Income Inequality

James Pethokoukis | October 3, 2014, 1:12 pm
100314inequality


From Mother Jones magazine, regarding the above chart (h/t to Timothy Lee):

It’s never been a bad time to be rich in America. But some times have been a lot better. In fact, the best time may be now, especially when you consider the amount of total income controlled by the top 1 percent since colonial times (with ancient Rome thrown in for comparison.

The point here, I guess, is that wealth inequality is a bad thing, and wealth inequality is as bad as its every been, and we the 99% should be outraged. From 1776 to today, a quarter millennium of exploitation of the masses! (We will, for now, set aside any debate over the data.)

But Americans are a lot better off today than they were in 1776 of 1860 or 1929 or 1960, right? I mean, that is kind of an important point. In 1800, per capita GDP — adjusted for inflation — was about $2,000 a year and average life expectancy was 39 year. Today it’s over $42,000 and 79 years. Not only would I rather live in 2014 America than in any of those other time periods, I would rather live in 2014 America than 2013 America.

The folks at Mother Jones seem so concerned with what others have, they seem to have missed all that they have — not to mention the wonders created by innovation-driven capitalism. It’s also worth noting that wealth inequality — as least measured by Thomas Piketty — was about the same in 1980 as it was in 1960 — and then it took off. But even as wealth inequality has risen, middle-class incomes have continued to rise, by some 40% in real terms.
Credit: Economic Growth: Unleashing the Potential of Human Flourishing

Credit: Economic Growth: Unleashing the Potential of Human Flourishing

Supporting charts are located at: 100314inequality | AEIdeas

tuhaybey said:

No, it is. At least in economic terms. It is a company charging customers more than is economically optimal, paying employees less than is economically optimal, or both.

Remember those supply and demand line charts you saw in econ class? Price is supposed to be set by the market where those lines meet. At that price point, there is zero marginal profit. Competition has driven the price down until it hit cost and couldn't go any lower at that point.

Now, in reality, it is more complex. Some markets have efficiencies of scale, others have finite supplies, so you end up with situations where a company can legitimately make profit around the edges. But, the goal of the system is to minimize profits, not to maximize them.

Click to expand...

Uh, no, it's to maximize profits. You're forgetting supply and demand, AKA, rule one.

gdgyva said:

No....not in America

Not in today's world

Profit keeps a company healthy...employees employed.....and the market working

Click to expand...

If you reject capitalist economics, what sort of economic system do you recommend?

KevinKohler said:

Uh, no, it's to maximize profits. You're forgetting supply and demand, AKA, rule one.

Click to expand...

No, you seem to be forgetting supply and demand... What that graph is about is that prices should tend towards the point where the supply and demand lines cross. That is the point where there is zero marginal profit. The price is set to exactly the same as the cost of producing the goods... I explained that in the post you replied to, so not sure what you mean when you say that I'm forgetting it.

This isn't some liberal or controversial thing I'm saying. This is the basis of capitalist economics. Every economist in the world would say the same thing.

tuhaybey said:

I'm not really interested in this stuff. Do you have any thoughts on the economic issues I'm raising?

Click to expand...

You're not interested in what's important. You're just like the whiners that want a wage for doing something one step above what a monkey could be trained to do. You're not interested because what I've done destroys your ability to whine and gripe about uneducated freeloaders getting something handed to them. Tell you what. When they do what I've done they can earn what I've earned. Until then, they can either rely on good intentioned do nothing bleeding hearts like you or do without.

tuhaybey said:

Of course it is different lol. The profits an owner takes are waste. They are created by charging customers more than the things you sell them are worth and paying employees less than they are worth. It's a business failing to perform well.

Now, to be clear, money a business owner makes up to their own productivity, that's the equivalent of their wages. That is not waste, that is them doing something useful and taking the amount of money for it that the market deems appropriate. I'm talking about profit taking- money taken above that line.

Click to expand...

I don't know what planet you live on but taking profit to buy that new million dollar yacht is not waste in the mind of the person taking the profit. In fact not only does taking profit reward the owners so they can buy that yacht, but it also creates jobs for yacht builders.

