Forces on Income Distribution

Driving Forces in income distribution:

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

With the insights gained in previous chapters, it is simple to argue the complexity of income distribution and even the drivers that made the distribution what it is and has been. 





A note to emphasize.

Income Distribution 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?

Chaper 8:   Conclusions and Comments



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 applaued loudly for his high level of achievement.  Rarely however do we see in the media the differentiation between performers on the basis of skill.  Rather the label of rich is used in some circles to identify those who have exploited the masses. 

This assumption that economics is a zero-sum game defies even basic logical obervation.   It strikes one as driven by envy and base level primative needs to be as good as and perhaps better than a neighbor.  However since thsi need for equality now affects so much political thinking and even idealogy, it needs to be examiend closely here.

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 catelog 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.


Important Systematic Variables:

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 Gobalization. 

Globalization meant new economic dependencies and 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.

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.

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 the market openness was a factor.  

The rate of structural change raised the question howspan 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 faught the forces as they occurred.  GM was greatly hampered by this lack of realization.


Macro Variables:

Household size, stability and career maturity:  Even divorce rate differences between quintiles are significant in certain geographies over time. 

Over 2x increase in the number of households, with many low-skilled immigrants caused a downward pressure on income mobility.

Tax codes affected the amount of reported income in the late 80's, as reported on by the IRS.

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. 

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. 

 The cost of a higher education has gone up in recent yearseven faster than healthcare, so this will make future mobility in income levels more difficult.


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 diminished.   

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. 


Other Economic Factors

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.

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. 

Inconsistent support for entrepreneurship has lead to a reduction in IPO's and startup investments in market driven areas, not the artificially enhanced area of green energy.   This in turn will reduce sustainable upward mobility in income.

Changes in income sources over the longer period has no doubt led to higher mobility.  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

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

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. 

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. 

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. 

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.



Social factors

Shift of power to Washington DC is most apparent in recent times.  However the growth of the cost of the federal governement has grown nearly as fast as healthcare.  Agencies abound and the serving of the debt and the future committments of Medicare and Social Security will hurt more the lower quintiles.

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.

Demise of the strong work ethic:from parenting to spoiling children.  The values being passsed on vary with quintile, and the growht of the single parent and fatherless families is a growing concern in some communities. 

Growing envy and sense of entitlement: and other negative values are not distributed equally. 

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.

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


Jefferson once said: "Eternal vigilance is the price of freedom."    div>