A key aspect of the rise in income inequality in the United States since the 1970s is the soaring incomes of the top 1%. Is this development unique to the U.S.?

Tony Atkinson, Andrew Leigh, Thomas Piketty, Emmanuel Saez, and others have used tax records to estimate the top 1%’s share of total income in a number of countries. Leigh has made a few adjustments to enhance comparability across the countries and posted the data on his website. He has a nice paper on the issue, which includes a version of the two charts shown below. (For more data and analysis see here, here, here, here, and here.) The data are for pretax incomes excluding capital gains.

It turns out that other English-speaking countries have experienced a similar trend:

Is this, then, simply the norm? No. In other affluent nations, the top 1%’s income share has increased only slightly or not at all during this period:

What accounts for these differing developments? We don’t know. Hypotheses abound, including differences in market competition, norms, labor power, government partisanship, tax systems, corporate governance practices, and demand for entertainment, athletic, and English-speaking executive talent. Because the data are relatively new, however, there has been limited systematic analysis as of yet.

is here.

Links to others Norman Geras has done, 240 so far, are here.

U.S. economy

The end of American exceptionalism, by Clive Crook

Road to ruin?, Financial Times

Living standards, inequality, poverty, well-being

Presidents and income growth, by Larry Bartels

Pulling apart: a state-by-state analysis of income trends, by Jared Bernstein, Elizabeth McNichol, and Andrew Nicholas

Hunger stalks millions of poor Americans, Financial Times

Worked over and overworked, by Steven Greenhouse

The economic costs of poverty, by Harry Holzer, Diane Whitmore Schanzenbach, Greg J. Duncan, and Jens Ludwig

Good jobs for Americans who help Americans, by Robert Kuttner

Trends in infancy/early childhood and middle childhood well-being, 1994-2006, by Kenneth Land (via The Early Ed Watch Blog)

For many, a boom that wasn’t, by David Leonhardt

Maybe money does buy happiness after all, by David Leonhardt

Tax credits and public benefits (pdf), by Elizabeth Lower-Basch (via Matt Lewis)

Wall Street winners get billion-dollar paydays, New York Times

Inside the middle class: bad times hit the good life, by the Pew Research Center

The wage that meant middle class, by Louis Uchitelle

Taxes

McCain and the decline of US, by Brad DeLong

Read their lips: Clinton and Obama take the pledge, by Howard Gleckman

Bush made permanent, by Paul Krugman

Weighing a McCain economist, by David Leonhardt

Principles of taxation, by Mark Thoma

Capital gains mythology, by Eric Toder

Health care

Are you confused yet?, by Jacob Hacker

The path to universal health care, symposium in The American Prospect

Housing

As cities revive, America’s poor are forced to the periphery, Financial Times

Playing the housing blame game, by David Leonhardt

Unsold homes tie down would-be transplants, New York Times

Modern suburbia not just in America anymore, USA Today (via Richard Florida)

Education

Evaluating NCLB, by Harry Brighouse

Considering effective education solutions, by the Center for American Progress

How the world’s best-performing school systems come out on top (pdf), by McKinsey and Co.

Primary watch: ignoring early education, by Sara Mead

Early education at risk?, by Sara Mead

Fixing education policy, by Jim Ryan

Trade

Krugman’s conundrum, The Economist

Better roses than cocaine, by Nicholas Kristof

Is trade the problem?, New York Times

America needs to make a new case for trade, by Larry Summers

Immigration

Of income and incomers, by Tim Harford

Immigration in western Europe, by Gianmarco Ottaviano and Giovanni Peri

Immigration reform suggestions: bring back indentured servitude?, by Jeff Weintraub

U.S. politics

The opiate of the elites, by Jeronimo Cortina, Andrew Gelman, David Park, and Boris Schor

Loose lips and Democratic ships, by E.J. Dionne

The culture wars, by Kevin Drum

The importance of campaign policy, by Ezra Klein

“Elite” … what’s it to you?, by Geoff Nunberg

Abroad

The paradox of disappearing European unemployment, by Tito Boeri

Europe’s employment growth revived after 1995 while productivity growth slowed: Is it a coincidence?, by Ian Dew-Baker and Robert J. Gordon

