The Growth of U.S. Income Inequality
The United States has the highest level of income inequality among wealthy nations, and the highest level of correlated health and social problems, both by wide margins. 
This status was achieved by the United States over three decades during which the bottom 99% lost one-fifth of its share of total income (GDP). As shown on the graph of the Piketty/Saez data shown in the previous post, the percentage of total GDP taken by the top 1% of income earners increased from 8.9% to 23.5% between 1976 and 2007, for a 14.6% reduction in the bottom 99%’s share of total income.  Total GDP in 2007 was $13.8 trillion, so the bottom 99% was getting $2.0 trillion less that year than if income were distributed as it had been in 1976. That lost income averages, among the 111 million estimated 2007 U.S. households, $18,300 per bottom 99% household. And this considerable loss of the buying power of most Americans took place before the 2008 crash.
Over these three decades, income inequality has skyrocketed. Some examples: from 1979 to 2007, total top 1% real household pre-tax income grew by 224%, and top 0.1% real household pre-tax income grew by 390%, while the entire bottom 90%’s real income grew by only 5%;  the multiple by which average corporate CEO pay exceeds a typical worker’s income rose from 42 times in 1980 to 343 times in 2010;  and in 2006 a group of 25 hedge fund managers “made three times as much money as [all of] the eighty thousand New York City schoolteachers.” 
Near the bottom, the 2009 median real incomes of Americans with high school diplomas ($32,900 for men and $25,000 for women in 2009) were below the poverty threshold for a household of eight ($35,300), while the median real incomes of college graduates ($51,000 for men and $40,000 for women in 2009) were only marginally above that poverty threshold;  when median incomes of college graduates are adjusted to net out the average cost of a college education, the 2009 median income for a female college graduate (about $35,000) was also below the $35,300 poverty threshold for a household of eight. 
These remarkable statistics on increasing income inequality only begin to convey the true enormity of the distribution problem.
Inequality and Growth
As Kuznets anticipated, this significant contraction of the bottom 99% economy necessarily entails an extreme reduction of overall growth. Total per capita income grew 90% over the first of two comparable 30-year periods (1946-1976), but only 64% over the following 30 years (1976-2006).  Here is the distribution of average annual real income growth published by both the Economic Policy Institute and the President’s Council of Economics Chairman Alan Krueger: 
1947 to 1979 1979 to 2010
Lowest fifth 2.5% -0.4%
2nd fifth 2.2% 0.1%
Mid fifth 2.4% 0.3%
4th fifth 2.4% 0.6%
Top 5th 2.2% 1.2%
Why would rising income inequality cause overall income growth to decline? The salient observation was made by Joseph Stiglitz, as quoted in the last post: “Moving money from the bottom to the top lowers consumption because higher-income individuals consume a smaller proportion of their income than do lower-income individuals.” Accordingly, as income becomes more concentrated at the top, aggregate consumption and income growth necessarily decline.
Because income inequality growth is a systemic problem, it has no natural tendency to correct itself or stabilize. Indeed, the U.S. income contraction is now accelerating. All growth has ceased except within the top 1%. Saez reports  the following figures for the allocation of income growth between the top 1% and the bottom 99%:
Period Top 1% Bottom 99%
1923-1929 70% 30%
1960-1969 11% 89%
1992-2000 43% 57%
2002-2007 65% 35%
2010 93% 7%
2009-2011 121% -21%
The 65% top 1% share of income growth from 2002-2007 (before the Crash of 2008) is comparable to the 70% of growth that went to the top 1% in 1923-1929 before the Great Depression. The 121% top 1% growth in 2009-2011 means that the only growth now taking place is high within in the top 1%. This is reflected in the near-exponential inequality growth within the top 1%: 
Group 2010 share 2010 ave. income 2010 over 1980
Top 1% 19.8% $1,019,098 2.36x
Top 0.1% 9.52% $4,906,513 3.34x
Top 0.01% 4.63% $23,846,950 4.32x
Income concentration in the top 0.01% is now accelerating, and virtually the entire rest of the economy is losing ground.
Small Business Income
Most of the discussion about inequality so far has focused on the reasons for labor’s declining share. The 2013 Economic Report of the President, for example, reports: “Proposed explanations for the declining labor share in the United States and abroad include changes in technology, increasing globalization, changes in market structure, and the declining negotiating power of labor.” 
Direct labor share suppression is important, but except for the lowest quintile, it is a relatively minor part of the problem. Lower 99% capital suppression — the suppression of small businesses within the middle class — is a bigger factor. The bottom 99% has unavoidably experienced a severe decline in capital income as well as labor income.
