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Good news for people who like bad news about inequality

So here's some bad news: The rise in wealth inequality? It's permanent.

wealth vs income inequality
This graph, which shows wealth inequality is even more severe than income inequality, isn't related to the study. It's just more bad news.

"Permanent," here, is a technical term. The other option would be "transitory." If the inequality we were seeing was merely transitory, it would mean that in any given year, sure, inequality is really high, but five years down the line, the families at the bottom of the income distribution might have moved to the top, or vice versa.

In an impressive new paper, Vasia Panousi and Ivan Vidangos of the Federal Reserve Board, Shanti Ramnath of the Treasury Department, Jason DeBacker of Middle Tennessee State University and Bradley Heim of Indiana University got tax data for 34,000 households between 1987 and 2009 and use it to track what was actually happening to individual families over that period.

Sadly, they did not find households easily shifting up and down the inequality scale. Instead, they found "the advantaged becoming permanently better-off, while the disadvantaged becoming permanently worse-off." For men, the added inequality was entirely of the permanent sort. For households, three-quarters was permanent.

The takeaway here is rough. The reason the permanent/transitory distinction matters is that  lifetime earnings are much more important than a single year's earnings. It's lifetime earnings that decide how you live in general, what sort of house you can afford, whether you can send a kid to college, whether you can retire comfortably.

If we were seeing a lot of transient inequality, that would mean the households at the bottom in any given year still have a good shot at improving their lifetime earnings. The fact that the inequality is of the permanent sort shuts the window on that optimistic interpretation: The earners at the bottom are stuck at the bottom, and their lifetime earnings are about as low as one would think.



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Dylan Matthews · March 22, 2013

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