Income inequality in US has not risen since financial crisis
began By David Leonhardt

By New York Times | 17 Feb, 2015

The average income of the top 1 per cent, by comparison, fell 21 percent over the same span. For the top 5 per cent, the drop was 15 percent. For the bottom 90 per cent of earners, it was 13 per cent. The notion that income inequality has continued to rise over the past decade is part of the conventional wisdom. You've no doubt heard versions: The rich just keep getting richer. Inequality is higher than ever. Nearly all of the gains from the economic recovery have gone to the top 1 percent.

No question, inequality is extremely high from a historical perspective ­worrisomely so. But new analysis, by Stephen J. Rose of George Washington University, adds an important wrinkle to the story: Income inequality has not actually risen since the financial crisis began.

How could that be? Because the crisis, which ran roughly from 2007 to 2010, reduced the pretax incomes of the wealthiest Americans more than the incomes of any group. The wealthy have indeed received the bulk of the gains since the recovery began, but they still
haven't recovered their losses. The steps that the federal government took in response to the crisis, meanwhile, including tax cuts and benefit increases, have mostly helped the non-wealthy.

Fascinatingly, Rose's case is not based on a new or previously undiscovered data set. It's based on the same statistics most commentators have been using to discuss inequality. The most up­-to-­date numbers come from the path-breaking analysis of tax records by Emmanuel Saez, a University of California, Berkeley professor who often collaborates with Thomas Piketty. A second set of statistics comes from the Congressional Budget Office.

Both point in the same direction: The income of the top 1 percent ­ both the level and the share of overall income ­still hasn't returned to its 2007 peak. Their average income is about 20 percent below that peak. Yet we have all become so accustomed to rising inequality that we seem to have lost the ability to consider the alternative. Maybe it's because many liberals are tempted to believe inequality is always getting worse, while many conservatives are tempted to believe that the Obama economy is always getting worse.

The numbers, however, make clear that inequality isn't destined to rise. Economic forces, like a recession, can reduce it, and so can government policy. And Washington's recent efforts to fight inequality ­ as imperfect and restrained as they've been ­have made a bigger difference than many people realize.

The existing safety net of jobless benefits, food stamps and the like cushioned the blow of the so­-called Great Recession. So did the stimulus bill that President Barack Obama signed in 2009 and some smaller bills passed afterward.

"Not only were low-­income people protected middle­-income and some higher­-income households had much lower losses because of these public policies," Rose said. "For those who think government programs never work, maybe they need to think again."

Before diving into the numbers on the government's role, let's start with the pretax statistics. These reflect what's happened before the government redistributes income through taxes and benefits.

The average pretax incomes for the top one ten-­thousandth of earners peaked at $39.4 million in 2007, according to Saez's data, which is adjusted for inflation. It then plummeted to $21 million in 2009 - partly because the stock market crash reduced gains from stock sales - ­before rising back to an average of $29.2 million in 2012 and 2013.

(Why am I using an average for 2012 and 2013? It's more meaningful than the data for only 2013, because changes in the tax law accelerated some stock sales into 2012. So looking at the data for 2013 alone makes the decline in inequality look even larger than it truly is.)

Needless to say, $29.2 million is a whole lot of money, but it represents a major decline ­-26 percent -­ from the 2007 level. No other income group has experienced such a large decline.

The average income of the top 1 percent, by comparison, fell 21 percent over the same span. For the top 5 percent, the drop was 15 percent. For the bottom 90 percent of earners, it was 13 percent.

If anything, these pretax figures exaggerate the level of inequality, as Rose notes in his paper, published by the Information Technology and Innovation Foundation, a Washington research group. The rich pay a higher average federal tax rate than the middle class and the poor. (The stories you hear about wealthy investors paying little in taxes are real but not the norm.) And unemployment insurance payments and other federal benefits help the middle class and poor more than the rich.

The numbers from the Congressional Budget Office, though not as current, show how much of an effect government policy has had. Pretax income for the middle class and poor dropped substantially from 2007 to 2011 ­ about 10 percent for most groups. Yet including taxes and transfers, incomes fared better: Average income for the bottom fifth of earners rose 2.6 percent, to $24,100, and the average for the middle fifth fell only 2 percent, to $59,000. Such stagnation is hardly good news, but it's a lot better than a large decline.

By contrast, the pre­ and post­tax incomes for the top 1 percent are nearly identical to each other, both showing large drops.

None of these facts, to be clear, change the larger story: Inequality is far higher than for most of the last century. The Great Depression and the New Deal helped reverse the high inequality of the 1920s. The last several years haven't reversed more than a small fraction of the post­1980 rise in inequality.

It's even possible that inequality will soon surpass its 2007 peak, because the affluent often fare better than any other group in the second half of an economic expansion. On the other hand, the current numbers don't reflect several of Obama's efforts to fight inequality, such as the expansion of health insurance or top­end tax increases. Whatever happens in the next few years, top incomes will almost certainly remain vastly higher than they were in previous decades, while incomes for the middle class and poor will remain only marginally higher. This stagnation has damaged living standards and caused widespread frustration.

As Rose himself, who's more optimistic about the state of the middle class than I am, says, the United States has "a real income-inequality problem."

But the fact that inequality hasn't continued rising in the last several years matters ­ first, because facts matter, and, second, because it helps show what Washington has the potential to do. For much of the last few decades, rather than attacking inequality, government policy has exacerbated it. Tax rates on the very rich, the same group receiving the largest pretax raises, have fallen the most.

In the last several years, however, the federal government has tried to combat inequality, through a combination of tax and spending policies. These efforts weren't aggressive enough to bring major raises to most families. The financial crisis was too big, and Washington's response was too restrained. Yet the efforts were aggressive enough to make a difference.

They are a reminder that rising inequality is not inevitable, and that the country has the power to shape its economy