Then you say by taking profit is a business failing to perform well. What a crock of BS. A business makes a profit and it expands and it continues to expand as a result of profit. And what does that do, it creates jobs. Of course a liberal could care less about jobs. Liberals have never been about creating jobs, they want to punish success and reward failure. And taking a profit to buy that yacht is evil, but the real evil is you liberals want all the yacht builders to go out of business. Damn those evil yacht builders making yachts for those evil profit takers.

Born Free said:

Let me ask you, what immigration bill has the dems presented to the president to sign? I mean they did control all three branches of Government. As for a republican congress they will be creating job bills, like sign here to start Keystone and kill the EPA etc.

From a money stand point it's the democrats that have the money and the most clout. They controlled all three branches of government and could pass anything they wanted anytime they wanted. But they did nothing, thus you have the money angle all wrong. It's the democrats that want an open border. They always have, they have never cared about jobs in this country, just votes. Obama is in charge of the worst pro-growth policies ever. The worst recover in US History. It is the liberals and their money that trump a few businesses. Now tell me how many illegals are working for big businesses, and of those how much money are they contributing to keep the border open.

I mean compared to Obama with is arms spread out inviting any and all illegals in, but you don't see that as Obama is your pet.

Click to expand...

Neither party has presented a reform bill to the president. Congress, as I said, has done squat about illegal immigration in decades and that, of course, includes both parties. When I said that the person with the most money has the most clout, I was referring not to a political party, but to the deep pocket political donors that contribute to both Republicans and Democrats.

The mantra that it's the Dems that want open borders and the Reps want to control immigration falls flat when you go back to the time, not so long ago, when the Republicans controlled both houses and the WhiteHouse.

GBFAN said:

Absolutely correct ... providing you are willing to pay the increased price for the food in the market.

Click to expand...

which would be very little, as the cost of harvesting is only a small percentage of the retail cost of produce.

edit: Looking back, I see Cephus beat me to it.

VanceMack said:

Actually...we just need to de-incentize Americans to NOT work. People need to become a little more hungry for work. They need to fight for jobs, even those low income jobs. We need to stop making it so easy for US citizens to be miserable failures their entire life.

Click to expand...

Yes, that too. People who work should always be better off than people who don't.

Dittohead not! said:

Yes, that too. People who work should always be better off than people who don't.

Click to expand...

We can and should do a better job of identifying those who truly are in need as opposed to those just too ****ing lazy to provide for themselves. The tragedy of our current situation is that there are SO many people at the trough, those that really need assistance have been squeezed out and cant be adequately taken care of.

GBFAN said:

James Pethokoukis |

It’s also worth noting that wealth inequality — as least measured by Thomas Piketty — was about the same in 1980 as it was in 1960 — and then it took off.

Click to expand...

I would say it is more of a launch:


Introduction

But even as wealth inequality has risen, middle-class incomes have continued to rise, by some 40% in real terms.

Click to expand...

This is an absolute flat out lie, no matter how you manipulate or define "middle class" stats, income for individuals or households in the middle class did not "rise in real terms by 40%", from 1980 until now, or even going back to 1973.


Introduction


Even Saez/Piketty data show this is false when it includes all of the 90% going back to 1968:



Jeopardy champs who studied history shouldn't dabble in economics blogging.

What's worse is depending on them for inequality argument.

tuhaybey said:

No, you seem to be forgetting supply and demand... What that graph is about is that prices should tend towards the point where the supply and demand lines cross. That is the point where there is zero marginal profit. The price is set to exactly the same as the cost of producing the goods... I explained that in the post you replied to, so not sure what you mean when you say that I'm forgetting it.

This isn't some liberal or controversial thing I'm saying. This is the basis of capitalist economics. Every economist in the world would say the same thing.

Click to expand...

Profit, what YOU call waste, is the motive for going int o business in the first place.

You're suggestion that our businesses should generate as little waste "profit" as possible by keeping prices low or employees paid more is, well....in a word, crazy.

Conservative65 said:

You're not interested in what's important. You're just like the whiners that want a wage for doing something one step above what a monkey could be trained to do. You're not interested because what I've done destroys your ability to whine and gripe about uneducated freeloaders getting something handed to them. Tell you what. When they do what I've done they can earn what I've earned. Until then, they can either rely on good intentioned do nothing bleeding hearts like you or do without.

Click to expand...

Anyways, do you have some kind of argument for why we shouldn't try to fix the problem with people being paid less than they're worth? Or what? It seems like you're just interested in some sort of weird allocation of blame thing or something, but I don't see why whatever all that is about would mean we shouldn't fix the economic issue, would it?

