The CBO takes on income inequality

Several years ago, Senators Max Baucus and Charles Grassley asked the Congressional Budget Office to whip up an analysis of income inequality in America. It took awhile to piece together, but the report’s now out, and the picture’s quite stark. The incomes of the wealthiest 1 percent have nearly tripled since 1979. Everyone else? Not so much.

The chart on the right sets the scene. The after-tax incomes of the middle class (the 21st to 80th percentiles) have grown at about 1 percent per year since 1979, adjusting for inflation. The incomes of the wealthies 1 percent, meanwhile, have zoomed upward at a consderably faster pace.

Now, note that this graph only goes up to 2007. Evidence suggests that the wealthiest 1 percent took a sizeable hit after the financial crisis. Though, as this chart shows, the incomes of the top 1 percent typically plummet during recessions and financial crashes, only to rebound quickly in the years that follow.

The CBO has a range of theories for why the top 1 percent has done so disproprtionately well. Changes in technology could have increased the returns to “superstar” actors and musicians — cheap mass media means it’s easier for entertainers to reach a wider audience. Corporate executives, meanwhile, have seen large pay increases since 1979, possibly because firms have gotten bigger and more complex, and possibly because weak corporate governance structures have allowed them to overpay themselves. (The CBO prefers the first theory.) What’s more, for a variety of reasons, the U.S. financial sector has ballooned since 1979, increasing the returns for those working in it.

Another big finding from the CBO report is that public policy has actually become less effective at curbing inequality over time. That’s what the graph shows. The U.S. tax code and transfers — programs like Social Security or Medicaid — do less now to mitigate pre-existing income inequality than they did in 1979.

The full CBO report has a lot of great information, and it’s really worth a browse. Kevin Drum highlights another set of charts showing that inequality in labor income hasn’t really changed much between 1979 and 2007. On the other hand, business income has become much, much more concentrated at the top, “probably,” Drum notes, “due to the growth of high incomes among privately owned professional firms (law, medicine, and finance).” Meanwhile, capital income — dividends, rental income — has become much more unequally distributed as well.