A 2011 Congressional Budget Office study of the major income sources  shows corporate and small business income concentrating faster than labor income from 1979-2007. “Corporate” income refers to the gains from distributed earnings of large corporations. “Business” income refers to the earnings of small businesses — partnerships and smaller, apparently mostly privately held, corporations.
The increase in the top 1% share of corporate income is not surprising, since the top 1% share of total income has been at or below 24% while the top 1% has held 42% or more of financial wealth over these three decades. But the concentration of small business income, which was also more highly concentrated in 1979, also grew far more than the inequality of labor income: The top 1% share of small business income grew from less than 20% to more than 45% over these years.
This shifting of small business income to the top 1% reflects the decline of local small businesses and of the middle class in general, as large corporations like Walmart have acquired their retail market shares. Mega-corporations like Walmart and Home Depot have consolidated their market power in producer, wholesale and and retail markets as they grew through mergers and acquisitions, after the demise of anti-monopoly law enforcement that began in earnest in 1980. 
The most highly concentrated income source is capital gains, of which 75% were going to the top 1% by 2007. Thus, while the bottom 99% income share plunges in 2013, many corporations have reported all-time record profits, and the stock market has posted all-time highs.
In 2009, Paul Krugman wrote: “Over the past year, by a number of measures, the world has experienced a slump every bit as severe as the first year of the Great Depression.”  A “depression” is an abnormally severe downturn lasting more than a few months, and the so-called U.S. “Great Recession” is now more than four years old.
With the steady contraction of the bottom 99% economy since the 1970s, not surprisingly, recessions have progressively become deeper and longer-lasting. Using its Payroll Employment Index (PEI), the Bureau of Labor Statistics has charted the length and severity of the last six recessions: 
By that measure, the latest downturn, which began in September 2008, is by far the worst since WW II.  Employment bottomed out in January 2008, two years into the “Great Recession,” with a -6.4 “percent job loss from peak,” and it has gradually improved since. But the economy must add 200,000 new jobs per month for employment to return to the pre-recession peak, not counting the additional new jobs needed for normal growth,  by February 2016, 6.5 years after the “Great Recession” began.
Although 181,000 jobs were added in January 2013, and over 200,000 in February, only 88,000 jobs were added in March. The media focus has been on whether the contraction resulting from the $85 billion federal spending cuts mandated by the March 2013 “sequestration” has begun to kick in. Regardless, severe sequestration impacts are expected, ranging from the CBO forecast of a 750,000 job reduction in 2013  to an Aerospace Industries Association (AIA) projection of 2.14 million job losses in FY 2012 and 2013, nearly half of which “would come from small businesses.”  According to the AIA study, “the unemployment rate will climb above 9 percent . . . reducing the projected growth in 2013 by two-thirds.”
Many economists focus on the gradual decline of the unemployment rate (7.6% in March 2013) as a sign of gradual recovery to “normal,” but even mainstream media has reported that the “participation rate” – the percent of non-working people actively looking for work – has fallen to the lowest level since 1979. It has become impossible to predict when, if ever, 2007 job levels will be restored.
(May 3 update: I’ve added following graph to clarify this point:
The New York Times on Friday, May 3, reported that the unemployment rate had fallen to 7.5% in March.  But in a companion article, “Keeping Up, Not Getting Ahead,” the point illustrated by this graph of BLS data was made: “The American economy continues to add jobs in proportion to population growth. Nothing less, nothing more.”  In terms of the share of adults with jobs, there has been no improvement in three years and there is no apparent prospect in this trend of returning to the pre-depression level of the share of adults with jobs by February, 2016.)
Perpetually high unemployment, however, is only part of the stagnation problem: As unemployment rose sharply in 2010 from about 5% to 10%, the median income fell by 10% during 2010 and 2011.  Reduced pay rates and hours worked translate into reduced income and growth, and less job creation. Other signs of growing depression since 2010 — reports of which are becoming increasingly common as 2013 unfolds — include growing poverty, an increasing foreclosure rate, declining construction and infrastructure, reduced educational opportunity and mobility, downsizing and closure of schools and essential government services, and the decline and bankruptcy of cities, towns and small businesses.
This review of the last thirty years of growing income inequality in the United States makes several things abundantly clear:
(1) Income distribution has enormous economic significance. By 2007, the declining income share of the bottom 99% had reduced its purchasing power by $2 trillion per year, more than $18,000 per lower 99% household. After the Crash of 2008, median income tumbled another 10% while unemployment jumped to 10%. (I have mentioned without documenting other important indicia of depression, because we are all becoming increasingly aware of them, and a detailed review is beyond the scope of this post.) Declining purchasing power means lower consumption, and the lesson of Keynesian macroeconomics is that means lower investment and economic contraction;
(2) This is a destabilizing contraction: The faith of economists discussed in the previous post that a market economy will eventually return to full employment on its own is baseless. The ever-widening income gap, and an accelerating growth of inequality, confirm that whatever stabilizing forces are imagined to exist, or that might exist if the problem was simply temporary swings in the “propensity to consume” out of a stable level of income, truly do not. Recessions have become progressively worse since 1980, and we’re now in a depression with no end in sight;
(3) The increase in income inequality is directly linked to a severe decline in income growth which, as discussed in more detail in the next post, can only be explained by the removal of vast sums of money from the active economy of the bottom 99% and sequestered (as inactive wealth) within the top 1%. Moreover, over time the destination of the wealth transferred up from below has narrowed to individuals very high up within the top 1%, possibly mostly within the top 0.1%-0.01%.