The new face of hunger, The Economist

How to show a dictator the door, New York Times

U.N. panel urges changes to feed poor while saving environment, New York Times

Japan may be rigid but it is not inefficient, by David Pilling

Miscellaneous

An uncertain truth, by Daniel Engber

When one parent is better than two, by Shawn Fremstad

How to really change your kid’s behavior, by Alan Kazdin

If climate skeptics are right, it is time to worry, by Paul Klemperer

Income inequality in the U.S. has increased sharply in the past generation. Those who worry about this development do so partly on grounds of fairness and partly because inequality may have adverse effects on politics, health, and crime. Sometimes overlooked is a more immediate cost: slow income growth for a large chunk of the population.

The following chart shows average inflation-adjusted incomes in 1979 and 2005 for various groups of households: the bottom 20%, the lower-middle 20%, the middle 20%, the upper-middle 20%, the next 10%, the next 9%, and the top 1%. The incomes include government transfers and subtract taxes. The data, from the Congressional Budget Office (here), are the best available for this purpose.

The average income among all households rose at a rate of 1.5% per year over these two and a half decades. But as the chart makes plain, much of that increase went to households at the top of the distribution, especially those at the very top. Households in the bottom three quintiles experienced very slow income growth — 0.2% per year for the poorest quintile, 0.6% for the next, and 0.7% for the middle.

What would 2005 incomes have looked like if income growth had been proportionate rather than heavily skewed in favor of the top — in other words, if all incomes had increased at a pace of 1.5% per year? The dashed line in the next chart shows the answer. To make it easier to see the effect, I include only the bottom 80% of households here. All of them would have been a good bit better off.

It’s often said that progressives focus too much on the distribution of income and don’t pay enough attention to absolute income levels. In fact, its impact on absolute incomes is one of the chief reasons to be concerned about rising inequality.

Income inequality in the United States has increased sharply since the 1970s. How much of this is due to reduced tax progressivity?

A key element of the rise in inequality has been the dramatic jump in incomes among the top 1% of the population. According to calculations from IRS data by Thomas Piketty and Emmanuel Saez (available here), this group’s share of total income more than doubled during the 1980s and 1990s.

This is due in part to the fact that in recent decades taxes have done less to reduce the top 1%’s income share. The following chart shows the pretax and posttax income share of this group from 1960 to 2001, according to the Piketty-Saez calculations. Between 1960 and 1979, its posttax income share was 70% of its pretax share. In the period from 1980 to 2001 that increased to 84%.

(Note: The Piketty-Saez data end in 2001, so they don’t reflect the Bush tax cuts. Calculations by the Congressional Budget Office suggest that from 2002 to 2005 the top 1%’s posttax income share was 85% of its pretax share, very similar to what the Picketty-Saez data indicate for 1980-2001. I don’t use the CBO data here because they go back only to 1979.)

What effect has this had on inequality?

The chart makes clear that most of the rise in the top 1%’s posttax income share is due to the increase in its pretax share rather than to changes in tax progressivity. The next chart offers another way to see this. The solid line in the chart shows the top 1%’s share of after-tax income since 1960. The dashed line shows what the top 1%’s share of income would have been had taxes reduced it to the same degree as in the 1960s and 1970s. It’s lower, but not massively so. Changes in taxation have mattered, but they have not been the main reason for the rise in the top 1%’s income share.

If reducing inequality is an aim of the next administration, increasing the progressivity of our tax system would surely help. But this is only one piece of the puzzle.

Kathy G. is against it — as are many progressives, it seems. The main reason is that means testing is thought to “make the relevant programs a lot more politically vulnerable.” I used to believe this, but I’m now skeptical.

