Sunday, March 4, 2012

Income Inequality of 1% Set to Increase During Recovery

What I am posting here is an abridged version of an excellent article by Emmanuel Saez on how the recovery is shaping up so far for the richest 1% and less rich 99% of Americans.  In short, Mr. Saez finds that the 1% are roaring back from the great recession at a pace that will increase income inequality.  The abridgment of his article is entirely my own doing to make it more readable. Please, I encourage you to go to the original article for validation and to obtain additional details.  The URL is below.

Striking it Richer: The Evolution of Top Incomes in the United States 
(Updated with 2009 and 2010 estimates)
Emmanuel Saez
March 2, 2012

What’s new for recent years?

Real Income Growth by Groups, 1993-2010

Average Income Real Growth
Top 1% Incomes          Real Growth
Bottom 99% Incomes           Real Growth
Fraction of Total (Growth or Loss) Captured by top 1%
Full period                  1993 - 2010
Clinton Expansion 1993 - 2000
Recession         2000 - 2002
Bush Expansion 2002 - 2007
Great Recession 2007 - 2009
Recovery Period 2009 - 2010
Computations based on family market income including realized capital gains (before individual taxes). See original article for additional details

Great Recession 2007-2009
 During the Great Recession, from 2007 to 2009, average real income per family declined dramatically by 17.4%  the largest two year drop since the Great Depression. Average real income for the top percentile
fell even faster (36.3%) and average real income for the bottom 99% also fell sharply by 11.6%.  This is the
largest two year decline since the Great Depression. This drop of 11.6% more than erases the 6.8% income gain from 2002 to 2007 for the bottom 99%.

The sharp fall in top incomes is explained primarily by the collapse of realized capital gains due to the stock-market crash. If you exclude realized capital gains for the top 1%, the top, their income share remained virtually constant from 45.7% in 2007 to 45.5% in 2009.  The fall in top decile income share from 2007 to 2009 is actually less than during the 2001 recession from 2000 to 2002.  The Great recession has hit bottom 90% incomes much harder than the 2001 recession.  The top 1% absorbed 49% of income losses from 2007 to 2009 while they absorbed a bigger 57% share of the income losses from 2000 to 2002.

2010: Recovering from the Great Recession
 In 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery.  It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover. National Accounts statistics show that corporate profits and dividends
distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly. Unemployment and non-employment have remained high in 2011.  This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.

Based on the US historical record, declines in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented to prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.

For The Text of “Striking it Richer” updated with 2010 estimates Go To Original:

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