Sunday, February 2, 2014

Important points that are rarely made on income inequality statistics

There are some very important points here that aren't really being made, or very rarely, in the media, and politics and economics blogosphere.

1) The statistics you almost always see are per household, not per adult, or earner. For some of these quintiles, deciles, etc. you see a slight gain – over 30 or 40 years – but it’s per household, not per worker. To make only slightly more over a generation or more, and then it's only with now both spouses having to work to get it! This should always be talked about. It makes it much worse. You know how much more stressful it is to have to work long hours at work and then have to go home and work long hours on housework, cooking, and all these other things, because now both spouses are working. You know how much time and effort it takes to manage a household and raise children in this day and age, and now you no longer have one spouse who can devote all of his or her time and energy to it. And on top of that, parents are now substantially older, and so have less energy, yet far more total work – all for almost no increase in household income.

In addition, your expenses are much higher with both spouses working, higher transportation costs, higher eating out and services costs due to lack of time, and so on. This alone can more than eliminate any small gain over a generation or two.

Of course, probably most women want to have a career, but it's different to work a job because you want to, than because you have to, and then to only make about the same household money a family was making a generation ago without that income, so you have little or no extra money to hire someone to take up all of the housework that you now can't do when you're at your job.

2) It's not just average income, at all. It's the variance, the riskiness, of income – In finance, you hear non-stop about the risk-average return tradeoff, but when we talk about income inequality over time, it's typically only the average, never the riskiness. But this is such a big part of it. Families are so much more at risk today of unemployment and ruin. A point Harvard bankruptcy and financial distress expert Elizabeth Warren made so well is that in the early 1970's the typical family's basic fixed "must-have" expenses were only about 50% of their after-tax income, and with just one earner. Today it's about 75% with two earners, so just a 25% loss can send them over the edge (see this Senate testimony, especially page nine). And with two earners, the odds of a job loss are, at a first cut, twice as high.

The long evidence and argument for the huge increase in financial riskiness is in Yale political scientist Jacob Hacker's "The Great Risk Shift", Warren's "The Two Income Trap", and the forthcoming, "Chasing the American Dream: Understanding What Shapes Our Fortunes", by a group of accomplished sociologists. For a brief summary of the last book, see this New York Times column by one of the authors.

It's so much not just the average. It's also the risk. And this is just almost never said when income inequality statistics are stated or discussed.

3) So much less of the income of families' is available. First, a far bigger portion of it must be spent on education – and this is really largely a cost of business, a production input, not income. Families a generation ago used to be able to consume this money. Today, often $15,000/year or more is going to pre-school or day care for the kids that wasn't in 1974. And then there's all of the educational products and assistance, and I won't even get into the skyrocketed college costs, where college wasn't at all the necessity it is today. Take that out of the income and then tell me families in the lower -tiles have had a slight gain. Next, of course, medical is much more expensive. Obviously the care is more advanced, but still that takes away your day-to-day money, and adds to the financial stress. Control for that too, and then let's see how families are doing – an amazing 40 years later, when they should be doing far better with the power of compound growth, and given how amazingly the top earners have grown. I'll add one more, that I mentioned briefly above: Because both spouses are now working, often for very little more household income than 40 years ago, there's no one full time at home to cook and do housework, so now they have a much higher expense of eating out and prepared food. And transportation and other business costs are much higher to support two working spouses – Control for that too, and again, then tell me there was a slight gain in lower –tile households.

4) Historic income inequality brings all sorts of positional externalities and expenditure cascades of great cost, pushing families into much more expensive items than before, for often little or no intrinsic utility gain per item. And this has to be done on a household income that has gone up little, if at all, over more than a generation for the lower –tiles.

These really do seem to me to be very important points that I rarely if ever hear, and it looks very misleading to me to leave them out.

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