A paper by Robert Greenstein (in a 1991 Brookings book, The Urban Underclass) initially spurred my rethinking. He noted that some of our most important means-tested benefits, including the Earned Income Tax Credit and Medicaid, fared quite well during the Reagan era. Christopher Howard’s recent book The Welfare State Nobody Knows updates Greenstein’s argument and analysis. Peter Whiteford has an informative examination of cross-country patterns, with a focus on Australia’s successful use of targeted benefits. My own preliminary assessment of the evidence is here (pdf).

That doesn’t mean I favor means testing of Social Security benefits. When you have a universal program in place that is contributory, functions well at reasonable cost, and enjoys considerable public support, it makes sense to keep it universal. But for a number of other programs I worry about progressives getting hung up on the alleged superiority of universalism.

A question in the International Social Survey Programme’s 1999 survey offered respondents pictorial illustrations of various income distributions and asked “What do you think the distribution in your country ought to be like — which do you prefer?” The choices were depicted as follows:

A relatively small share, fewer than 20% in most countries, said they preferred type A, B, or C. This isn’t surprising; each of those three has a large share of the population at the bottom. The bulk of respondents selected either type D or type E.

D and E are identical in their population shares at the bottom. The difference between them is that D has a larger share in the middle, whereas E has a larger share at the top. Average income is higher in E. Inequality is lower in D.

Interestingly, more respondents in the ISSP survey preferred D than preferred E. The results are strikingly similar across countries, even among nations that seemingly have very different orientations toward affluence and equality.

I wouldn’t go so far as to conclude from this that people tend to value low inequality over high incomes. Other ways of posing the question might yield different results. But it does suggest that inequality matters to people.

I suggested in an earlier post that it would be good if leading Democrats encouraged Americans to embrace economic change. Doing so would increase the political feasibility of putting in place a policy package that enhances economic security and promotes mobility.

I want to try to spell out the argument a little more clearly and elaborate a bit.

The argument

1. Economic globalization tends to benefit Americans as consumers. We get to choose from a wider array of products and services, and the increased competition among firms tends to reduce the prices we pay.

2. Economic globalization also benefits some Americans as workers. The prices their employers pay for inputs are lower, and the number of customers is larger. Both may increase employment and/or wages.

3. Economic globalization hurts some Americans as workers. Some lose their job; others experience stagnant or falling wages.

4. Access to the U.S. market tends to benefit citizens in poor countries, in the form of more jobs at higher wages. This is good for Americans on both altruistic and self-interested grounds.

5. It is economically and politically wise to have government policies in place that help those hurt by globalization to adjust. These include unemployment insurance, portable pensions and health insurance, retraining, job placement assistance, wage insurance, infrastructure improvement for hard-hit communities, and a higher and inflation-adjusted minimum wage and Earned Income Tax Credit. In addition, government can support job creation via a large-scale investment in renewable energy and/or an employer subsidy. By compensating the losers, these policies make globalization win-win. And in doing so, they lessen opposition.

6. Technological advance has properties similar to globalization; it tends to benefit us as consumers and some of us as workers, but it also hurts some of us as workers. So too does the ability to move, buy, and sell across state borders within the United States.

7. The policies described in #5 are just as appropriate for those hurt by technological change or internal economic movement as for those hurt by globalization. We would want these policies even if there were no cross-country trade or offshoring at all.

8. These policies are likely to be easier to sell politically if framed as a response to all forms of economic change, including globalization.

9. We already have most of these policies, but they are inadequate in coverage, funding, and coordination.

10. Part of the reason these programs are inadequate is that debate about economic globalization tends to get stuck on the question of free trade vs. managed trade. Three groups have an interest in framing the debate in these terms. One is Republicans who find it helpful to argue that Democrats are protectionist and therefore against the interests of American as consumers. The second is lobbyists for firms that stand to benefit from protection. The third group is people who work in manufacturing and offshorable services. They hope that blocking trade and offshoring will help protect their jobs. Democrats want their votes and hence often say they’ll address globalization in part by restricting it.

Regardless of whether the proposed restrictions are relatively minor (minimal labor and/or environmental standards) or extensive, once this door is opened it almost inevitably takes center stage in the debate. Far less attention, if any, gets devoted to the adjustment and cushioning side. As a result, the political constituency and momentum for these policies tend to be far smaller than they could be.