KevinKohler said:

Profit, what YOU call waste, is the motive for going int o business in the first place.

You're suggestion that our businesses should generate as little waste "profit" as possible by keeping prices low or employees paid more is, well....in a word, crazy.

Click to expand...

That's the whole genius of capitalism. The more aggressively they chase the profits, the less profit there is. You are selling widgets at a profit of $10 each, so then I decide I want some of that action, so I start selling them for a $9 profit each. Then you want more profits, so you drop your price to $8 above cost and so on until we're just $0.01 above cost. That's the point where society is getting the most widget at the best price. That's the whole goal of capitalism. That's the core idea- it is designed to be a way to get the most widgets at the best price, not a way for the owners to extract money from the masses.

tuhaybey said:

Anyways, do you have some kind of argument for why we shouldn't try to fix the problem with people being paid less than they're worth? Or what? It seems like you're just interested in some sort of weird allocation of blame thing or something, but I don't see why whatever all that is about would mean we shouldn't fix the economic issue, would it?

Click to expand...

Just briefly. What is less than someone is worth?

Born Free said:

I don't know what planet you live on but taking profit to buy that new million dollar yacht is not waste in the mind of the person taking the profit. In fact not only does taking profit reward the owners so they can buy that yacht, but it also creates jobs for yacht builders.

Then you say by taking profit is a business failing to perform well. What a crock of BS. A business makes a profit and it expands and it continues to expand as a result of profit. And what does that do, it creates jobs. Of course a liberal could care less about jobs. Liberals have never been about creating jobs, they want to punish success and reward failure. And taking a profit to buy that yacht is evil, but the real evil is you liberals want all the yacht builders to go out of business. Damn those evil yacht builders making yachts for those evil profit takers.

Click to expand...

It isn't that profit in and of itself is bad per se, what is bad is charging more than the economically optimal price. That point where those S and D lines cross- that's the best place for the price to be economically. That's where the most widgets are produced the most efficiently. If you raise the price above that point in order to get more profit, then less widgets are sold and they are sold at a higher, less efficient, price.

Again, this isn't some crazy theory, this is the most fundamental basis of capitalism. Every conservative economist on the world agrees with this. Every economics 101 textbook in the country goes over this in the first chapter. In fact, it is pretty much the one and only economic concept that pretty much everybody knows- supply and demand. That's what the supply and demand graph is about.

joG said:

Just briefly. What is less than someone is worth?

Click to expand...

A worker is worth their productivity. However much they increase the revenues of their employer, minus all non-labor expenses, that is how much they should be compensated if the market is functioning properly.

tuhaybey said:

That's the whole genius of capitalism. The more aggressively they chase the profits, the less profit there is. You are selling widgets at a profit of $10 each, so then I decide I want some of that action, so I start selling them for a $9 profit each. Then you want more profits, so you drop your price to $8 above cost and so on until we're just $0.01 above cost. That's the point where society is getting the most widget at the best price. That's the whole goal of capitalism. That's the core idea- it is designed to be a way to get the most widgets at the best price, not a way for the owners to extract money from the masses.

Click to expand...

The problem is, there is another angel to capitalism. That is to say, in every contest, there are winners, and there are losers. Once the price war you have mentioned ends, likely with the demise of the weaker of the two companies, the one left standing owns the market.

Now, that in of itself isn't so bad, but we have a lot of market entry barriers in this country, in the name of oversight and safety. And those are good things, but they result in it being quite difficult to move in and set up shop, in order to ensure competition. Without competition, there is no capitalism, only corporatism. See the US.

joG said:

Just briefly. What is less than someone is worth?

Click to expand...

Paying them less than their level of productivity. In order for there to be profits, employees must, by definition, be paid less than the value they bring to the endeavor.

tuhaybey;1063833344]It isn't that profit in and of itself is bad per se, what is bad is charging more than the economically optimal price. That point where those S and D lines cross- that's the best place for the price to be economically. That's where the most widgets are produced the most efficiently. If you raise the price above that point in order to get more profit, then less widgets are sold and they are sold at a higher, less efficient, price.

Click to expand...

Only fewer widgets are sold if there isn't constant demand. Look at gasoline. The US government has to DICTATE what gasoline is sold for, because ultimately, not buying it isn't an option for a great many people.

