Growth in incomes in the US: a picture’s worth a thousand words

Blog_CBO_Income_Inequality_2007From this site – courtesy of Krugman.

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Jc
Jc
13 years ago

Unless Krugman shows evidence for his theory, we should treat these comments as one would from a snakeoil peddler..

What’s interesting is how he is silent about the 11 million illegals in the US… as though that number doesn’t have an effect on lower wages.

The professor ought to focus on his core competetency… promoting hatred of the GOP.

Patrick
Patrick
13 years ago

The three charts in this Economist feature are each (even the innovative but not actually very good third) better than that one (although understandably so since this one has not been selected for any great quality, but for the information it purports to convey).

None of them, for example, obscures the entire point of the exercise! Such as the number of $100 notes or the value of each note to the recipient.

Patrick
Patrick
13 years ago

Incidentally, the weekend AFR had a ‘review’ of Krugman’s book, too. It was barely more than hagiography, as demonstrated by the ultimate sign of the partisan hagiographer: what the reviewer likes best about Krugman is that, in politics as in (as far as the reviewer could discern) in economics, he strives not to persuade but merely to state things as they actually are.

Obviously that’s a rare virtue – the other side(s) (and by implication most of the reviewer’s own side!) are clearly trying to deceive their audiences!

Anyone who sincerely believes such a proposition in such general terms is a partisan nut. Since I believe the reviewer to be one of the parties responsible for The Guardians’s famously dumb electioneering stunt in 2004, this is probably not a contentious statement in this case.

Chris Lloyd
Chris Lloyd
13 years ago

I guess I am stating the obvious but the vertical axis measures the “percentage change in the percentage of wealth” which is a pretty strange measure. The top 1% are always going to have a smallish portion of the distribution – so relatively modest increases will give large percentage increase.

On a quick glance, the graph suggests the lower percentile groups are doing worse absolutely. It would be nice to see this graph along side one that plotted absolute wealth rather than relative.

Thaks for the head-up on the old graphics Patrick. I may talk about them on my stats blog later in the month. Happy New year to all. Drive safely. And a big thanks to Ken, Nick and Jacques for founding/populating/maintaining this great blog.

Fyodor
13 years ago

Nicholas, as Chris pointed out, the chart doesn’t show “growth in incomes in the US”. It shows a change in the share of income. Moreover, it’s not worth a thousand words. I’d give it three, tops, and specifically the following words: “very”, “dodgy” and “chart”. This post explains the chart’s creation.

A handy antidote to this doom-mongering distortion is another article in the excellent Christmas edition of The Economist: “The new (improved) Gilded Age”.

Jc
Jc
13 years ago

Here’s Greg Mankiw’s blog piece about Krugman’s article, more or less saying what i said. Nice to see greg agrees with me for a change :-)

Friday, December 28, 2007
Krugman on Trade
Together with Larry Summers and Doug Elmendorf, I have recently become an editor of the Brookings Papers on Economic Activity. Our first conference will be held in the spring of 2008, and we have a blockbuster lineup. One of the papers is by Paul Krugman, who will be writing about trade and inequality. I was delighted to get Paul thinking about economics again, hoping the project might distract him from his compulsion to tell the world how much he hates Republicans. (In case you missed it, the answer is, A LOT.)

In today’s Times, Paul gives us a hint about what his paper will be about. The column is well worth reading. He suggests that trade makes the United States richer overall but reduces the incomes of a majority of workers. In essence, he is saying that the gains from trade are concentrated at the top of the income distribution. That is certainly a theoretical possibility. The Times column, however, leaves that conclusion more as an assertion than as an established fact. Presumably, the Brookings Paper will give the numbers to back up the claim.

It seems to me that Paul is still struggling with the implications of this view. He concludes the column by saying, twice, that he is not a protectionist, but he also says that we should respect “those who are worried about trade.” But what if those who are worried about trade are protectionists? Should we still respect them?

Joshua Gans
Joshua Gans(@joshua-gans)
13 years ago

There’s nothing wrong with examining the changes in the share of income received by different income quintiles. What makes this graph unhelpful is that the ‘growth rates’ are calculated using the shares themselves as the base, rather than the total. The reference to ‘$100’ on the vertical axis also helps to confuse things. If we are calculating percentage changes, the original choice of index is irrelevant.

But there is no shortage of statistics testifying to the worsening of America’s income distribution, so I don’t know why anybody would get all indignant about this perticular, poorly conceived graph.

Fyodor
13 years ago

But there is no shortage of statistics testifying to the worsening of Americas income distribution, so I dont know why anybody would get all indignant about this perticular, poorly conceived graph.

“Worsening” relative to what? The top 1% of income earners take a small fraction of the total income pool, so a small change in their share looks large in percentage growth term but says nothing meaningful about the distribution of income as experienced by the bulk of the population. Going from, say, 1% to 1.5% share of income is a 50% increase, but does it mean anything? The chart LOOKS impressive, but it’s an artefact. Compare it to the other charts in the link I presented earlier – looking strictly at quintiles shows a distinctly less dramatic change. Yes, the top quintile has increased its share, but at a much more moderate rate.

Essentially, what Krugman et al are whinging about is the likes of Oprah Winfrey, Bill Gates, professional athletes and hedge fund managers making a lot more money than they used to. If Bill Gates makes two billion dollars a year rather than one billion dollars, does that make other Americans worse off?

Likewise, relative inequality as measured by income shares may be worse than a couple of decades ago, but what does that mean if the US population, including those beneath the poverty line, is experiencing better ABSOLUTE living conditions?

Patrick
Patrick
13 years ago

Likewise, relative inequality as measured by income shares may be worse than a couple of decades ago, but what does that mean if the US population, including those beneath the poverty line, is experiencing better ABSOLUTE living conditions?

