Wednesday, June 27, 2012

Ten Fingers: America and Income

America Part II

So let’s get economical. Open both hands up and look at everyone in America standing together. Rich and poor all in one. Now close one hand, the open hand roughly divides the country into five economic categories or quintiles (if we want to get all professional and statistical).

Your pinky is the poorest 20% of Americans. They earn about $16,500 a year or $330 a week. To contrast put up ten fingers briefly and make each one a minute. In ten minutes Mitt Romney earns (from his investments so no actual work) $412 or the difference in size approximately between your pinky and middle fingers.

Back to the five fingers. The next 20% (ring finger) makes about double the first quintile. The middle finger makes slightly more than the median income at $52,100. The pointer finger makes $73,800. And finally the thumb makes $125,000 per year. Or seven and a half times that of the bottom quintile (7.5 fingers).

But that doesn’t tell the whole story. First, since 1979, households have added 10 work weeks (fingers) to their annual output. Productivity in America has soared. For the majority of households though, this means that their real gains (after doing all the adjustments and stuff for our ever-changing world) amount to barely a perceptible shift. For the pinky, wages per hour have actually decreased.

This doesn’t square with a simple fact of American incomes—they’ve increased dramatically. So what gives? Well, let’s look at the top 10% of Americans. Put up ten fingers; each finger is one percent of that final 10%. The first nine fingers saw a greater than average rise, but nothing too special. Although still a factor of two fingers to the middle quintile’s one--in some cases even more (three or even four).

Now we get to the famous 1%. The last finger. This finger makes over $1.2 million per year, and each year they make about 10% more than the last. In contrast, the bottom 20% took nearly 30 years to make 10% gains to their income and had to add 10 work weeks. These guys have experienced a 256% income increase since 1979 or 10 times (fingers) what the average middle-class household (the middle finger 20%) experienced. Wow. These guys get a big slice of America’s gains.

But they are nothing. Open up all your fingers again; this is now the one percent divided by ten. The last finger (.1%) makes over $7 million. Open up your hands again. This is the .1% divided by ten. The last finger (.01%) makes over $32 million. Not even Romney can keep up with those guys.

For tax purposes though, the people that make $320,000 are the same as those who make $32 million. Weird huh?

Let’s zoom out though. Put up ten fingers again and look at all of America. Now look at your last finger and lick your finger tip—that’s the 1 percent ($1.2 million). Slice off the tip after the nail (if you have short nails) and that’s the .1% ($7 million). Now draw a dot with a pen on the very tip of your finger, that’s the .01% ($32 million+).

Here’s the deal though. It didn’t have to be this way. But we’ll talk about that later. For now, all you really need to know is that the rising tide has not taken all the boats with it—many are left with less net worth than the generation before. In fact, if the tide of rising income had lifted all the boats equally between 1979 and 2006 (the year for which I have based most of this data), then 9 fingers (90% of America) would have done better overall.

For the median household that translates to nearly $13,000 extra per year or about 2.5 extra fingers.