The 1% Ain't What It Used To Be

Unsurprisingly, Occupy Wall Street have pushed income inequality to the center of the national conversation.  Also unsurprising, I think, is the unspoken assumption that income inequality has continued to get worse since the crisis.  After all, where are the bankers panhandling for change or standing in line at the food pantry?

But it would actually be quite surprising, if true.  The massive, decades-long data set assembled  by Piketty and Saez seems to show that income inequality falls during recessions, and particularly during prolonged crises.  Crises destroy capital, and top incomes tend to be more tightly linked to capital than those of average workers.  If you work for a wire factory that goes bankrupt, you may well have a rough year or two before you find another job, and your income may never fully recover. But if you own that factory, it will be years before you have an income even close to what you enjoyed before--and it's very possible that you'll never get there at all.

Note that this is not an argument about who suffers more during a recession; it is self-evident that a worker who loses a third of their $20,000 annual paycheck is much worse off than an owner who loses two thirds of their $500,000 annual draw.  But the measured gap between their incomes will still shrink dramatically.

That's why I was surprised, two years ago, when census data seemed to show that income inequality had continued rising.  However, I filed it under "maybe this time is different" and didn't really revisit the subject.

But as it happens, I was back at the University of Chicago this weekend for my tenth business school reunion.  And while I was there, I ran into Professor Steven Kaplan, who has done a bit of research into what sorts of occupations contributed to rising income inequality. (Shockingly, finance played a large role.)  And he told me that my initial assumption seems to be correct: the incomes at the very top started falling in 2008.  The Piketty-Saez data, which currently run to 2008, show a little bit of it.  But Kaplan has calculated the incomes of the top 1% and the top 0.1% for 2009, and his results show that they continued to fall pretty steeply.  (There's nothing more recent than that because tax data take a while to be finalized).

Here's the chart he sent me:

The decline in the share going to the top 0.1% is if anything more dramatic.  I threw together a chart based on the data he sent me:

There's an obvious caveat: 2009 was a very bad year for finance, corporations, and lawyers, who drive a lot of the top income.  Probably 2010 and 2011 weren't so bad, so these results may well rebound considerably when the data are in.  (They also may not; I just don't know.)

Also, this only shows the 1% and the top 0.1%; maybe the 0.01%, or the 10%, are doing really well, but these groups aren't.

The larger question is "how much does it matter"?  I doubt Occupy Wall Street will be assuaged by learning that the top 0.1% now only receive 8% of the income earned in the US, even if that number is the lowest it's been since 2003.

But I think it does matter.  If we think there's a real problem, we need the best possible data so that we can understand its contours.  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.

(If income inequality is declining, what's all that happening on Wall Street?  Well, for one thing, the data I've seen seem to show that whatever has been happening to incomes, unemployment inequality remains very much with us.)