Size of the Pie, Distribution of the Pie

“Today’s problems have less to do with the size of the economic pie than the way it is divided.” This, according to a New York Times article, is what Hillary Clinton’s economic advisers believe. I’m certain John Edwards’ economic team would agree with the statement, and I suspect Barack Obama’s would too.

Is this a sensible view? That’s a large question, but here is one way to think about it. The solid lines in the following chart show trends since World War II in inflation-adjusted incomes of families at the 60th, 40th, and 20th percentiles of the income distribution. The data are from the Census Bureau (here).

From 1947 to 1973, incomes at each of these three levels grew at an annual rate of about 2.7%. That was approximately the same as — actually slightly faster than — the rate of growth of the economy as a whole; GDP per capita during that period grew at a rate of 2.5% per year.

Since 1973 incomes in the middle and lower portion of the distribution have increased much less rapidly: 0.8% per year at the 60th percentile, 0.5% per year at the 40th, and just 0.3% per year at the 20th. Is this because the economy as a whole has failed to grow? No. The annual growth rate of per capita GDP since 1973 has been 1.9%. Instead, it’s because most of that economic growth has gone to those at the top of the distribution.

The dashed lines in the chart show what incomes at the 60th, 40th, and 20th percentiles would have looked like had they grown at the same 1.9%-per-year pace as the economy since 1973. The difference is striking. Incomes for a very large swath of the American population would be much higher — $15,000 to $30,000 higher — if economic growth since the mid-1970s had been distributed more equally.

Some will respond that the heavily skewed distribution of post-1973 economic growth contributed to that growth. In other words, the pie would now be smaller if those below the top had gotten more of it during the past generation. If you believe that, see this post.

4 thoughts on “Size of the Pie, Distribution of the Pie

  1. Pingback: The Ambrosini Critique » Blog Archive » Income inequality

  2. “Incomes for a very large swath of the American population would be much higher”

    Which swath? You’re measuring incomes for percentiles not tracking individuals.

    Assume the lowest 20th percentile is mostly 20 somethings, some of which are still and school and the rest just starting their careers. Why would we think that demographic should have increasing incomes at the same rate as the economy as a whole?

    (BTW, I do some more analysis at my website.)

  3. Definitely an interesting way of looking at this. The chart would be even more informative, though, if it also included P80 and P99 (including the hypothetical trend lines). Any inclination to add these?

    Also, would it be possible to add regression lines to the charts in the linked post, on inequality and growth in the EU? Do you still have the spreadsheet to hand?



  4. Pingback: WurfWhile - Was Charlie Gibson Right About $200,000 Being A “Middle-Class” Income?

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