Off the Charts Blog | Center on Budget and Policy Priorities

The shares of the nation’s income going to each of the bottom three fifths of households were the lowest on record last year, in data that go back to 1967, today’s Census Bureau report shows.  The share of income going to the top fifth was the highest on record (see graph).

The bottom 20 percent of households received just 3.2 percent of all household income in 2011, and the middle fifth of households received only 14.3 percent of the income.  But the top 20 percent of households got 51.1 percent of the income in the nation, and the top 5 percent of households garnered 22.3 percent.

In short, as more of the gains of economic growth have accumulated at the top, the shares of the national income going to the bottom and middle have fallen.

Although the economy grew last year, middle-income households continued to lose ground, and the losses were particularly large for working-age households.   It’s a stark reminder that when it comes to the living standards of middle- and low-income families, overall economic growth is necessary but not sufficient.

For these families to get ahead, the economy must not only expand but that expansion must reach more households, particularly those for whom growth has been largely a spectator sport.

Some policymakers, like House Budget Committee Chairman Paul Ryan, have tried to dismiss studies like this one from the Congressional Budget Office showing a large rise in income inequality in recent decades by arguing that these studies do not account for income mobility in America.

Here’s their argument:  the data we have showing rising inequality is based on successive “snapshots” of the income ladder over time, but people are not stuck on the same rung over many years; they move up and down the ladder.  Increased income inequality means the rungs of the ladder are further apart, but if there is enough movement up and down that income ladder, where people are in a particular year would tell us very little about where they were a few years earlier or where they will be a few years later.  If mobility has increased enough, the dramatic rise in income inequality over the past thirty years is not an obvious problem.

The problem is, there’s just no evidence that mobility is increasing, and quite solid evidence to the contrary.

A new paper by Federal Reserve economist Katharine Bradbury clearly documents a statistically significant decline in the rate of mobility.  The slowdown isn’t dramatic; Bradbury accurately labels it “slight.”  But it’s there.

This graph, based on Bradbury’s analysis, shows two measures of family income mobility over ten-year spans:  the share of families in the richest fifth who move down the income scale to the middle or lower fifths and the share of families in the poorest fifth who move up to the middle or higher.

The lines basically drift down starting in the late 1970s, meaning there’s less movement between the rungs on the income ladder.  Bradbury found that the downshift over time was statistically significant (see Table 5 of her paper).

The argument that mobility offsets higher inequality may sound plausible, but the facts don’t support it.

The Congressional Budget Office has released a fascinating and disturbing analysis on the growth in income inequality among American households over the past few decades.

The key findings are:

• Inequality increased significantly over this period (see graph).  Between 1979 and 2007, incomes grew by 275 percent for the wealthiest 1 percent of households, 37 percent for the middle 60 percent of households, and 18 percent for the poorest 20 percent of households.  These figures adjust for inflation and account for the impact of taxes and government transfer payments such as Social Security and unemployment benefits.

• The share of the nation’s total income accruing to the middle 60 percent of households fell from around half in 1979 to a bit above 40 percent in 2007.  Virtually all of this decline (and the decline in the share of income held by the bottom 20 percent of households) is reflected in the increase for the top 1 percent, whose share of the nation’s total income more than doubled.

The increase in inequality mostly reflects the growing share of market income — that is, income before accounting for taxes and transfer payments — going to higher-income Americans.  Because our tax and transfer system is progressive (e.g., higher-income households pay higher federal income taxes and transfers tend to benefit those with lower incomes), taxes and transfers reduce inequality at any given point in time.

But, given that market incomes have grown more unequal, a good question is whether changes to the tax and transfer system in recent decades have made it more effective in pushing back against this rising tide of inequality.  They haven’t.  In fact, the opposite has happened.  The CBO study finds:  “Between 1979 and 2007, the Gini index [a measure of income inequality] for market income increased by 23 percent … and the index for income measured after transfers and federal taxes increased by 33 percent.”