Again, this isn't some crazy theory, this is the most fundamental basis of capitalism. Every conservative economist on the world agrees with this. Every economics 101 textbook in the country goes over this in the first chapter. In fact, it is pretty much the one and only economic concept that pretty much everybody knows- supply and demand. That's what the supply and demand graph is about.

Click to expand...

Yes, but what I think you are missing is that an increase in supply does NOT always mean a decrease in demand. In the 70's, chevy produced more corvettes than they ever had before, and many forecasted that this would be a mistake, it would mean cars sitting on lots, it would be dropped prices for chevrolet's flagship car. But what happened? They sold more C3 corvettes in the late 70s, DESPITE their being seen today as the WORST corvette ever produced, than ever before, and ever SINCE.

An increase in supply =/= a decrease in demand. So long as demand is strong, you can charge any price you want, regardless of cost to build, regardless of competition, etc.

KevinKohler said:

The problem is, there is another angel to capitalism. That is to say, in every contest, there are winners, and there are losers. Once the price war you have mentioned ends, likely with the demise of the weaker of the two companies, the one left standing owns the market.

Now, that in of itself isn't so bad, but we have a lot of market entry barriers in this country, in the name of oversight and safety. And those are good things, but they result in it being quite difficult to move in and set up shop, in order to ensure competition. Without competition, there is no capitalism, only corporatism. See the US.

Click to expand...

Absolutely right that competition is the lifeblood of capitalism and we don't have nearly enough of it.

That said, it isn't really regulatory hurdles that create big barriers to entry. There is some truth to that in a handful of ultra-regulated industries like insurance where they require insurance companies to have huge amounts of money to back up their policies. That said, you do kind of need to have a lot of money if you're going to honestly offer policies that could potentially cost huge amounts of money, for example, in a natural disaster.

But generally speaking, regulators are generally the only thing keeping the competition alive at all. In a totally de-regulated market, you pretty much always end up at a monopoly. Monopolies are so much more profitable than competitive markets that companies always find a way to make one work. For example, if you're selling widgets, maybe you pay the trucking companies not to haul your competitor's widgets. Maybe every time a small company tries to set up shop in the widget market, you just drop your prices so low that they can't compete, then you jack them back up again when the competitor goes out of business. Or, maybe you just merge with all the other big players. Antitrust regulators are constantly battling those sorts of things. IMO, the solution is much more aggressive antitrust regulation, not less regulation of other things.

tuhaybey said:

Absolutely right that competition is the lifeblood of capitalism and we don't have nearly enough of it.

That said, it isn't really regulatory hurdles that create big barriers to entry. There is some truth to that in a handful of ultra-regulated industries like insurance where they require insurance companies to have huge amounts of money to back up their policies. That said, you do kind of need to have a lot of money if you're going to honestly offer policies that could potentially cost huge amounts of money, for example, in a natural disaster.

But generally speaking, regulators are generally the only thing keeping the competition alive at all. In a totally de-regulated market, you pretty much always end up at a monopoly. Monopolies are so much more profitable than competitive markets that companies always find a way to make one work. For example, if you're selling widgets, maybe you pay the trucking companies not to haul your competitor's widgets. Maybe every time a small company tries to set up shop in the widget market, you just drop your prices so low that they can't compete, then you jack them back up again when the competitor goes out of business. Or, maybe you just merge with all the other big players. Antitrust regulators are constantly battling those sorts of things. IMO, the solution is much more aggressive antitrust regulation, not less regulation of other things.

Click to expand...

Well, there are a few things i cna think of that aren't HIGHLY regulated, but most things are. Food service? Very expensive to get into, for what is, typically, a low profit margin field. Medical care? Forget it. Regulations have made it next to impossible for someone NOT worth about 3 billion to start, say, their own clinic. Auto repair? Again, pretty expensive, due to regulation. Hell, even SALES, a traditionally cut throat, lawless field, has regulations, and increasingly so.

Wanna open a restaurant? I hope you have about 1 mil under the pillow. If you can find an EXISTING restaurant, already furbished, then you MIGHT get opened for about 500K.

The costs of opening a healthcare facility is incalulable to me.

A garage? Plan on going into debt to the tune of about 600K. So you can average about 70K per year.

