Income Inequality – What’s Real – Whats Myth

I had taken about 23 hours of college math before I had my first course in probability and statistics.  At that point, probability and statistics appeared fairly simple and straight forward, but I came to believe that it is the least intuitive of the various fields of mathematics.  Yet it is the one that seems to be most often referenced by individuals and the popular media.  I have a relative that likes to say, “figures don’t lie, but liars figure”.  But often, I think the difficulty comes because people don’t understand the pitfalls.  As an example, averages can often be misleading.  A former boss of mine liked to say that one can drown in a lake with an average water depth of 6 inches.  Columnist Robert J. Samuelson publish an article recently that was head lined “Myth-making about economic inequality”.  The myth part of that has taken hold in the popular media.  Most people seem to take an increased inequality as a new phenomenon which has resulted in the middle class falling behind.  The data isn’t wrong, but I believe some of the analysis and conclusions may be.  Some of it may be to support people’s existing positions, but I think much is the unintended result of not understanding the math.  Everyone should have at least one course in statistics.

The most commonly quoted reporting seems to be to compare the average income of the top 5% of people’s income to the “middle Class”.   I’m not sure who the “middle class” includes, but there is no doubt that the average income at the top is growing faster than the rest of the population.  But that is not new, and people with above average income increases certainly does not include everyone in the top 5%.  The use of the “average” is misleading.  A better measure might be to use the median income of the top 5%.  If the median were used, there would not be much change at all, and much of Samuelson’s “myth” would not exist.

For years the difference between the 95th percentile ($200,000-250,000) has been about 10 to 12 times the poverty level income ( $20,000 +/-).  While this is a significant amount it is not nearly what the difference is between the 95th percentile and highest 1%.  Our local college basketball coach was just offered a job at a revival (private) university at a reported $2 to $3 million per year or 10 times or more what the  a person at the 95th percentile would make.  There are NFL players making 20 to 30 times more than a person in the 95th percentile.  Based on 2009 data and 2010 estimates a person at the 98th percentile is making only about 25-30% (250,00-300,000) more than a person in the 95th percentile. In Samuelson article he reports the growth in income from 1980 to 2010 for different income levels.  The poorest 20% of Americans had income growth of 44%, while most other levels below the to top 1% had growth of between 30-40%.  The top 1% growth in pretax income was 190%.  The range of income levels in the top 5% is much greater than that in the first 95% and not recognizing that is not helpful.

Who are these people in the top 1% and why should the increase not be a surprise?  College football coaches at major state universities are, it was reported in our paper recently, the highest paid state employees in most of the states.   Based on a report recently in USA Today, major state university coaches receive compensation in the range of $2-6 million dollars per year.  College basketball coaches are probably not far behind.  This was not the case in 1980, and because these are state employees these numbers have been available and reported for the last several decades.  Some professional sports players make more than that.  As do movie stars and CEO’s.  These are all people in the top 1%, and the growth in these salaries has been going on for at least a couple of decades and has been widely reported.  The Forbes richest 400 Americans do not currently include anyone with a net worth less than $1 billion.  They don’t report annual income numbers for these folks, but if their income is 10% of their net worth, then their income would be at least $100 million per year.   This is more than 500 times more than the person at the 95th percentile.  Averages don’t fairly represent most of the people in the top 5%.  Coaches salaries, ball player’s salaries, movie star salaries, have all been reported in the popular press for some time.  These are the ones I believe are primarily driving the increase in the top and the result should not be a surprise.

Is it fair?  Interestingly enough, based on reporting in the popular media, the primary public negative outcry has been against CEO salary increases.  It is interesting to speculate why that is so.  Should coaches, ball players, and movie stars who primarily provide entertainment receive higher compensation than people who manage organizations that employee 20,000 to 30,000 people and make products that we all use or need in our daily lives?  I believe that a lot of CEO’s were underpaid in 1980, but that the increases have gone too far.  The same might be said of ball players and football coaches.  I think there are some similar reasons for head coaches and CEO’s both having had rapidly increasing income. (But that is a discussion for another time).  I’m not sure what, if anything should be done about it.  Is it fair?  Probably not, but one of my 3 basic adages is, “Life is not fair”.  Does it impact me personally?  For 99% of us the spread of incomes has not changed significantly, and there have always been a few “super rich”.  The tangible impact for most of us I think is that the ticket prices for athletic events and other entertainment has risen significantly.  CEO salaries have probably not had much effect on product prices, because even at the high level, they are a relatively small percentage of revenue or expense.  And if they are doing their job, they are finding ways to improve productivity, which also holds prices down.

So is the average income of the top 5% increasing faster than the rest?  Yes.  Is it the whole top 5%?  No.  Is the popular media reporting complete, fair and balanced?  Probably not. Is there a discernible, tangible, negative impact on the 99% of us from the  rise in the top 1%?  Not likely except for entertainment ticket prices.  Are the high salaries fair?  In some cases; maybe – in a lot of cases; probably not.  What should be done?  Probably nothing.  In a free market system, things tend to cycle.  They often go too far in one direction or the other.  The good news is, if left alone, they usually correct themselves.  The other good news is that the people listed in the Fortune 400 this years are significantly different from those listed in 1980.  And it’s not family wealth that seems to make a difference, its individual work and accomplishment that overall has been good for our society.  So there is still upward mobility which gives hope to all of us.



About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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One Response to Income Inequality – What’s Real – Whats Myth

  1. Pingback: Income Inequality – What’s Real – Whats Myth | MemePosts

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