What, Not WhySubmitted by Atlas Indicators Investment Advisors on October 8th, 2020
Data can be an incredibly useful tool. Used correctly, the bits can be turned into information. Once information begins to collect, knowledge could be a byproduct. Atlas downloads data daily and uses it to make objective decisions about the portfolios we manage. Most of the time, however, data tells us the “what” of a story and nearly never tells the “why.” I once heard a wise person say that “why” can be an incredibly expensive question because by the time it is answered, it is too late.
Periodically Atlas scans papers on economics. One source which tends to have a very data-first approach is the Rand Corporation, a nonprofit global policy thinktank here in Southern California. They published this working paper on income trends from 1975 - 2018. It’s being given some attention here because one of the authors, Kathryn A. Edwards, was adamant in a radio interview that their research does not offer an explanation of why, just what, and I found such an acknowledgement refreshing.
In this paper the authors attempt to quantify the income gap which has grown during the past four decades versus a counterfactual income distribution which they modeled based on patterns in the three decades following the Second World War. In short, if income growth after 1975 had remained as equitable as it was immediately after the War, they estimate wages of the bottom 90 percent of earners in America would have been 67 percent higher in 2018. Their research suggests the aggregate income gap between reality and the counterfactual model for those below the 90th percentile is $47.0 trillion (yes, with a “t”).
Median income is an interesting place to start. This central tendency measure is the level at which half the earners make more and the other half make less. In 1975, that value was $26,000 using today’s dollars. In 2018 it rose to $36,000. The counterfactual model suggested it would have been $57,000 if growth-rate distributions were similar to the decades immediately following the Second World War. Instead, income growth has been less than one-third of the earlier post-War trajectory for median income.
Looking at the 90th percentile reveals a faster growth rate. In 1975 the 90th percentile income level was $65,000, and today it is $112,000. However, even they have suffered at the hand of a less egalitarian growth distribution. The researchers’ model suggests it should have been $142,000, so the growth rate still lagged, reaching only about 60 percent of the level it would have been if distribution of income growth was more consistent with its initial trajectory. It’s not until you get to the top one percent, individuals earning $162,000 in 1975 and $491,000 today, that the growth rate starts to look better. In other words, the top one percent’s income growth was 171 percent of what it would have been if the initial conditions persisted.
Any number of factors could be creating this growth disparity. Some might argue tax brackets are still too high for top earners, leading them to attempt squeezing more profitability out of workers by investing in machines and limiting wage increases. Those of another persuasion might suggest minimum wages are too low or unions aren’t strong enough anymore. The working paper from Rand attempts to quantify what, but the truth is we still don’t know why.