The reason is that both federal taxes and transfers, while still progressive, have become less so over time.  In a sense, the tides of inequality have been rising, while the levees to hold them back have been shrinking.

Politicians and the small business lobby regularly claim that small businesses are the main drivers of growth in the U.S. economy, but the facts show otherwise, as I explain in an op-ed in today’s New York Times. Here’s the opening:

I challenge you to find a stump speech by a politician running for any office from dog catcher to president that doesn’t invoke the importance of small businesses.

That’s not necessarily a bad thing. It’s a hat tip to American entrepreneurialism, evoking images like that of Steve Jobs planting a seed in his garage that grew into an amazing Apple orchard.  Besides, don’t most people work for small businesses, and aren’t such businesses the engine of job growth?

Actually, no.  In what may be the most misunderstood fact about the job market, although most companies are small — according to 2008 census data, 61 percent are small businesses with fewer than four workers — more than two-thirds of the American work force is employed by companies with more than 100 workers.  You can tweak the definitions, but even if you define “small” as fewer than 500 people (as the federal government does, basically), you still find that half the work force is employed by large businesses.

Click here for the full piece.

President Obama’s new, robust, and ambitious jobs plan is a well-crafted measure that would provide significantly more job and earnings opportunities for working Americans. Given the economic difficulties facing America’s families, Congress should enact it sooner rather than later.

The President did not estimate how many jobs it would create or save but, at about $450 billion, it’s clearly large enough to cut the unemployment rate over the next year or so.  Moody’s Analytics’ Mark Zandi predicts the plan would add 1.9 million jobs in 2012 and cut the jobless rate — which now stands at 9.1 percent — by a percentage point compared to where it would otherwise be.

In fact, as the chart reveals, if Congress fails to pass any of the measures in the American Jobs Act, we should expect the unemployment rate to be slightly higher next year (9.3 percent).  But with the AJA job-creation measures at work in the economy, the jobless rate would be 8.3 percent.  That’s still too high, but it’s a marked improvement.

As expected, the President called for renewing the payroll tax cut and extending unemployment insurance benefits, both of which are scheduled to expire at the end of this year.  But he also called for considerable extensions of both policies.

On the payroll tax break, he proposed raising the 2 percentage-point cut to 3.1 percentage points (half of the overall payroll tax on employees).  The benefits of the tax cut to a typical worker earning $50,000 per year would grow from $1,000 to $1,550.

Employers also pay a 6.2 percent payroll tax, and the President proposed cutting that in half to 3.1 percent, capped at $5 million of payroll.  In other words, employers would benefit from tax relief of up to $155,000.  Since large businesses have payrolls well over the $5 million cap, the structure of this tax cut favors small businesses.

Just as under the current payroll tax cut, the federal government would transfer general revenues to Social Security to reimburse it for the revenues lost through the payroll tax cut.

The President’s proposed extension of unemployment benefits includes a new $4,000 credit to employers who hire the long-term unemployed (those seeking work for at least six months).

On the infrastructure side, the President’s plan includes $50 billion for surface transportation projects, $30 billion for public school and community college repairs and renovations, and a $10 billion down payment for an infrastructure bank.

Also, given the serious loss of state and local jobs during the downturn, the plan wisely includes $35 billion to preserve jobs of teachers and “first responders” such as police and firefighters.

Other parts of the jobs plan include:

• a $15 billion neighborhood stabilization fund to help improve and repair low-income housing, including homes vacant due to foreclosure, that can then be sold to low-income homebuyers;

• a $5 billion “Pathway Back to Work Fund,” including summer jobs for low-income adults and youth, subsidized jobs for members of low-income families, and a training/work placement program.

• an on-the-job training program for unemployment recipients; and

• a small business expensing program that allows businesses to write off the cost of certain capital expenses (typically equipment and software) in one year as opposed to the usual many years.

The President proposed paying for the package through revenue increases and spending cuts.  But to avoid canceling out the stimulative impact of the plan, these “pay-fors” would kick in down the road, when the economy is presumably stronger.