11. For Democrats, it might not be harmful politically to shift toward a position that embraces economic change — in other words, that forgoes managed trade. Democrats could then ask voters whether they prefer globalization and technological advance with less government help (the Republican position) or with more. But even if it hurts them politically in the short run, an approach that focuses on responding to globalization via adjustment and cushioning rather than managed trade is, in my view, the right thing for Democrats to do.

12. This does not mean Democrats ought to rule out trade restrictions altogether. What it means is that they should leave them off the list, or put them at the very bottom, of strategies for addressing job loss and wage stagnation. And labor and environmental standards should be discussed mainly in the context of foreign and/or environmental policy, rather than trade policy.

A couple of examples

Barack Obama and Hillary Clinton. In campaigning in Ohio and Pennsylvania, Clinton and Obama have criticized trade agreements such as NAFTA for contributing to American job losses. What’s ironic is that the leading economic advisers to both candidates — Austan Goolsbee for Obama and Gene Sperling for Clinton — are known to have different views about how to approach economic globalization. I’m not sure whether the candidates’ positions are due to the closeness of the campaign or to a genuine difference between them and their advisers (more on this here, here, and here). Either way, I’m afraid there will be little significant advance in pursuing the policy agenda highlighted in point 5 above until leading Democrats move away from the managed trade approach to globalization.

Jared Bernstein. I’ve just read Jared Bernstein’s book All Together Now: Common Sense for a Fair Economy. It’s full of compelling analysis and argument. On addressing the challenge of globalization, he offers a three-pronged proposal (pp. 72-77). One is help with adjustment. A second is a proactive strategy to create new jobs. These are both terrific. The third, though, is to more actively manage our trade arrangements, mainly in the form of imposing conditions on our trading partners — “some degree of labor standards and honesty in exchange rates.” There is nothing wrong with this per se. But once managed trade is introduced as an option, it ends up crowding out discussion of other approaches.

Okay, but …

They don’t really mean it. Neither Obama nor Clinton is likely to press for serious restrictions on trade or offshoring if elected president. This holds for most Democrats running for Congress too. But that isn’t the point. Even if they did follow through on a managed trade agenda, it probably wouldn’t have much impact on actual import levels. Pacts such as NAFTA seldom dramatically alter the degree of cross-border trade; had it not passed, imports from Mexico would not be much lower than they are today. The problem isn’t that managed trade rhetoric might lead to actual trade restrictions; it’s that it distracts from efforts to advance the scope and generosity of adjustment and cushioning policies.

Are there really net gains to Americans from globalization? I think the evidence leans heavily in favor of believing so, but some reasonable analysts are skeptical. Even if this skeptical view were correct, though, I doubt that trade restrictions would do nearly as much good for Americans as a generous set of cushioning and adjustment policies.

We need the cushions in place first, before agreeing to forgo trade restrictions. This is a reasonable notion in the abstract. But it traps us in an unproductive loop. Insisting that the cushions come first reduces the chance we’ll get them. And round and round we go.

I might be wrong about the impact of restrictionist rhetoric on the politics of social policy. My argument rests on a hypothesis that Democratic leaders’ trade rhetoric has a significant effect on the political feasibility of more generous and extensive social policies. I could be wrong about this. But given that any trade restrictions they might actually put in place would probably do little to stem globalization, it seems to me the potential costs of abandoning managed trade rhetoric are likely small.

More reading

Here are links to some of my favorite writing on this issue:

Alan Blinder, Offshoring: the next industrial revolution?

Brad DeLong, Free vs. fair trade

James Galbraith, Why populists need to rethink trade

Nicholas Kristof, Inviting all Democrats

Paul Krugman, Pop internationalism

Paul Krugman, In praise of cheap labor

Paul Krugman, Divided over trade

Paul Krugman, Trade and wages, reconsidered

Robert Reich, Hillary and Barack, afta Nafta

Dani Rodrik, Has globalization gone too far?

