The financial crisis didn’t, and won’t, fix inequality

The incomes of the top 1 percent have fallen in the last two recessions because their incomes were disproportionately affected (through capital gains and stock options, among other things) by the steep decline in the stock market that occurred in the early 2000s and in the recent financial crisis. This decline in the stock market and incomes linked to it are disproportionately claimed by the rich, so this led to a temporary reduction in income inequality. After the early 2000s episode, high incomes and inequality rose quickly during the upturn as the stock market recovered. There is little reason to expect this not to be replicated in coming years after the sharp 2009 fall.

People would be well-advised to keep this in mind – too many observers, such as Megan McArdle, have highlighted this drop in top incomes by 2009 and suggested that maybe income inequality has stopped growing, saying “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.” A New York Times article echoed this perspective. EPI countered in a post yesterday with new data showing that wages for top earners have restarted their upward march after hitting a post-recession low in 2009 – meaning that income inequality (or at least inequality of wages) is, not surprisingly, already rising again.

The fall in incomes at the top between 2007 and 2009 had much to do with the fall in realized capital gains and EPI pointed out that capital gains actually fell far more than the stock market decline. That makes sense since households would not want to sell off their stock when prices are low. The graph below plots average capital gains income for the top 1 percent of income earners along with the S&P 500 index (both indexed to 1989) and shows that this “overreaction” of realized capital gains relative to stock market movements is far from unusual.

This dynamic was very much at play in the 1990s and 2000s. Capital gains income for top earners skyrocketed faster in the 1990s than the growth of the stock market and then fell faster after the technology bubble crash. This was followed by capital gains growth faster than the stock market in the recovery period from 2003 to 2007. Unfortunately, the data from Emmanuel Saez and Thomas Piketty on incomes used in this graph only extend to 2008, but it isn’t difficult to see what is happening here. The behavior of the S&P 500 since 2008 is shown, with the recovery from the 2009 bottom clearly visible. As reported in our blog post yesterday, we know that capital gains fell further in 2009, which surely helps to explain the dip in the top 1 percent of incomes that McCardle highlights.

But we also can see the stock market increase in 2010 and 2011, which is surely driving capital gains income for the top 1 percent higher. The important part of the inequality debate is not to cherry-pick individual years where the rich suffer, or do exceptionally well, but to show the unmistakable trend over time. Temporary reductions in the relative income of the very rich are a common feature during recessions – but so far, the long-run trend of growing income concentration has re-established itself quickly after these cyclical downturns. Given this, it is most unlikely that the financial crisis has fixed income inequality.

(Wonky note: The spike in capital gains income in 1986 was due to a change in tax law in 1986: The Tax Reform Act of 1986. The law raised the rate on capital gains income, effective January 1 1987, from 20 percent to 28 percent.  Long-term capital gains on corporate stock were seven times their December 1985 levels in December 1986. For more, see “The Labyrinth of Capital Gains Tax Policy: A guide for the perplexed” by Leonard Burman, Brookings Institution Press, 1999.)


  • http://freeourfreemarkets.org Steve Banicki

    OWS needs to hire Alan Simpson as their spokesperson and then they need to push to accomplish the following.

    1. Prohibit Corporations and Unions From Financing Political Campaigns by Amending The Constitution 
    2. Enforce Anti-Trust Laws against Oligopolies & Monopolies!
    3. Bring Our Deficit Under Control and amend tax code! 

    The above are long term goals that will eventually bring more equally to the economy. The above goals will not be accomplished overnight and we need to do something that will bring the unemployment rate down now. A good start is President Obama’s jobs bill with some modifications brought about by sound ideas brought about by members of Congress and the Senate.
    The purpose of a jobs bill, or any stimulus package, is not to directly create jobs that will be long lasting. Instead, its purpose is to  create temporary jobs that will increase demand for goods and services. This in turn will create an atmosphere where the private sector will create jobs to meet the new demand created by the stimulus. Businesses will add to their work force because their profits will increase because they can sell more products.  More:  http://bit.ly/nHTA41

  • Anonymous

    Mr. President please use best tools-Pictures not mass of words
    It is so simple to tell:
    20% own 85% Net Wealth–80% own 15%
    20% own 93% Financial Wealth–80% own 7%
    50% get 87% individual lncome–70,000,000 get 13%

    80/15  80/7  50/13  is Inequality in any nation
    clarence swinney  madmadmad at Inequality in America

  • Ben Leet

    The CBO reported last year on Trends in Income Distribution 1979-2007 that The top-earning 1% of households received 21% of before-tax income and 17% after-tax-and-transfer income. The report concluded, “For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007 (see Summary Figure 1).”In 1979 the share for the top-earning 1% was 8%. Their share grew from 8% to 17%, after-tax and after-transfers, 1979 to 2007 (page 6). I wish EPI would put things in perspective in brief reports like the above.