Home > Uncategorized > Unequal distributions of income

Unequal distributions of income

from David Ruccio

We all know that the distribution of income has been increasingly unequal in recent decades—in the years leading up to the crash of 2007-08 and, now, during the current economic recovery.*

But, as I explained to my students in class this week, there are two different ways of conceiving of and measuring inequality within capitalism. One is the size or interpersonal distribution of income—the distribution of income to individuals or individual households. Thus, for example, the Gini coefficient, the share of income going to the top 1 percent, and the 90-10 ratio are all ways of measuring the size distribution of income. The other way is the functional distribution of income—the distribution of income to groups that are functionally related to the production of total income. Thus, we often refer to and measure the income shares going to capitalists and workers (and, less often these days, to landlords).

The question is, what is the relationship between the functional distribution of income and the size distribution of income?

Branko Milanovic (pdf), in a recent paper, usefully clarifies the issue by exploring the conditions that link a higher capital share to a larger share of income going to the tiny group at the top of the household distribution of income. They are two. First, the concentration of capital income has to be high.

Working with only two factor incomes, that of labor and capital, for the overall inequality of personal income to go up, the requirement is that the more unequally distributed source has to grow relatively to the less unequally distributed source. With capital income, this condition is relatively easily satisfied since in all known cases, the concentration of capital income is greater than the concentration of labor income.

Second, there has to be a high association between households that are capital-rich and households that are income-rich. This requirement is

expressed in the form of a high correlation between rankings according to capital income and rankings according to total income. Put simply, this requirement means that people who receive large capital incomes should also be rich. Empirically, this requirement is easily satisfied in most countries.

In other words, if there’s an unequal distribution of capital ownership (and thus capital income) and if the capital owners are themselves the richest members of society, then a more unequal functional distribution of income will result in a more unequal size distribution of income.

Or, to put it differently, if the capital share (consisting of profits and other distributions of the surplus, e.g., in the form of dividends and CEO incomes) is rising then we should expect the share of income going to the top 1 percent to also be rising.

And that’s exactly what we’ve seen in the United States in recent years and decades: both the functional and size distributions of income have become increasingly—indeed, obscenely—unequal. Capitalists and the top 1 percent are pulling further and further away from labor and the 99 percent.

*In fact, TPM is hosting a promising series on “The March to Inequality,” edited by Josh Marshall, which I look forward to reading.

  1. antireifier
    November 8, 2015 at 4:47 pm

    I am wondering if the following could be developed into a project for your students to tackle and might then be part of the TPM?

    Does the interest that governments pay on their debts contribute to the capital growth of the 1%? In other words are the owners of capital those who largely lend to governments and thus major beneficiaries of government expenditures in the form of interest on the debt? How significant a factor is this?

    Current macroeconomic policy is for governments to borrow from the private sector rather than from their own central banks. In Canada older estimates were that about 50% of this borrowing was from Canadians and much of that through payroll deductions. The balance may be pension funds, insurance companies, banks, etc. Given that most countries have large debts to the private sector, could the interest the countries pay be seen as a transfer of wealth from taxpayers to the well-off for the most part and therefore governments’ debt policies contribute to inequality? Again in Canada the third highest expenditure of the federal government is debt service charges amounting to $25.7 billion dollars in the latest balanced budget. Past budgets have transferred massively larger amounts and of course deficit financing adds to the debt and hence the transfers to the well-off. Would shifting the balance from borrowing from the private capital markets to borrowing from one’s own central bank for infrastructure then put the brakes on the power of the Capital markets and shift the wealth to the productivity labour side?

    This is obfuscated by at least three campaigns of the government propaganda machinery. The first is to focus on balanced budgets, the second is to complain that high taxes stifle the growth of GDP and the third is to state that the Debt to GDP ratio is low and thus debt is not a problem.

    • David F. Ruccio
      November 9, 2015 at 5:08 pm

      It certainly contributes to growth of income and wealth of the 1 percent. In 2015, the federal government paid out $402,435,356,075.49 on the outstanding debt (https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm). Clearly, the 1 percent prefers to get paid a portion of those interest payments for lending money to the government than to be taxed to finance government expenditures.

      • November 10, 2015 at 12:22 am

        That $402 billion is distributed to the top 10%. They in turn ‘work’ thru other investing to then redistribute most of that to the top 1%.
        But that is peanuts compared to the $90 trillion that the Private For Profit Banks have distributed to the same circle of percentiles that was acquired by NII (Net Interest Income).
        Using their legislated right to issue our money as loans with a taxation called “Interest”.
        But as Soddy said and one can understand why this is not an accepted truth,
        ” So elaborately has the real nature of
        this ridiculous proceeding been surrounded with
        confusion by some of the cleverest and most
        skillful advocates the world has ever known, that
        it still is something of a mystery to ordinary
        people, who hold their heads and confess they
        are ” unable to understand finance “. It is not
        intended that they should.”
        Please read Justaluckyfool’s comment:“QE” TAXATION EQUALS PROSPERITY.
        Quote (?), “It does not matter why,whenwhere or by whom a truth is told or made known; it only matters that it is true”

