Driving Forces in Income Distribution:

Having delved into data sources, distribution statistics, mobility, and even definitions - the dynamics are quite significant and need to be cataloged in order to have a good grasp of what is driving the income distribution and why.

The Chapters on data, distribution, mobility, along with defining and understanding the concepts of poverty and fairness in our modern world, should have made a strong case for the idea that a complex parameter such as income distribution has complex causes.  This leads us to this Chapter where we catalog the causes discussed and describe others.   Since we have analyzed the time period from the mid-60's to 2010, we can focus on the forces acting on all of us during that period.

The presentation below is a summary of that complexity.  The rating given each line item is 1 through 5, with 5 being the strongest influence on income and its distribution.  Zero is no influence, 3 is medium, 4 significant, and 5 huge.  Make your own ratings.  In the list below there are 26 distinct forces, with 15 receiving a large portion coming from the government.


With these forces operating, where to begin in setting policy?



Income Distribution Intro Page

Chapter 1:  Data Sources and Validity

Chapter 2:  Income Distribution

Chapter 3:  Define Terms like Poor

Chapter 4:   Income mobility

Chapter 5:   Critical forces acting on us

Chapter 6:  The Occupy Movement

Chapter 7:  Buffet Rule fair?

Chapter 8:   Conclusions


More links are presented at the bottom of this page. 


Upon attending a wonderful Jazz concert I realized that I was in the presence of one of the top performers in jazz piano in the world.  The audience did not make note that he was clearly in the top 0.01% of his profession, and that his skill was not the result of a redistribution of skill.  In fact he was received and celebrated as exceptional and applauded loudly for his high level of achievement and performance.  Rarely however do we see in the media the differentiation between performers on the basis of skill.  Rather in the case of income, the label of rich is used in some circles to identify those who have exploited the masses in some throwback to an earlier time and the cries for a totally suppressive political idea. 

This assumption that economics is a zero-sum game defies even basic logical observation.   It strikes one as driven by envy and base level primitive needs to be as good as and perhaps better than a neighbor.  However since this need for equality now affects so much political thinking and even ideology, it needs to be examined closely here.  The culture of punitive policy is not one to bring about a benevolent or even compassionate society.  Certainly the Taker versus maker culture is not one that many would outwardly propose.

It is also not the case that none of the outcomes indicated are static. This is very important in trying to assess any policies that are being advocated, such as OWS and the Buffet Tax, subjects of the next Chapters.  If during this period we did have a fixed population and households, no mobility up and down of income earners, we had a static market growth processes - and if also had a growing income distribution moving more money to the top - then we could say that whatever form of economy we had did have flaws.  But none of these are true.  So understanding the driving forces in our economy since the 60's is critical if we are to either judge or advocate good policies.


Important Systematic Variables:


Sporadic butstrong economic growthgiving us a unprecedented economic well-being.    This usually comes with having capital being used in the most productive manner.  There are many policies that restrict this optimization, some are itemized below. (Rating 4)

Education falling behind the changing economy.  The movement in the 70's towards a skill based economy away from a local economy also leads or is driven by Globalization.  Education from early years to college, did not keep up with the competitive needs.  With the gap in educational outcomes and performance between the students from rich families and those from poor is growing, so this issue is growing.   (Rating 5)

Globalization meant new economic dependencies and avenues to competitiveness.  One had to compete with the world not just the next community.  Clearly the relative cost reduction of distribution, marketing, and all of the cost factors were strong contributors.  It meant learning new skills continually through ones career in order to command a premium in a world market place.  This force was not recognized by most in the labor force as rapidly as did the companies trying to take advantage.  (Rating 4)

A strong shift to a technology based economy, that in turn drove economic growth, world trade, and markets.  One could have a business in one country and have most of the revenue for the product coming from another country.  Those that had the skills to drive this and take advantage of it became the richest people in the world, like Bill Gates.  Again learning was a key for any individual.   (Rating 4)