Gene Sperling, The pro-growth progressive

Gene Sperling, Rising tide economics

Joseph Stiglitz, Making globalization work (ch. 3)

Mark Thoma and others, Helping the losers from globalization

U.S. economy

An economy undermined?, Financial Times

Betting the bank, by Paul Krugman

The b word, by Paul Krugman

Slump moves from Wall St. to Main St., New York Times

A subprime conversation, by Mark Thoma

Living standards, inequality, poverty

Green-collar jobs in America’s cities, by the Apollo Alliance

The subprime borrower protection plan, by Dean Baker

The squeeze is on, by Jared Bernstein

How to cast a mortgage lifeline?, by Alan Blinder

The rich are different, by Len Burman

The end of the age of Friedman, by Brad DeLong

On the new reports from the Social Security and Medicare trustees, by Robert Greenstein

Unemployed, and skewing the picture, by David Leonhardt

Culture of success: inside an inequality riddle, by Brink Lindsey

How Europe’s model could solve America’s immigration problem, by Douglas Massey

Infrastructure is America’s best investment, by Felix Rohatyn and Warren Rudman

House of cards: consumers turn to credit cards amid the mortgage crisis, delaying inevitable defaults, by Tim Westrich and Christian Weller

The American public and the next social contract, by Cliff Zukin

Education

The teaching penalty, by Sylvia Allegretto, Sean Corcoran, and Lawrence Mishel

Middle-class schools for all, by Richard Kahlenberg

At charter school, higher teacher pay, New York Times

What makes Finnish kids so smart?, Wall Street Journal

U.S. politics

What is McCain’s economic agenda?, by Jared Bernstein

Obama’s theory is tested, by David Brooks

Rich state vs. poor state, rich voter vs. poor voter, over time, by Andrew Gelman

Expand the House of Representatives, by Larry Sabato

Forecasting the electoral college, by John Sides

What should the Democrats do about Florida and Michigan?, by Jeff Weintraub

The case for partisanship, by Matthew Yglesias

Abroad

Brazil’s lesson for China: do not ignore inequality, by Geoff Dyer

Economics and the rule of law, The Economist

Why we need a world education bank, by David Manning

Darfur - four years and counting, by Jeff Weintraub

Miscellaneous

Information liberation, by Daniel Akst

Where the Starbucks and Walmarts are, by Andrew Gelman

Body counting, by Megan McArdle

More and more Americans are in mortgage default. In some cases the homeowner can no longer afford the mortgage payment. But according to reports in the Financial Times and Wall Street Journal, a growing number of homeowners are choosing to walk away from their mortgage even when not forced to do so by their financial situation.

Why?

For some, no doubt, it’s straightforward economic calculus. One recent estimate suggests that for 10% of homeowners, the largest share since the Great Depression, mortgage debt now exceeds the value of the home. Over the past decade it became easier to get an initial mortgage loan with very little down payment. Many were able to later add a second mortgage (home equity loan); home equity loan debt tripled between 2000 and 2007. With rising home prices, this strategy works: the homeowner can keep up with the loan payments and even accumulate equity. But if home values fall, mortgage debt can easily exceed the market selling price of the home.

A mortgage is a non-recourse loan, which means a borrower in default does not owe the lender anything other than delivery of the loan’s collateral — in this case, the home itself. Defaulting on a mortgage loan in this circumstance therefore makes financial sense (at least in the short run, as default reduces the chances of getting a future loan). Some simply pack up and send the keys to the bank. For those who want to be certain the relevant paperwork is handled properly, a New York Times story tells of at least one newly-founded company, You Walk Away, that will take care of it for $995.

What is the role of norms here? Traditionally, losing one’s home has carried a stigma. Stigma can be a powerful deterrent to behavior that might otherwise bring financial and/or psychological benefit. Think of use of illicit drugs, divorce, out-of-wedlock childbearing, not attending church on Sunday, abortion, homosexuality.

