Wealth and Poverty: Who's Got How Much?

Who's Got How Much?

To measure income inequality—a measure of wealth and poverty that can be applied to any geographical area—economists use quintile rankings. These rankings divide households into five groups according to income. Each group accounts for one-fifth of the number of households. Table 11.2 shows the income breakpoints for each quintile of U.S. households for 2000, 1990, 1980, and 1970, according to the U.S. Census Bureau.

Table 11.2  U.S. Household Income Limits by Quintile (upper limit of each quintile—with the exception of the fifth quintile, in current dollars, rounded to nearest 100)

Year	Lowest	Second	Third	Fourth	Lower Limit of Top 5%
2000	18,000	33,000	52,300	82,000	145,500
1990	12,500	23,700	36,200	55,200	94,700
1980	7,600	14,100	21,600	31,700	51,500
1970	3,700	7,100	10,300	14,700	23,200

Source: U.S. Census Bureau

Just to clarify, this table is saying that in the year 2000:

• 20 percent of U.S. households had incomes of $18,000 and under
• 20 percent had incomes between $18,001 and $33,000
• 20 percent had incomes between $33,001 and $52,300
• 20 percent had incomes between $52,301 and $82,000
• 20 percent had incomes above $82,000

It is also saying that in 2000, 5 percent of households had incomes of $145,500 and higher. (This 5 percent is also counted in the top 20 percent.)

To analyze the data in this table accurately, however, we should use real, rather than nominal, dollars to correct for the effects of inflation. Table 11.3 shows the same data in real dollars (adjusted for inflation by the Census Bureau using the Consumer Price Index).

Table 11.3  U.S. Household Income Limits by Quintile (upper limit of each quintile, in real dollars, rounded to the nearest 100)

Year	Lowest	Second	Third	Fourth	Lower Limit of Top 5%
2000	18,500	33,900	53,700	84,200	149,600
1990	16,400	31,100	47,500	72,500	124,400
1980	15,400	28,700	44,000	64,500	104,800
1970	14,600	27,900	40,600	57,900	91,500
Increase in Breakpoint, 1970-2000	26.7%	21.5%	33.3%	45.4%	63.5%

Observers who point out that the wealthiest Americans have been doing better than the rest of the population are clearly correct. In real dollars, from 1970 to 2000, the upper limit of the fourth quintile (that is, the lower limit of the fifth quintile) rose by 45.4 percent while the upper limit of the lowest quintile rose by 26.7 percent. Meanwhile, the lower limit that defines the top 5 percent—the very wealthiest housholds—rose by 63.5 percent.

That's interesting, but changes in the share of total income going to the various quintiles tell an even more interesting story. Table 11.4 shows the percentage share of total income going to each quintile and to the top 5 percent of households.

Table 11.4  Share of Income Received by Each Quintile and the Top 5 Percent

Year	Lowest	Second	Third	Fourth	Fifth	Top 5%
2000	3.6	8.9	14.9	23.0	49.6	21.9
1990	3.9	9.6	15.9	24.0	46.6	18.6
1980	4.3	10.3	16.9	24.9	43.7	15.8
1970	4.1	10.8	17.4	24.5	43.3	16.6

Source: U.S. Census Bureau

It doesn't take a raving socialist to see that the shares of total income going to U.S. households in the top 20 percent—and in the top 5 percent—increased from 1970 to 2000, while the shares going to those in the lower four quintiles—the lower 80 percent—decreased. What you think should be done about this trend, if anything, is another matter. Yet clearly, over the past 30 years, a larger share of income has gone to those who were already earning the highest incomes.

That is a major point of contention in the political, social, and economic argument over income distribution in the United States. Very few Americans seriously argue that income equality is a reasonable, or even desirable, goal. Americans recognize that the incentive to earn a higher income drives people to get an education and work hard, fuels economic growth, and informs our national character. If incomes were “equalized” through taxation or other means, the labor market would fall into disarray and people would lack economic incentives to better themselves.

However, despite very real disparities in income, Americans pride themselves on being a “classless society,” or at least on being a nation with such a large middle class that it may as well be composed of one class. This may be wishful thinking, given the actual distribution of income.

Through work, education, innovation, and financial savvy, people in America can move to a higher socioeconomic class more easily than in most other societies. This is another source of national pride and economic incentive in the United States. Might that change if people with the largest slice of the economic pie keep getting an even larger slice? If we became a nation in which the economic deck were stacked against average people—those with average education and skills—both social mobility and incentives to work could diminish. Moreover, with much of the fruits of economic growth going to a relatively small segment of the population, the once tight social fabric of the country could fray.

There is some evidence that that fabric has frayed since the “glory days” of World War II and the 1950s. The urban riots of the 1960s arose in part from economic issues. The character of many U.S. cities changed during and after that period, in many instances leaving a much smaller middle class to fill jobs, attend schools, spend money, and pay taxes. Suburban sprawl, “white flight,” and the need for more housing transformed large portions of cities like Detroit, Baltimore, Los Angeles, and New York into urban societies with two-classes: wealthy and poor.

Some people point out that even if the lower four quintiles each have a lower share of the economic pie than they did 30 years ago, their incomes are still larger than they were back then. That may be true, but relative to the top quintile, they are poorer, and the distribution of the shares of national wealth is the key measure of wealth and poverty in a nation as rich as the United States.