Wealth and Poverty

Who's Got How Much?

To measure income inequality—a measure of wealth and poverty that can be applied to any geographical area—economists use quintile rankings. These rankings divide households into five groups according to income. Each group accounts for one-fifth of the number of households. Table 11.2 shows the income breakpoints for each quintile of U.S. households for 2000, 1990, 1980, and 1970, according to the U.S. Census Bureau.

Table 11.2  U.S. Household Income Limits by Quintile (upper limit of each quintile—with the exception of the fifth quintile, in current dollars, rounded to nearest 100)
YearLowestSecondThirdFourthLower Limit of Top 5%
200018,00033,00052,30082,000145,500
199012,50023,70036,20055,200 94,700
1980 7,60014,10021,60031,700 51,500
1970 3,700 7,10010,30014,700 23,200

Source: U.S. Census Bureau

Just to clarify, this table is saying that in the year 2000:

It is also saying that in 2000, 5 percent of households had incomes of $145,500 and higher. (This 5 percent is also counted in the top 20 percent.)

To analyze the data in this table accurately, however, we should use real, rather than nominal, dollars to correct for the effects of inflation. Table 11.3 shows the same data in real dollars (adjusted for inflation by the Census Bureau using the Consumer Price Index).

Table 11.3  U.S. Household Income Limits by Quintile (upper limit of each quintile, in real dollars, rounded to the nearest 100)
YearLowestSecondThirdFourthLower Limit of Top 5%
200018,50033,90053,70084,200149,600
199016,40031,10047,50072,500124,400
198015,40028,70044,00064,500104,800
197014,60027,90040,60057,90091,500
Increase in Breakpoint, 1970-200026.7%21.5%33.3%45.4%63.5%

Observers who point out that the wealthiest Americans have been doing better than the rest of the population are clearly correct. In real dollars, from 1970 to 2000, the upper limit of the fourth quintile (that is, the lower limit of the fifth quintile) rose by 45.4 percent while the upper limit of the lowest quintile rose by 26.7 percent. Meanwhile, the lower limit that defines the top 5 percent—the very wealthiest housholds—rose by 63.5 percent.

That's interesting, but changes in the share of total income going to the various quintiles tell an even more interesting story. Table 11.4 shows the percentage share of total income going to each quintile and to the top 5 percent of households.

Table 11.4  Share of Income Received by Each Quintile and the Top 5 Percent
YearLowestSecondThirdFourthFifthTop 5%
20003.68.914.923.049.621.9
19903.99.615.924.046.618.6
19804.310.316.924.943.715.8
19704.110.817.424.543.316.6

Source: U.S. Census Bureau

It doesn't take a raving socialist to see that the shares of total income going to U.S. households in the top 20 percent—and in the top 5 percent—increased from 1970 to 2000, while the shares going to those in the lower four quintiles—the lower 80 percent—decreased. What you think should be done about this trend, if anything, is another matter. Yet clearly, over the past 30 years, a larger share of income has gone to those who were already earning the highest incomes.

That is a major point of contention in the political, social, and economic argument over income distribution in the United States. Very few Americans seriously argue that income equality is a reasonable, or even desirable, goal. Americans recognize that the incentive to earn a higher income drives people to get an education and work hard, fuels economic growth, and informs our national character. If incomes were “equalized” through taxation or other means, the labor market would fall into disarray and people would lack economic incentives to better themselves.

EconoTip

Don't confuse income distribution with income redistribution. Income distribution refers to the amounts and shares of income that go to various segments of a population. It's actually a frequency distribution, which you learned about in The Economist's Toolbox.

Income redistribution refers to government programs to even out income disparities to some degree. This involves taking money from relatively wealthy segments of society and transferring it to relatively poor segments, through public assistance and other government programs.

However, despite very real disparities in income, Americans pride themselves on being a “classless society,” or at least on being a nation with such a large middle class that it may as well be composed of one class. This may be wishful thinking, given the actual distribution of income.

Through work, education, innovation, and financial savvy, people in America can move to a higher socioeconomic class more easily than in most other societies. This is another source of national pride and economic incentive in the United States. Might that change if people with the largest slice of the economic pie keep getting an even larger slice? If we became a nation in which the economic deck were stacked against average people—those with average education and skills—both social mobility and incentives to work could diminish. Moreover, with much of the fruits of economic growth going to a relatively small segment of the population, the once tight social fabric of the country could fray.

There is some evidence that that fabric has frayed since the “glory days” of World War II and the 1950s. The urban riots of the 1960s arose in part from economic issues. The character of many U.S. cities changed during and after that period, in many instances leaving a much smaller middle class to fill jobs, attend schools, spend money, and pay taxes. Suburban sprawl, “white flight,” and the need for more housing transformed large portions of cities like Detroit, Baltimore, Los Angeles, and New York into urban societies with two-classes: wealthy and poor.

Some people point out that even if the lower four quintiles each have a lower share of the economic pie than they did 30 years ago, their incomes are still larger than they were back then. That may be true, but relative to the top quintile, they are poorer, and the distribution of the shares of national wealth is the key measure of wealth and poverty in a nation as rich as the United States.

book cover

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book direct from the publisher, visit the Penguin USA website or call 1-800-253-6476. You can also purchase this book at Amazon.com and Barnes & Noble.

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