  2. November 8, 2015 at 9:03 pm

    C

    • November 8, 2015 at 10:18 pm

      “QE” TAXATION EQUALS PROSPERITY.
      November 8, 2015
      If the U.S. Government Treated Poor People as Well as It Treats Banks.
      http://www.theatlantic.com/business/archive/2015/10/if-the-us-government-treated-poor-people-as-well-as-it-treats-banks/410614/
      Why not use a proven golden bullet?
      Ben Bernanke has proven that QE-yes,
      QE used as a way and means to purchase assets would correct the fatal flaws by which we administer our “Capitalism”

      “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism would be the best ways and means to help “form a more perfect union….”, Pontifical Council.
      SOLUTION.
      “LEGISLATE FOR “We the People” WHAT WE HAD LEGISLATED THE CENTRAL BANK TO DO FOR THE Private For Profit Banks (PFPB) ! ISSUE OUR OWN MONEY AS LOANS AND CHARGE A TAX CALLED INTEREST ! ! ! ”
      Create an honest Central Bank that shall fund-
      ““We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…””
      ANY “QE” PLAN COULD BE USED AS A “PEOPLE’S ” QE” PLAN.
      Increase…. net wages,
      Increase.. Jobs,
      Decrease.. Federal Debt,
      Decrease… Poverty
      Decrease .. Inequality.
      ALL AT THE SAME TIME:
      ” QE4JOBS”-a plan to create millions of jobs that will pay for themselves while decreasing federal debt, poverty, as well as the income gap….or stated another way, “How does this capitalistic government create an INCOME stream over and above its budget, while decreasing its present debt, while having complete control over the quality and quantity of its currency?
      “QE 4 JOBS”
      Have the American financial system rush to the rescue with a generous and flexible legal funding that no other country could match.
      Not a bailout.
      Not a cost to all the taxpayers.
      Not an increase in deficit spending.
      Rather a magic economic proven golden bullet, (Bernanke should get Noble for this).
      QE!
      A simple change in direction of doing something for the common bettering of all the people.
      The FEDS did in fact QE for the Private For Profit Banks.
      The FEDS made direct purchase of bank assets.
      Why not have the FEDS do for the States exactly that-purchase from each state $20 billion of State improvement bonds w/ terms of 2% for 36 years.
      Thereby creating 3-5 million jobs while at the same time producing an income stream (tax revenue) or as banks call Net Interest Income, (money that by law is to be turned over to Congress for appropriations).

      WHY WOULD YOU NOT WANT PROSPERITY FOR YOURSELF AND YOUR CHILDREN?
      A simple understanding of -TAXATION.
      As Frederick Soddy said,
      ” So elaborately has the real nature of
      this ridiculous proceeding been surrounded with
      confusion by some of the cleverest and most
      skillful advocates the world has ever known, that
      it still is something of a mystery to ordinary
      people, who hold their heads and confess they
      are ” unable to understand finance “. It is not
      intended that they should.”

      Yes, a solution:
      Reverse “ an economic recovery program that has privileged the recovery of financial markets and corporate profits has fueled the increase in wealth inequality, in the United States and across the world.”, reverse that program, make it fund “…a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”

      Read and challenge:
      Frederick Soddy writings, namely “The Role Of Money”
      (Entire book as a free download…)http://archive.org/details/roleofmoney032861mbp

  3. Larry Motuz
    November 8, 2015 at 9:38 pm

    Branko Milanovic’s paper “Increasing capital income share and its effect on personal income inequality” is a valuable contribution.

    It is particularly important in that having monies out of which to budget is a prerequisite within monetized economies, and something upon which all ‘consumer’ activity depends.

    To ‘consume’ is to use something to obtain a benefit from that use. That benefit is not ‘value-in-exchange’ but ‘value-in-a-specific-use’. When the very ability to acquire anything for ‘use’ (i.e., for any defined, cardinally measurable benefit from that use) depends upon having the money/income to do so, it is inevitable that the distribution and concentration of ‘ownership’ :: of anything that might be termed an ‘asset’ :: is what makes the wheels of the bus go round and round. When ‘assets’ are then used primarily to make a profit off of, this amounts to not merely higher levels of inequality, but to allocative inefficiencies when other non-monetary units of account are used to measure ‘efficient allocation’ of resources or money itself as a resource.

  4. Paolo Leon
    November 9, 2015 at 10:33 pm

    I am not sure that the difference is mainly between functional and size distribution. It is generally forgotten what happens to balance sheets when stock market prices increase: the value of owned capital increases, irrespective of what happens to profits. During the long boom period (1978-2008) wealth in the form of securities or property titles has increased enormously, while the distribution of wealth has worsened. Incomes or profits are relevant, but wealth too.

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