than the average American in 1971.

And Cox and Alm constructed the graph below of the rate of penetration of modern technology over time, which appeared in the NY Times (larger image here):

A new paper from May of 2012 by Mark Bliss uses more advanced statistical techniques to account for the shortcomings in survey data to estimate the change in consumption inequality since 1980. While, in absolute terms, consumption inequality is still much lower that that of income inequality, the increase in consumption inequality tracks that of inequality in income:

Our estimates suggest that consumption inequality increased by close to 30 percent between 1980 and 2010, nearly as much as the change in income inequality, and nearly three times that estimated based on directly examining relative household expenditures in the CE [Consumer Expenditure Survey].

This paper is certainly not to be the last word on the consumption versus income debate over inequality.

A more anecdotal piece of evidence comes from Don Boudreaux who revisited his 1975 Fall/Winter Sears catalog, which he then compared to the equivalent products today (he uses as a measure the number of hours the average America had to work to be able to afford  the items in 1975 and in 2006). You can read his posts here and here.

Other than the style differences, the fact most noticeable from the contents of this catalog’s 1,491 pages is what the catalog doesn’t contain. The Sears customer in 1975 found no CD players for either home or car; no DVD or VHS players; no cell phones; no televisions with remote controls or flat-screens; no personal computers or video games; no food processors; no digital cameras or camcorders; no spandex clothing; no down comforters (only comforters filled with polyester).

Sears’ lowest-priced 10-inch table saw: 52.35 hours of work required in 1975; 7.34 hours of work required in 2006.

Sears’ lowest-priced gasoline-powered lawn mower: 13.14 hours of work required in 1975 (to buy a lawn-mower that cuts a 20-inch swathe); 8.56 hours of work required in 2006 (to buy a lawn-mower that cuts a 22-inch swathe. Sears no longer sells a power mower that cuts a swathe smaller than 22 inches.)

Sears Best freezer: 79 hours of work required in 1975 (to buy a freezer with 22.3 cubic feet of storage capacity); 39.77 hours of work required in 2006 (to buy a freezer with 24.9 cubic feet of storage capacity; this size freezer is the closest size available today to that of Sears Best in 1975.)

Sears Best side-by-side fridge-freezer: 139.62 hours of work required in 1975 (to buy a fridge with 22.1 cubic feet of storage capacity); 79.56 hours of work required in 2006 (to buy a comparable fridge with 22.0 cubic feet of storage capacity.)

Sears’ lowest-priced answering machine: 20.43 hours of work required in 1975; 1.1 hours of work required in 2006.

A ½-horsepower garbage disposer: 20.52 hours of work required in 1975; 4.59 hours of work required in 2006.

Sears lowest-priced garage-door opener: 20.1 hours of work required in 1975 (to buy a ¼-horsepower opener); 8.57 hours of work required in 2006 (to buy a ½-horsepower opener; Sears no longer sells garage-door openers with less than ½-horsepower.)

Sears highest-priced work boots: 11.49 hours of work required in 1975; 8.26 hours of work required in 2006.

One gallon of Sears Best interior latex paint: 2.4 hours of work required in 1975; 1.84 hours of work required in 2006. (Actually, Sears sells no paint on-line, so the price I got for a premium gallon of interior latex paint is from Restoration Hardware.)

Sears Best automobile tire (with specs 165/13, and a treadlife warranty of 40,000 miles: 8.37 hours of work required in 1975; 2.92 hours of work required in 2006 – although, the price here is of a Bridgestone tire that I found at another on-line merchant.  Judging from its website, Sears no longer sells tires with specs 165/13 and a 40,000 mile warranty.

Improvements in the standard of living of the average American, of course, do not directly address the issue of inequality. However, those who prefer these types of real-world examples point out that they speak to the drastic increase in the material well-being of all Americans in the past thirty-five years. Improvements that are obscured if we focus only on growing inequality. They also argue that compared to nearly any previous time in the history of the world current equality is quite high. As Don himself has pointed out, there is a lower-cost version of nearly every amenity the rich enjoy that is available to all Americans. For most of human history this wasn’t the case. Critics retort that the standard of living required to participate fully in society in the twenty-first century has itself increased and thus such comparisons are futile. Instead, we should compare what poorer Americans today have relative to what they need to lead happy, productive, and integrated lives that allow for full democratic participation. I believe both views have their merits.

In my next post I’ll examine the second of the two alternative inequality measures: wealth.

Inequality in America – The Broad Trends

A recent book review in Foreign Affairs, perhaps the most well-respected of all international relations journals, noted of the recent recessionary difficulties of many Americans:

This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom.

This statement is just one example of what is perhaps the most talked about economic and political topic outside of healthcare reform. The Occupy Wall Street movement and its protest is only the most prominent form of public outrage at what has been often termed “The New Gilded Age.”

