Thursday, October 30, 2014

The rich rob the poor?

Since the early 2000s, a wave of interest to income inequality has been rising. A few researches found a specific way to prove that the distribution of income has been changing in the US in favor of very rich (top 1%).  Figure 1 is borrowed from an article by Atkinson, Piketty, and Saez (BPS) published in the Journal of Economic Literature. Before call for help, let’s consider the source of increasing portion of the richest. It’ll show us that the poor are not robbed.    

Figure 1. The increasing portion of total income for the top 1 % of households.

There are two different sources of the increasing portion of the top income. First, the cake (total income) is not changing in time and the richest take away from the portion of the poor. Second option is the increasing portion of the total income in the GDP without any harm to the 99% of population. Figure 2 demonstrates that   the ratio of gross personal income (GPI) and gross domestic product (GDP) (both borrowed from the bea.gov) repeats the curve in Figure 1 practically one-to-one. In the GPI, all incomes subject to taxes (BPS refer to the IRS data for Figure 1) are counted in. We can conclude that the portion of personal incomes in the GDP has been increasing since the 1970s together with the portion of top 1% richest. In other words, the richest people change the proportion of corporate and personal incomes in the GDP, the former falls and the latter rises.  But both likely belong to the same people. Ninety nine percent of population hardly benefits from these corporate incomes, and Figure 3 evidences that the portion of personal income estimated by the Census Bureau in the annual Current Population Surveys has not been changing between 1967 and 2001. (The fall after 2003 is likely artificial introduced by a new questionnaire.)

Conclusion. The redistribution between personal and corporate incomes related to the richest 1% was misinterpreted as the changing income inequality. The richest just put some money from their left pocket into the right pocket. The same money is still with them. The truth is that the other 99% have never been the beneficiaries of the ~50% of the GDP, which belongs to Richie-Rich.  

The richest might rob the poor many-many years ago but the income inequality has been hardly changing ever since. The problem of economists is that they are not able to measure income inequality accurately enough and get in own trap.  As a physicist I can add – never measure aggregate variables using a changing portion (GPI) of a closed system (GDP). The result is always wrong. 


Figure 2. The ratio of gross personal income (GPI)and gross domestic product (GDP) since 1929.

Figure 3. GPI/GDP and the ratio of the personal (money) income measured by the Census Bureau and the GDP.



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