Monday, January 30, 2012

Trends in Household Income Inequality

Inequality is in the news these days.  I think most of the evidence suggests that incomes in the United States are indeed more unequally distributed than in the past. However, I also think that it is a mistake to attribute the trend toward greater disparities in income to deregulation or, indeed, to any of the policies of recent years. This is because the trend is not a recent phenomenon.

The "gini coefficient" is a measure of distribution that varies between 0 and 1.  When the gini coefficient of household income, for example, is "0" that means that every household has the same income. When it is "1" that means that income is completely concentrated in a single household. In order to look at income inequality in the United States, I've plotted gini coefficients for household income from 1967 to 2010, as provided by the Census Bureau's Current Population Reports, and posted the resulting figure here.

Incomes today are more unequally distributed than in the past. But this did not begin to happen in the era of deregulation.  Income inequality actually began to rise in the late 1960s, stalled briefly during the stagflation era of the mid-1970s, and then resumed a steady rise, with a single sharp upward jolt in the early 1990s.  Household income inequality actually rose more slowly through the 2000s than in earlier years.

As I see it, this simple chart is an illustration of the most important fact about income inequality. It is a consequence of a gradual and long-term change in the nature of the American economy, not a consequence of a one percent elite gone wild with greed. Previously, I have tried to identify this long-term change as the rise of a consumer-oriented, demand-side economy that based economic growth on deficit spending by both government and private individuals. If this is true, increasing spending, whether private or public, will tend to increase inequality, not decrease it.

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