But are these dismal claims true? Though you probably have a canned response ready to flip assuredly off or your tongue, in this post, and the ones that follow, I want to challenge these notions and mainly argue that the answer is “It depends.” It depends for a lot of reasons that I will discuss, but one of the most surprising is that many of the terms we think of as quite precise are actually inexact. Even the word “income” does not, in and of itself, allow for easy comparisons. Are we talking about pre- or post-tax income? Does income include benefits such as 401K matching, vacation, and, most notably, healthcare coverage? Is it pre- or post-government transfer we are talking about? Are we considering individual income, tax unit income, or household income? How are we accounting for changes in any of these variables over time when making our comparisons?

The assumptions used—the answers to those questions above and similar ones—changes the results of any analysis about differences in income over time. For now I want to put these questions to the side, however, and instead talk about broad trends in income inequality. Though differences in the assumptions above can change the degree to which inequality is measured—middle-class income may, for instance, improve from a roughly 3% increase since 1979 to a 35% increase—the assumptions are not large enough to override the broader patterns in income distribution. It is still important to remember, however, that, even putting aside these technicalities, the data that follow are not the last word on inequality. Some economists, for instance, argue that inequality of wealth is more important than that of income, others consider consumption a better relative measure of quality of life, and still others point out, correctly, that macroindicators that consider populations as a whole do not tell us about the mobility between income quintiles—the top and bottom quintiles in 1979 and 2012, respectively, do not contain the same individuals (we can think of obvious examples of “upper mobility,” for instance, if we consider entrepreneurs such as Mark Zuckerberg or Sergey Brin, both of whom jumped from lower income brackets to higher ones in a relatively short amount of time). I will return to all of these considerations in later posts, including the more technical aspects.

So on to the data. Roughly speaking two patterns are true: (1) income inequality within the bottom 99% remained relatively unchanged since 1979, while inequality between the bottom 99% and top 1% increased drastically and (2) incomes among all quintiles increased during that same period. That is—to use the famous pie analogy—the pie itself got much larger since 1979 and every person’s slice of the pie also got larger. The top 1% of “pie eaters” got a slice that had grown very, very much, while the other 99% each got a slice that had grown only moderately. This does not, however, imply that the top 1% somehow “stole” the portion of pie that the rest of us were “owed” or “deserved,” a point I will return to at the end of this post.

One great starting point for high-quality data is this Congressional Budget Office (CBO) report from late 2011. In it, the CBO used Internal Revenue Service (IRS) tax return data in conjunction with the Current Population Survey (CPS) from the Census Bureau. Because of the long delay in getting high-quality data from government sources, the CBO report only includes incomes through 2007. Below is the share of incomes by quintile.

You can see that the lowest through the fourth quintiles lost, in percentage terms, shares of overall US income between 1979 and 2007, the 81st to 99th group of income earners have roughly equal shares in both years, and the top 1% enjoyed a large increase in their share. Again, getting back to the pie analogy, this chart says that if we compare the pie from 1979 with the one from 2007, most people are getting a smaller slice. But, and it is an important but, the pie has gotten much larger. Effectively, then, most people are enjoying a smaller slice of a much larger pie (and thus overall are getting to “eat” more pie). Here, I’m staying agnostic about whether the rich have too much pie relative to the rest of us (that will be discussed in a later post).

This increase in the pie can be seen if we look at income growth from 1979 to 2007, which is shown below.

Here we see what I mentioned earlier: first, that all quintiles have seen increases in income since 1979; second, that most income brackets have enjoyed roughly equal increases in income (although clearly the higher the income, the more gains have been realized); and third, that the top 1% has seen a very large increase in income gains relative to the other 99%. Below is the same data displayed differently:

The CBO also investigated this gain by breaking income down into its constituents. They find that from 1979 to 1988 the shift in income shares to top earners resulted primarily from a higher concentration of labor income accruing to this group. From 1991 to 2000 inequality increased as a result of an overall shift in the economy toward monies from capital gains and and increasing concentration toward top earners in both labor and capital income. From 2002 to 2007 the increase is largely due toward further shifts to capital gains and these gains being further concentrated among top earners.

Though much public rhetoric pins the increase in inequality on exploitation by top earners, the fact is that few if any economists believe that increases in the incomes of the top one, five, or twenty percent came at the expense of the rest of us. As the CBO notes:

The precise reasons for the rapid growth in income at the top are not well understood, though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities.

It is important to recognize, however, that while gains in inequality may not have come at our expense, the resulting effects may well be. Most economists think some amount of inequality is actually good for society because it provides incentives for hard work and fiscal prudence. The challenge, though, is identifying the inflection point where inequality ceases to provide positive incentives and starts to become discouraging to workers, increases political and societal frictions between classes, and, perhaps, even becomes dangerous to the extent that increased inequality offers channels for a small elite to enjoy unhealthy amounts of political power. These issues, as well as others, will be taken up in my continued series on inequality in America.