Krugman’s necessarily implied thesis is that relative inequality is more important to well-being than absolute wealth. If, as I do, you disagree, it is hard to get that excited. But it is interesting to consider how many people, given a Rawlsian veil, would choose the more equal but absolutely worse world to the less equal but absolutely better.

JF: what there is to get indignant about is that Krugman surely knows a thing or two about graphs. One is entitled to presume that he chose this one despite its deficiencies because he thought it illustrated his point best. Bye-bye economist, hello partisan hackcolumnist.

SJ
SJ
13 years ago

Fyodor said:

Essentially, what Krugman et al are whinging about is the likes of Oprah Winfrey, Bill Gates, professional athletes and hedge fund managers making a lot more money than they used to. If Bill Gates makes two billion dollars a year rather than one billion dollars, does that make other Americans worse off?

I think you might be missing the overall point being made by the graph’s author (who isn’t Krugman, BTW). It’s that concentration of wealth can, in fact be a bad thing in and of itself, because it can enable a complete takeover of goverment by the wealthy, despite the presence of democratic trappings like elections. From Roosevelt in 1942:

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism–ownership of government by an individual, by a group, or by any other controlling private power.

Peter Whiteford
Peter Whiteford
13 years ago

The income share of the top 1% is a lot greater than Fyodor implies

See http://www.econlearning.com/top10_various.pdf

This shows that the share of market income received by the richest 1% increased from around 8% in the late 1960s and early 1970s to around 15% more recently.

Of course the final income distribution is more equal than the market distribution.

JC
JC
13 years ago

I think you might be missing the overall point being made by the graphs author (who isnt Krugman, BTW). Its that concentration of wealth can, in fact be a bad thing in and of itself, because it can enable a complete takeover of goverment by the wealthy, despite the presence of democratic trappings like elections. From Roosevelt in 1942:

Really? Obama , the present front runner, has a net worth of $1 million dollars- the lowest of any of the serious contenders. When Bill Clinton first ran he didn’t own his own home having lived in public housing as a Governor. He beat twowealthy guys.

What a silly idea. Let’s raise taxes to ensure your idea of ” equality” so rich dudes like John Edwards aren’t enticed into running for office.

what’s more there’s little evidence of your assertion.

JC
JC
13 years ago

And although it may not be krugman’s chart he uses it to promote a dishonest or shoddy argument.

SJ
SJ
13 years ago

And although it may not be krugmans chart he uses it to promote a dishonest or shoddy argument.

Point me to where exactly Krugman used the chart.

SJ
SJ
13 years ago

Really? Obama , the present front runner, has a net worth of $1 million dollars- the lowest of any of the serious contenders.

Regardless of the truth of this assertion, when a right wing nutcase like Joe Cambria suddenly feels the need to step in and defend a Democrat candidate, one starts to suspect that there’s some truth in the suspicions that Obama is just another Bush clone.

JC
JC
13 years ago

spewing venom as usual , SJ.

when a right wing nutcase like Joe Cambria suddenly feels the need to step in and defend a Democrat candidate, one starts to suspect that theres some truth in the suspicions that Obama is just another Bush clone.

He’s a black liberal democrat who wants to remove the troops asap and voted against the war. Given the chance I’ll be voting for him like other right/ libertarians. Some clone, you moron.

Try an argeument next time , you leftist envy ridden nutjob . LOL.

Patrick
Patrick
13 years ago

Its that concentration of wealth can, in fact be a bad thing in and of itself, because it can enable a complete takeover of goverment by the wealthy, despite the presence of democratic trappings like elections.

What evidence of this is there in any Anglo-saxon western state?

Brendan Halfweeg
Brendan Halfweeg
13 years ago

Its that concentration of wealth can, in fact be a bad thing in and of itself

This is simply the politics of envy and hatred.

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.

Rossevelt is wrong. The protection of the individual FROM the state (democratic or otherwise) relies on the growth in private power of the individual. The whole point is that the interests of the rich align with the interests of the masses. The Magna Carta, The English Civil War and The Declaration of Independence were all products of some of the wealthiest and most influential individuals in society overcoming the entrenched power of the state.

The Russian and Chinese states may one day come to fear the billionaires that are being created in the midst of the breakdown of socialism and the command economy. Already the Russian state is struggling to control rich wealthy Russian dissdents both abroad and domestically and have resorted to extrajudicial executions (Litvinenko, who was connected to the wealthy Boris Berezovsky) and dubious incarceration (Khodorkovsky, formerly 16th richest man in the world).

The richer individuals become, the less power the state has over them, and the more resources they can dedicate to keeping the state in check.

Andrew Reynolds
13 years ago

The other (possibly major) law in the chart is that it says nothing about movement between the quintiles. It implicitly assumes that the people in each section in 1979 are the same in 2005/6 – clearly nonsense.
The Economist article that Fyodor linked to (in #5) comprehensively pulls Krugman apart.

Chris Lloyd
Chris Lloyd
13 years ago

In Fyodor’s link we find

according to happiness researchers, inequality in self-reported life satisfaction has been shrinking in wealthy market democracies, America included, suggesting that the quality of lives across the income scale are becoming more similar, not less.

Interesting to see that a right wing correspondent is willing to quote happinss research when it suits them!

But the more interesting point being made there is that consumption may be more equal than income. Certainly, there is no way Bill Gates can comsume a fraction of what he makes. And Kerry Packer famously decided to stop taking his life preserving drugs because hsi life was not how the richest man in Australia should live. His wealth bought him power though.

jc
jc
13 years ago

His wealth bought him power though.

Rent seeking brought him power. Not his wealth. It was state granted monopolies that offered that kind of wealth. Most of his ventures where he had to compete weren’t exactly sterling successes.