Yesterday afternoon, The Economist online posted an article depicting a graph from a recent Congressional Budget Office (CBO) report (see inset). The graph illustrates after-tax income growth from 1979 to 2007, as broken up by income group (bottom 20%, 21-80%, 81-99%, and the evil top 1%). The article, entitled "Income inequality in America," explains that the "catchy" slogan of occupy!--We are the 99%--gets a boost from "some solid economics" in the recent CBO report. From the graph, the Economist asserts "that the people at the top have made out like bandits over the past few decades, and that now everyone else must pick up the bill." Shoot, give me one of those picket signs and the $500 REI kit to go with! But wait, "Of course it is a little more complicated than that." Well, heck, I could have told you that, and I didn't even major in Econ. So, let's dig a little deeper.
Not one to take something at face value, I pulled up the CBO report. From 1979 to 2007, after-tax household income increased by 62%. The bottom quintile (actually, let's just call it straight: the poor) saw their income increase 18%. The 21-80% range (ostensibly the middle class) received a 40% boost, and the top quintile (minus the evil 1%) now earn an additional 65%. But, hold onto your seat, the super-wealthy now rake in a whopping 275% larger salary. Where's Robin Hood when you need him?
Okay, so, let me break down a couple quick observations. According to the CBO, one very real cause of the increase in earnings of the top 1% was investing. In the 28 years from '79 to '07, the evil 1% increased their market share by about double, and the amount of money they received from investing (also referred to as capital gains) tripled. According to the CBO, "Without that growth at the top of the distribution, income inequality still would have increased, but not by nearly as much." The CBO also cites innovation as a cause, asserting that modern technology calls for a more highly-skilled workforce with top talent commanding a much higher salary. This demand increase "along with a smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated workers." So, wait, getting an education in something useful, working hard, and investing your savings makes you more money? Where have I heard this before?
So, come on now, The Economist. The CBO states that they chose the range 1979 to 2007 because the start and end points were at similar points economically. Really? 1979 was following years of stagflation. 2007 was after years of significant market growth--the likes of which we've never seen before--driven by a boom in mergers and acquisitions. This was largely resulting from a series of pro-market legislation, culminating in the repeal of the Glass-Steagall Act in 1999. And wait, 2008 kicked off one of the sharpest market sell-offs since the Great Depression. Noted above, the evil 1% draw a good source of their income from capital gains. Hmm, I wonder why the CBO cut off the data at 2007.
I am not in the top 1% of earners. I'm also not with the occupy! rabble. But I'm certainly not with the jokers at The Economist, either.