Frequently, stigma has delayed widespread adoption or public acknowledgment of behaviors such as these for a considerable period of time. That doesn’t seem to be the case with mortgage default. I don’t know what share of people who could afford to keep paying are walking out on their mortgage loan, but the reports suggest it is nontrivial. If so, why hasn’t stigma acted as a more powerful brake?

One possibility is that the rate at which stigma’s influence declines has accelerated. Stigma associated with a behavior tends to recede when it is widely recognized that the behavior is fairly common. It may be that heightened access to information is dramatically shortening stigma’s influence. Mark Thoma suggests this as a possible factor in the rise of mortgage defaults.

My vague sense is that stigma’s influence declined more rapidly for out-of-wedlock childbearing than for divorce, and did so more rapidly still for homosexuality. As one indicator, the following chart shows the share of Americans saying homosexuality is “always wrong” since the early 1970s (the data are from the General Social Survey here). After holding constant during the 1970s and 1980s, the share fell by nearly 20 percentage points in the early 1990s (more discussion here).

Is the apparent acceleration in the pace of stigma’s decline real? Are there other examples?

A parable about the virtue of low tax rates for the rich has circulated on the web for a number of years. It apparently originated as a letter to the editor in the Chicago Tribune in 2001. Here is a recent version:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men — the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share”? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

The parable is misleading in several ways. (For more commentary see this, this, and this.)

First, though it doesn’t matter much, the numbers aren’t right. See here (table 1b) for the actual shares of federal taxes paid by various groups.

Second, and more important, if the government (the bar owner in the story) reduces tax rates (the price of beer) it usually must do one of two things to compensate for the lost revenues. One option is to reduce its expenditures. In the context of the parable, this means the bar owner lays off a bartender or a bouncer; or perhaps she has the bar cleaned less often or forgoes needed repairs. Some customers won’t care, but others will find the bar a less attractive place to spend time in. They might be happy to pay a little more for beer if it means faster service, nicer surroundings, and fewer bar fights. The same applies to government services such as police, military, schools, roads, bridges, subways, and parks.

The other option is that the government borrows money to finance the tax rate (beer price) reduction. If the bar owner does this and it results in a substantial debt, as was the case for our federal government in the 1980s and in the 2000s, a larger share of her revenues will go to her lenders as interest payments. Eventually she may decide it makes sense to raise prices (taxes) again, as did the first president George Bush in the early 1990s — even though it meant reneging on his “read my lips: no new taxes” pledge.

But set these issues aside. The most important point is this:

The claim made by proponents of equal-percentage tax cuts is that the rich man (the tenth) will stop coming to the bar and paying for a large share of the tab if he doesn’t get the same percentage price (tax) reduction as the others. (Forget about the others beating him up; that’s a distraction from the real point the parable aims to make.) This could conceivably be true. Or it might not be. Many advocates of tax cuts for the affluent believe it’s true. But that doesn’t mean they’re correct.

In my view it’s equally plausible to hypothesize that the tenth man would keep showing up even if he were asked to continue paying $59 — in other words, even if the others get a beer price (tax) cut while he doesn’t. After all, he wouldn’t be paying any more than before. And he could probably afford it; according to Congressional Budget Office data — see table 1c here — average pretax income among households in the top tenth was $340,000 as of 2005.

How the tenth man will react is an empirical question. There’s some discussion of relevant evidence in previous posts of mine here, here, and here.

Stories resonate with us far more than do impersonal statistics. But in some instances, such as this one, the reason a story resonates is simply that it affirms prior beliefs, rather than because it offers genuine insight.

Barack Obama is ahead of Hillary Clinton in the (regular) delegate count, and it looks almost certain that he will remain so when all of the primaries and caucuses are completed. Still, the gap is not large, and it is possible that Clinton will end up with the most popular votes. Rightly or wrongly, it appears that some — perhaps many — of the as-yet-uncommitted Democratic superdelegates intend to take electability into account in deciding which candidate to support (see here, here, and here).

What information should they consider in making a decision?