Rising cost of healthcare from the mid-60's, and its increasing share of the GDP hurt all income earners, if one assumes that with the lack of competition that the cost basis was higher than it would have been in a free market, which should be an arguably simple conclusion to draw.   It was shown to be plausible that the income across the populace would have increased by something like 10% each year (non-accumulative).  This would have allowed more for investment, seeking better educational opportunities, as well as more capital for more productive uses, and for some being over the threshold of being able to buy a home.    Lower cost basis would also promote more equal medical outcomes than we currently have.  (Rating 3)

However at the same time there has been a shift more towards a more regulated economy, with the correlated increase in cronyism, and changes in the new business model.  In some cases the level of investment in lobbying for favors and to protect even market access was a factor.  Regulations are seen as giving business a guided path, but often this means a reduction of competition.   Add to this the protective barriers and high corporate tax rate, and the result is employment and compensation were not what they could be.  Having capital seek the best use is key to all incomes increasing.   (Rating 3)

Lack of stability of the money supply and resulting periods of high inflation:  the high income quintile was in a much better position to prepare for this condition and even take advantage of it.   The middle class and below relied on equity in their homes and saved income.  If one could afford a home it has been for much of the time a good hedge against inflation.  However if one had just savings and no equities, it would be very difficult to get ahead.  The inflation coupled with the emphasis on mortgages for all drove up the cost of housing and over inflated this market.  Some strongly argue this is the underlying cause of the financial crisis of current times.  In any event inflation and policies that even further inflate leave the lower quintiles at risk of being further incapable of entering these markets.   (Rating 4)

The rate of structural change raised the question how span have institutions not kept up with the high rate of change?  This is more than just globalization.  All forms of institutions that did not identify and recognize the change to more of a meritocracy and skill based economy.   Certainly public and private unions did not make any systematic changes, and in fact fought the forces as they occurred.  GM was greatly hampered by this lack of realization.   (Rating 3)


Macro Variables affecting the analysis:


Over 2x increase in the number of households, with many low-skilled immigrants caused a downward pressure on income mobility.  As these families and individuals mostly enter at the lower quintile, it has affected the analysis.     (Rating 3)

Household size, stability and career maturity:  The data presented is centered on a household or a tax unit, and not an individual.   This slants the data, but also small poor households with more dependents will push that household into a lower income curve.  Even divorce rate differences between quintiles are significant in certain geographies over time.   The incentives, welfare driven, for single parent families must be mentioned also here, for this is a key aspect of some ethnic communities.  Rating 2)

Tax codes affected the amount of reported income in the late 80's, as reported on by the IRS.  We have seen how that distorted the conclusions drawn by some on the amount of skew in the income distribution.    Tax rates should be seen not as redistribution mechanisms but rather a means to have a competitive advantage while also supporting a fair government function.   The Buffet or Obama Tax threatens to make the US near with the worst in developed countries in both capital gains and cooperate tax rates. (Rating 3)


Crisis of Dependency


All of the reasons one is incentivized to remain poor:  from taxes, to Medicaid, to food stamps, to general welfare.   The welfare portion of our society is alive and well.  With 99 weeks of unemployment insurance, the incentives for hard work seem currently diminished.    The amount of money this past year in transfer payments was close to $1T, $2T if you count Medicare and Social Security.    (Rating 4)

Despite welfare reform in the 90's, the growth of transfer payments continues to mount.  The effectiveness should be in question.  The growth in the drive towards a socialized society continues.  Examples are ObamaCare, and in general the absolute size of transfer payments is growing.  The percentage that is poor in this country ranges from 3% based upon an analysis based on consumption to 14% based on government's desire to increase transfers.   Since $1T are transferred each year, that would amount to $100K given to each of the 10 million poor (using 3%) if it was just given.  It is hard for anyone to justify more transfers when these are being done so poorly.     (Rating 4)

Media and higher level education promoting the need for more equality and entitlement: is a failure of the system to promote good career preparation and a strong philosophy of successful contribution through merit.   (Rating 2)


Other Economic Factors


The wealth accumulated in the top 0.1% is reported on here and elsewhere.  For the upper 1% the income sources more favored salary and business income in this period.  Variation in the High mobility, as reported in the Chapter on mobility, the mobility in income did vary geographically and within sectors. 