There's a REASON why mom and pops are a thing of the past. You franchise, or you prepare for a lifetime of calling someone else boss.

Unless you're rolling in dough.

KevinKohler said:

Only fewer widgets are sold if there isn't constant demand. Look at gasoline. The US government has to DICTATE what gasoline is sold for, because ultimately, not buying it isn't an option for a great many people.

Click to expand...

Yeah, that's right. The term for that is "inelastic demand." Certain things, people will basically pay an infinite amount for just because they don't have much choice. Insulin is the classic example.

KevinKohler said:

Yes, but what I think you are missing is that an increase in supply does NOT always mean a decrease in demand. In the 70's, chevy produced more corvettes than they ever had before, and many forecasted that this would be a mistake, it would mean cars sitting on lots, it would be dropped prices for chevrolet's flagship car. But what happened? They sold more C3 corvettes in the late 70s, DESPITE their being seen today as the WORST corvette ever produced, than ever before, and ever SINCE.

An increase in supply =/= a decrease in demand. So long as demand is strong, you can charge any price you want, regardless of cost to build, regardless of competition, etc.

Click to expand...

No, you're misunderstanding what the supply and demand represents. The supply line doesn't represent how much of something is available, it represents the cost per unit at a given quantity. For example, if it costs you $2 to make one widget and $3 to make two widgets, then the supply line would be at $2 for one widget and $1.50 for two widgets. Likewise, the demand line represents the price you would have to set to get people to buy that many of the thing. Here, lets do an example:



With regard to the demand line, what this graph is telling us is that 40 people are each willing to pay $4 for this widget. They are really into widgets. There are 70 people who would be willing to buy one if it cost them $3, 90 people who would be interested at a price of $2, and if you dropped it all the way to $1, then 100 people would buy them.

The supply line tells us that you can make 10 widgets for $1 each. Maybe those are just widgets you have lying around already. If you need to make 40 widgets, it'll cost you $2 each. If you need to make 70 widgets, that'll run you $3 a pop. If you need to make 140 widgets, then you're like having to pull copper wire out of other products to get enough to make widgets or something, so it costs you $4 each.

The point where the lines cross is the point where 70 people are willing to pay $3 each and you just so happen to be able to make 70 for exactly $3 each.

Now, it is actually a bit more complicated than that because really the demand line is "marginal cost," not "average cost." So, in reality, you actually can make a bit of profit in that scenario. But, for simplicity's sake, the explanation above is pretty close

KevinKohler said:

Well, there are a few things i cna think of that aren't HIGHLY regulated, but most things are. Food service? Very expensive to get into, for what is, typically, a low profit margin field. Medical care? Forget it. Regulations have made it next to impossible for someone NOT worth about 3 billion to start, say, their own clinic. Auto repair? Again, pretty expensive, due to regulation. Hell, even SALES, a traditionally cut throat, lawless field, has regulations, and increasingly so.

Wanna open a restaurant? I hope you have about 1 mil under the pillow. If you can find an EXISTING restaurant, already furbished, then you MIGHT get opened for about 500K.

The costs of opening a healthcare facility is incalulable to me.

A garage? Plan on going into debt to the tune of about 600K. So you can average about 70K per year.

There's a REASON why mom and pops are a thing of the past. You franchise, or you prepare for a lifetime of calling someone else boss.

Unless you're rolling in dough.

Click to expand...

Definitely lots of businesses are expensive to get started in, but I don't buy that regulations are a significant driver of those costs. Most regulations actually don't apply until you get 50 employees or 200 employees or in some cases hit certain revenue baselines and whatnot. Most small businesses are more or less de-regulated as long as they don't violate basic common law crimes like fraud and whatnot. For example, I was part of the management team at a start-up for a while. We had one and only one regulatory burden- we had to file out taxes once a year. That was kind of a pain to be sure. The CEO did it himself the first couple years and found it annoying. But then he hired an accountant for a few hundred once a year and that was that. That's it. That's the only regulatory thing we ever encountered. That's pretty typical unless you're like actually trying to do whatever it is that the regulations are there to prevent, like trying to sell unsafe products or scam your employees or something.

Gimmesometruth said:

In case you missed it...

Click to expand...

:lol:

Gimme demonstrates that the top 10% have provided far more value added to production over the past few decades, and then asks why gains in productivity gains haven't resulted in equally dramatic increases in lower-value income wages.