Partisans and pundits have suggested a number of reasons why one might stand a better chance than the other of defeating John McCain in the general election. Clinton is more strongly despised by conservatives and thus may generate larger Republican turnout. On the other hand, she appears to have stronger support among working-class voters, women, and Latinos, whereas Obama is stronger among professionals and African Americans. If the latter groups are more likely than the former to vote Democratic regardless of who is the nominee, this is an advantage for Clinton. Obama seems more likely to inspire independents, but Clinton may be better prepared to effectively confront Republican attacks. I’m not convinced that these considerations clearly favor one or the other.

National polls pitting Obama or Clinton vs. McCain are another potential source of information. They often show little difference between the two, but it’s too early for them to be of much use.

If I were a superdelegate trying to assess electability, I’d be inclined to focus on which candidate is most likely to win states that are not solidly “blue” or “red.”

The following chart shows the 24 states in which the popular vote in the 2000 and/or 2004 presidential election was within 10 percentage points. The numbers in parentheses indicate the 2000 and 2004 vote results. A plus sign means the Democratic candidate (Gore, Kerry) won the state; a minus sign means Bush won it. The states are ordered by the number of electoral votes they’ll have in the 2008 general election. The markers (”Ob” and “Cl”) indicate the winner of the state’s primary or caucus.

Consider first the 20 states at the bottom. Together they have 159 electoral votes. All but one have had their primary or caucus already. Of them, Obama has won states that have total of 98 electoral votes, and Clinton has won states with a total of 56 electoral votes. (West Virginia, with 5, holds its primary in May.) These results favor Obama.

One can argue that perhaps some of these states aren’t truly in play. New Jersey seems likely to go Democratic regardless of who is the nominee, and so too do Hawaii, Maine, and New Hampshire. Similarly, neither Obama nor Clinton is likely to win Tennessee or West Virginia. As best I can tell, though, subtracting these types of states would not change the picture much.

What could change it significantly is if all of the “big four” states — Florida, Pennsylvania, Ohio, and Michigan — go for Clinton. These states have 85 electoral votes between them. They decided the 2000 and 2004 elections, and might well do so again this time. If Clinton were to win these four states, she’d have won in-play states with a total of 141 electoral votes, versus 98 for Obama. Though primary results don’t automatically translate into general election performance (see this and this), this would give her a case for claiming greater electability. Otherwise, it seems to me that electability either is a draw or favors Obama.

Clinton won Ohio. Pennsylvania holds its primary April 22nd. If I were a superdelegate concerned about electability, I would want a true primary result from Florida and Michigan.

Addendum:  Jeff Weintraub has some sensible thoughts on what the Democrats should do about Florida and Michigan.

Doug Hibbs has posted an analysis of the implications of his “bread and peace” model for the 2008 presidential election. My earlier, considerably less thorough discussion is here. See also summary and comments by Mark Thoma and Andrew Gelman.

Andrew Leigh suggests that Australia would benefit from an Earned Income Tax Credit. I agree (pdf).

Income inequality in the United States has been rising since the 1970s. What is the most effective way to succinctly convey this fact?

Here is my choice (a pdf version is available here):

The chart shows average inflation-adjusted incomes of the poorest 20%, middle 60%, and top 1% of households since the 1970s. The incomes include government transfers and subtract taxes. For the bulk of American households, incomes have increased moderately or minimally. For those at the top, by contrast, they have soared.

Why This Chart?

Here are what I think should be the principal considerations. Some are obvious, others perhaps not.

1. Tell the substantive story clearly. The graph does a good job of conveying the two key aspects of the rise in income inequality over the past generation. One is the dramatic increase in incomes for households at the very top. In 1979 household income among those in the top 1% averaged $325,000 (in 2005 dollars). By 2005 that had increased to nearly $1.1 million.

The other is stagnation at the bottom and modest growth in the middle. Among the poorest 20% of households, average income was $14,500 in 1979 and $15,500 in 2005. Among the middle 60% of households, average income rose from $42,000 to $51,000.

