New York City Mayor Bill de Blasio likes to proclaim as pithy a distillation of left-leaning economics as one could want: “There’s plenty of money in this country,” he says. “It’s just in the wrong hands. We Democrats have to fix that.”
This incorrect distribution of abundant loot — or “economic inequality” in less blunt language — is sure to be a prominent issue in the 2020 presidential campaign, a major theme of the eventual Democratic nominee, even if, as seems likely, that isn’t de Blasio.
But one thing that may not be so plentiful as that debate unfolds is precision in describing the level of inequality in America, or its trends over recent decades, or the degree to which government policies already alter it.
So if there remain voters in America who care about such things, they might find it useful to secure a baseline of facts concerning income in America. Fortunately, the trustworthy Congressional Budget Office is out this month with its latest report on “The Distribution of Household Income,” based on 2016 data.
Indisputably, the existence of sharp inequality is one of the facts to be faced. CBO reports that in 2016 average annual income among the least prosperous “quintile” (or 20%) of American households was about $21,000. Among the richest 20%, average income was $1.8 million.
Averages, though, can be misleading, especially at the top, where the kingly cash flows of the mega-rich distort the picture. Resentment of the very largest incomes is part of the discontent inequality fuels, of course — and accumulated wealth is a distinct issue this CBO report doesn’t address.
But to get a more realistic picture of how closer-to-normal people live, it might be more helpful to note that the CBO’s data shows, among three-person households, that the top 1% of incomes begin at about $670,000, while the bottom 20% includes all households taking in less than about $40,000 a year.
These incomes include private earnings along with “social insurance benefits” — mainly Social Security and Medicare. What they don’t account for are taxes, including refundable tax credits, or means-tested public benefits like Medicaid and food stamps and cash assistance.
The degree to which “taxes and transfers” redistribute income in America is perhaps the most enlightening context in the CBO report. How much income should be redistributed in this way from one hand to another, and how best to accomplish that without undermining economic incentives and prosperity, has always been the crux of the inequality debate.
The CBO’s data shows that taxes and transfers boosted the average household income in the lowest quintile by fully two-thirds in 2016, from $21,000 to $35,000. Meanwhile, the average income among the top 1% fell by one-third, from $1.8 million to $1.2 million.
Again, it may reveal the circumstances of more people to note that the starting point for the “1 percent” falls, after taxes and transfers, from $670,000 to $470,000 among three-person households.
The top 10% of three-person household incomes, after taxes and transfers, begins at about $169,000.
Nothing stokes displeasure over inequality more than the sense that it has dramatically increased in recent decades — with “all the income growth going to the richest among us” in the common but exaggerated wisdom. The CBO’s data tells a less stark but still important story.
Average real (inflation-adjusted) household income for the top quintile jumped by just about 100% between 1979 and 2016, CBO reports — both before and after “taxes and transfers.” For every group below the top 20%, income before redistributions grew about one-third that fast.
After taxes and transfers, however, the fortunes of the non-rich have varied. The lowest-income 20% of households saw real income, after government’s interventions, rise by an impressive 85% (expansion of the Earned Income Tax Credit and Medicaid are two major causes). Yet the after-tax-and-transfer incomes of the middle 60% of households, on the other hand, have grown only 47%, and have been particularly sluggish since the Great Recession hit in 2008.
That’s not complete stagnation, but middle-class grievances are not causeless.
Interestingly, the CBO report reinforces an observation discussed here before. To a surprising extent, the modern era’s soaring incomes at the top can be seen as a phenomenon of the 1980s and ’90s. The CBO’s numbers show that more than three-quarters of the 40-year increase in top quintile income had occurred by the end of dot-com bubble two full decades ago.
Explanations offered include the much-increased use of stock-based “incentive pay” for corporate executives (combined with a big bull market on Wall Street), and counting more executive fringe benefits as taxable income. Both involved tax law changes aimed errantly at reining in excessive executive compensation.
In any case, the various trends combined to produce a more complicated inequality history than one is accustomed to hearing. The top 1% of households’ share of total income (before taxes and transfers) soared from 9% in 1979 to 17.5% by 2000, a figure it has only sporadically equaled or exceeded since. It stood at 15.8% in 2016 — and was reduced to 12.5% after taxes and transfers.
Meantime, the bottom quintile’s share of total income (before redistributions) was 6% in 2016. Taxes and transfers raised it to 10.3%.
Much has happened since 2016 that may have modified the income distribution. The economy and job market have been strong, like the stock market. Minimum wages have been hiked in many places. And a major tax overhaul has boosted after-tax incomes for many groups, but in different degrees.
All that will provide plenty of room for political debate free of definite facts.
The CBO’s report at least gives us a solid starting point, and a reminder that America already does more than is usually acknowledged to “fix” the free market’s allocation of income.
D.J. Tice is at Doug.Tice@startribune.com.