Super-Inequality

Tyler Cowen quotes Jeffrey Sachs noting that the 400 richest taxpayers in the United States had a combined income of $69 billion in 2000. This comes up in the course of a discussion of global inequality, comparing that $69 billion to "the $57 billion in combined income of Botswana, Nigeria, Senegal, and Uganda." That's a lot of inequality. I think, though, that the inequalities this embodies are worth putting even into the American context.

The normal measures you here about, breaking the population down into quintiles or even deciles tend to miss the really extreme inequality that exists on the far right hand of the U.S. income distribution graph. I went to an expensive private high school where all but a tiny handful of scholarship students must have been from families in the top one or two percent of the income distribution spectrum. In one sense, then, it was an incredibly narrow slice of American society. Nevertheless, the level of inequality in family income present among the population of Dalton parents has to be much larger than that on display in a normal school.

If you take a look at this chart you'll see that the average member of the 40-60 quintile (the middle one, that is) makes about 1.5 times as much as does the average member of the 20-40 percent lower middle class quintile. The average 60-80 percent upper middle class quintiler makes 1.47 times as much as does the average 40-60er. But the average member of the top 20 percent makes 2.4 times as much as does the average member of the upper middle class. The really big inequalities, however, are inside the 80-100 quintile. The average member of the top one percent makes more than ten times as much as does the average member of the 81-90 percent bracket. And the average member of Sachs' Elite 400 makes over 100 times what the average member of the top one percent makes. Even that figure understates the case because the Sachs data is from 2000 and my data is from 2003 or 2004. What's more, my calculation of the average income of the top one percent includes the Elite 400 so if you compared the Elite 400 to the income of Person 401 down to Mr. 99th Percentile you'd get an even bigger gap. And I think we can assume that the gap between, say, Person 3 and Person 382 is enormous.

This is an important and, I think, problematic social phenomenon. Not especially because we need to cry for the sad case of the average member of the top 20 percent, or even the average member of the 60-80 percent bracket, but because it distorts a lot of people's thinking. This extreme inequality at the top does a lot to explain, I think, why you see a lot of people who make more than 85-90 percent of the population refusing to think of themselves as rich. Once you enter into the Rich Zone, you start coming into contact with people who are way, way, way, way richer than you are. If you run into somebody who has twice -- to say nothing of 10 or 100 -- times your earnings, it's hard to think of yourself as rich. After all, you're closer to making $0 and being out on the streets than you are to making what he makes. Then the flipside is that it becomes hard for people outside the Rich Zone to see what's really happening with tax policy. Everybody in the top 20 percent got some money from Bush's tax cut, but almost a quarter of it went to the very, very narrow segment of people in the top one percent of households. I don't have the numbers in front of me, but if you could look at how big a share went to the top 0.1% or the top 0.01% it would get even more shocking. That's not the prosperous guy who lives on the nice house at the end of the tree-lined street on the other side of town we're talking about, that's a guy who makes ten or even a hundred times as much as the prosperous guy on the other side of town.