Variation in the ability to respond to economic crashes will be in the longer term after a crash, better for the upper income levels, partly because they have the assets to survive but also because they have the assets to capture bargain investments.   (Rating 3)

Disruptions in the business cycle and markets causing discontinuities in payback to investments made by the different quintiles.  In other words, the lower quintiles are perhaps hurt more in the long run by markets that are disrupted by government or crony intervention.  During this period a growing number of households did hold equities.  Since there were a few boom and bust cycles, this would be recovered from and even profited more by those with access to the expertise or assets to take advantage of it.     (Rating 3)

Inconsistent support for entrepreneurship has lead in recent times to a reduction in new businesses and IPO's and startup investments. The artificially enhanced area of green energy distorts investment based on a criteria of the best use of capital.   This in turn will reduce if not distort the sustainable upward mobility in income.  (Rating 3)

Min wage and the lack of employment experience: leaves some kids without the experience of a summer job and the good effects of working hard.    (Rating 2) 

Changes in income sources over the longer period has no doubt led to higher mobility but if the forces driving this change are better controlled or felt by a small portion of the populace then this is of concern.  Clearly the huge salaries in the past decades have been made in larger quantities in the financial sector.  An argument can be made somewhat that this sector could take better advantage of periods of high rate of change for instance in interest rates.   (Rating 1) 

 The cost of a higher education has gone up in recent years even faster than healthcare, so this will make future mobility in income levels more difficult as student debt and other factors play out.  In fact it was recently learned that total student loan debt has totaled $1 Trillion.  Given that this sum is large than previously thought, it cannot be ignored and robs capital and investment in the future, thereby making the barrier to rising to a higher quintile that much more difficult.     (Rating 1) 

Public versus Private cost of employment:  as the public is left with the higher cost of public services, making the lower quintile face a relatively higher cost.  When one sees the number of public employees in the city of Detroit having fewer active employees than retirees with large pensions, one has to have concern over the impact on income and value distribution.   (Rating 2)

Variation in economic conditions between States is becoming more real now, given the differences in business and tax environments.  (Rating 1)



Social factors


Shift of power to Washington DC is most apparent in recent times.  However the growth of the cost of the federal government has grown nearly as fast as healthcare.  Agencies abound and the serving of the debt and the future commitments of Medicare and Social Security will hurt more the lower quintiles.  The mere fact that 3 of the top income making counties in the country are in or near Washington DC should make one pause.   (Rating 4)

Cultural and value divide is growing: as the rich educate and raise their kids with an increasingly separate approach.  The lack of performance of public schools affects more than just the academic achievement of the students.  It affects how such achievement is seen in each community.  (Rating 3)

Demise of the strong and pervasive work ethic: as a result of parenting to societal value systems.  The values being passed on vary with quintile, and the growth of the single parent and fatherless families is a growing concern in some communities.  (Rating 2) 

Growing envy and sense of entitlement: and other negative values are not distributed equally.  Also the academic community projects in its practice of teaching a largely left leaning view of the desirability for equal outcomes rather than equal opportunity, equality in so many aspects of society rather than a belief in a meritocracy can lead to a better way to serve the poor while achieving great things in ones own life.    (Rating 3)

Policies such as affirmative action disturb the meritocracy progression, and it can be argued slow the income mobility not enhance it.   (Rating 2)

Lack of understanding of economics is a factor in the public preparing properly for conditions as they occurred.   The recent mortgage bubble burst leaving a good many lower income people with highly leveraged assets that they could no longer afford to support.  This subject is clearly not being taught effectively, and along with a major portion of the media, striving economically is seen as too materialistic, instead of being a means to gain independence and add value to society.    (Rating 3)

Our we our brothers' keeper?  Leave us to ponder the underlying social assumptions here.  Clearly a strong family correlates well with good income, along with the factors above.  (Rating 1)


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Jefferson once said: "Eternal vigilance is the price of freedom," could be amended to include
"and achieving understanding of the forces operating on freedom is essential."