If so many people are out of work and on the edge of eviction or foreclosure, how come we’re not seeing more evidence of economic disaster? Why hasn’t it spread throughout the economy? Why aren’t things worse than they are reported to be?
The answer is disturbing. And simple.
Who lost their income?
It’s all about income. If your income is modest and you lose your job, it has a devastating effect on you personally. But maybe only you.
It’s just the opposite when the job losses start at the top of the income pyramid. If you make the Big Bucks and your job goes away, odds are lots of other people will feel your pain. They’ll know your income is gone because it won’t become part of their income.
Think about it. If you are doing well and suddenly lose your job, your travel agent may be the first to know.
You cancel your regular vacation in the islands.
You buy less wine.
You eat out less.
You delay buying this. Or that.
Lots of regular spending gets slowed or suspended altogether. Before you know it, dozens of people have been directly affected by your income loss. If gains in income “trickle down,” so do losses of income.
The power of income differences
We know all this. Kind of.
Examine it more closely and we can actually measure the power of income differences. It comes down to a simple principle:
The greater the income difference between the highest and lowest incomes, the greater the impact if those at the top lose their income. And the lesser the impact if those at the bottom lose theirs.
You can understand this by examining the Internal Revenue Service data on income. A close look at their figures on the distribution of income among American taxpayers tells us a lot.
If you’re among the Haves, you don’t need statistics to be informed. All you need to do is look at your net worth.
It’s up.
Stocks dropped, and then recovered. Home prices continue to rise in most of the country. Ownership of both is a must for the Haves, a Never-Never Land for the Have-Nots.
Measuring income distribution changes
It’s the same with income. It continues to rise for the Haves, both in absolute amount and in proportion of all income.
Back in 2001 the top 10 percent of earners received 42.5 percent of all income. The bottom 50 percent received 14.4 percent. In 2017, the most recent year for which the IRS has figures, the top 10 percent received 47.74 percent of all income. The bottom 50 percent received 11.25 percent of all income (see table below).
The entry income required to be in the top 10 percent of earners in 2017 was $145,135. Income below $41,740 put you in the bottom 50 percent.
The Increasing Share of Income at the Top |
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| This table shows the change in share of income for the top 10 percent and bottom 50 percent of earners between 2001 and 2017. | ||
| Year | Top 10 Percent Earners | Bottom 50 Percent Earners |
| 2001 | 42.5% | 14.4% |
| 2017 | 47.7 | 11.2 |
| Gain (Loss) | +5.2% | (3.2) % |
| Source: https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-rates-and-tax-shares | ||
What income losses mean
Now let’s translate those figures into losses of income for the economy. If 20 percent of all workers in the bottom 50 percent of earners lose their jobs, unemployment will be 10 percent. A 10 percent employment rate hits hard. But the loss in purchasing power is only 2.25 percent.
That’s not a big number. It wouldn’t mean much for the 90 percent of all workers who remained employed.
If job loss comes from the Have side, the impact is far greater. If 20 percent of all workers in the top 10 percent lose their jobs, unemployment will be only 2 percent. But purchasing power will decrease by 9.54 percent. That’s about four times as great an impact on the economy. To have the same raw dollar impact on the economy as a 20 percent job loss at the top, 85 percent of all workers in the bottom 50 percent would have to lose their jobs.
That would be an unemployment rate over 42 percent. A depression, and then some.
Simple arithmetic vs. existential threat
None of this is a surprise. It’s just arithmetic.
While there have been job losses in most of our economy, they have been concentrated in sectors with relatively low wages: leisure and hospitality, restaurants, bars, health services and retail trade.
The problem is what’s simple arithmetic to a Have is an existential threat to a Have-Not.
Related columns:
Scott Burns, “Taxes and the long road to Richistan,” 2/1/2020 https://scottburns.com/taxes-and-the-long-road-to-richistan/
Scott Burns, “Is it time to eat the rich?,” 8/17/2019 https://scottburns.com/is-it-time-to-eat-the-rich/
Scott Burns, “Eat the rich and take their money (continued),” 9/1/2019 https://scottburns.com/eat-the-rich-and-take-their-money-continued/
Sources and References:
IRS.gov “SOI Tax Stats – Individual Income Tax Rates and Tax Shares: https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-rates-and-tax-shares
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Thais Cordeiro from Pexels
(c) Scott Burns, 2020