2. Use the best available data. There are various sources of income data, including the annual Current Population Survey (CPS), the decennial census, IRS income tax records, and others. The data used in this chart are from the Congressional Budget Office (CBO), which has merged tax records with the Current Population Survey. They’re available here. Tax records are incomplete, because many low-income citizens do not file tax returns. But they have the advantage of providing relatively good data on those with high incomes. The CPS data are from interviews of 50,000 or so households. They are more representative of the population. But for various reasons the CPS data are not as good for those at the top of the income distribution. Also, the CPS data are for pretax income. The CBO data arguably combine the best features of these two sources.

The main disadvantage of the CBO data is that they begin in 1979. It’s thus not possible to see the contrast with earlier periods. I say more about this below.

3. Show incomes, rather than a summary inequality measure. Common inequality measures include the Gini coefficient, percentile ratios (e.g., P90/P50 and P50/P10), and income shares (e.g., the income share of the top 1%). They are quite useful. Nice examples from the Economic Policy Institute’s The State of Working America are here, here, and here. But they have two drawbacks. One applies to the Gini index, which is the most commonly-used inequality statistic. It doesn’t identify where in the income distribution the rise in inequality has occurred. For example, suppose the Gini rises over time. Is that because those at the top have pulled farther away from everyone else? Because those at the bottom have fallen behind? Because of a widening spread in the middle? All three? Something else?

To address this problem analysts often turn to percentile ratio or income share measures. These, however, fail to provide information about trends in actual incomes. Suppose, for example, that the 90/50 ratio increases over time. Is that because the incomes of those at the top have risen faster than the incomes of those in the middle? Because incomes at the top have risen while those in the middle have been stagnant? Because both have decreased but those at the top have done so less rapidly? Something else?

Showing trends in actual incomes — adjusted for inflation, of course — overcomes these problems. A potential drawback of doing so is that it may not be obvious from the raw income data whether or not inequality has increased, or by how much. If the magnitude of the rise in inequality is small, it may be preferable to use an inequality measure. For the United States over the past generation, however, the increase in inequality is easy to spot from data on incomes.

4. Show income levels, rather than growth rates. A common and helpful inequality graph is a bar chart showing rates of growth of real incomes during different periods for households at various points in the income distribution. See here for an example. This gives a good sense of the magnitude of the change in inequality, but it doesn’t convey anything about the magnitude of the level of inequality.

5. Show the full trend, rather than snippets or period averages. A frequent choice is to show the level of inequality in selected years, or averaged over groups of years (e.g., business cycles). That’s fine in many instances, but when there is relative stability within periods it is usually preferable to show all data points.

A Helpful Supplement

The chief limitation of the above graph is that it doesn’t fully convey what has happened at the bottom of the distribution since the 1970s. It is clear from the chart that incomes for those in the top 1% have jumped dramatically and that incomes for much of the bottom half of the distribution have been stagnant. But the latter aspect is not highlighted to the degree it could be.

Here is a second chart that helps to flesh out this point:

This chart shows trends in real incomes for families at the 20th, 40th, 60th, 80th, and 95th percentiles of the income distribution. In order to go back to the 1940s we have to accept two data limitations: the income data, from the CPS, are pretax; and the units are families rather than households, so adults living alone are not included. These data are available here.

Between the late 1940s and the mid-1970s incomes increased at roughly the same pace throughout the distribution; they doubled for each group. Since the 1970s the story has been quite different. At the 95th percentile, incomes have continued to rise. At the upper-middle levels (the 80th and 60th percentiles), they’ve increased at a moderate pace. In the bottom half of the distribution (the 40th and 20th percentiles), they’ve been fairly stagnant.

This chart makes it clearer that a defining feature of rising inequality in the United States is the stagnation of incomes in the lower half of the distribution. Even at the 95th percentile, where incomes have increased appreciably since the 1970s, the rate of growth did not accelerate relative to earlier years; the average growth rate of family income at the 95th percentile was 1.5% per year between 1979 and 2005, compared to 2.4% per year between 1947 and 1979.

Other Nominations?

If you’ve seen an inequality graph that is as good or better, please let me know.