The contraction of demand and income growth inherent in growing income inequality make it clear that the appearance of another depression has been no coincidence. There are effectively two economies now, a “providing” economy and a “taking” economy, and the reports of aggregate income and other aggregate data, as Simon Kuznets warned back in 1955 (and as Joseph Stiglitz warns today), have become all but useless.
The next post takes a closer look at theoretical aspects and policy ramifications of the inequality problem: Since vast quantities of money are now being siphoned up from the bottom 99% and a portion of the lower end of the top 1%, the proper response is not to stimulate demand through expansionary fiscal policy. When inequality is rapidly growing, that hasn’t worked. People whose income share is declining have insufficient demand because of their inadequate and declining purchasing power; therefore, increasing government spending without correcting the causes of inequality growth can’t reverse the decline and stimulate growth.
JMH – 4/29/2013; updated 5/3/2013; conclusion clarified 5/4/2013
 Richard Wilkinson and Kate Pickett, The Spirit Level, New York, Bloomsbury Press (2010). The indexed health and social factors include life expectancy, math and literacy, infant mortality, homicides, imprisonment, teenage births, trust, obesity, mental illness (including addiction) and social mobility. Wilkinson and Pickett also studied the individual relationship of the various factors to income inequality. The measure of income inequality was the ratio of top and bottom 20% (quintile) average incomes, which shows a much less pronounced inequality level than the 1%/99% ratio. These results have not been widely criticized, but not successfully challenged.
 See, e.g., “Income Inequality In the United States, 1913-1998,” by Thomas Picketty and Emmanual Saez, Working Paper 8467 (National Bureau of Economic Research, September 2001) (here); “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective,” by Thomas Piketty and Emmanuel Saez, Journal of Economic Perspectives, Volume 21, Number 1, Winter 2007, pp. 3–24 (here); and “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, , DP No. 8675 (CEPR, November, 2011) (here).
 Economic Policy Institute (EPI) analysis of Piketty/Saez data (2008); “Snapshot: Incomes rising factest at the top,” by Arin Karimian, The EPI blog (October 20, 2011) (here).
 AFL-CIO study, reported at “CEOs earn 343 times more than typical workers,” by Jennifer Liberto, CNN Money (April 20, 2011) (here).
 Paul Krugman, End This Depression Now!, New York & London, W.W. Norton & Co. (2012), p. 82.
 These conclusions are based on a study I conducted in 2012 of trends in income levels for men and women with and without college and advanced levels of education. Income data are from from Fast Facts, Institute of Education Sciences (IES), National Center for Education Statistics (here); Poverty threshold data (updated for inflation) are from the U.S. Dept. of Commerce, Bureau of the Census (here).
 I used present value computations from a study by Skidmore economist Sandy Baum, U.S. News and World Report, October 30, 2008 (here).
 “Average Income in 2006 up $60,000 for Top 1 Percent of Households, just $430 for bottom 90 Percent: Income Concentration at Highest Level Since 1928, New Analysis Shows,” by Chye-Ching Huang and Chad Stone, Center on Budget and Policy Priorities (CBPP), rev. October 22, 2008 (here); “A guide to Statistics on Historical Trends in Income Inequality,” by Chad Stone, Danilo Trisi and Arloc Sherman, CBPP (rev. October 23, 2012) (here).
 EPI (updated, October 5, 2012); “Family Income Growth in Two Eras,” by Alan Krueger, Reuters, January 13, 2012 (here).
 “Inequality: You Don’t Know the Half of It,” by Nicholas Shaxson, John Christensen and Nick Mathiason, Tax Justice Network, July 19, 2012 (here), p. 7. The Piketty/Saez data includes capital gains.
 The 2013 Economic Report of the President (here), p. 60.
 “Trends in the Distribution of Household Income between 1979 and 2007,” Congressional Budget office (CBO), October, 2011 (here). (See the “Lorenz” curves on p. 11.)
 “Market power” is the ability to sell products and services above cost, for profit. The most comprehensive analysis of the growth of market power and the decline of competition in America and globally I have found is: Barry C. Lynn, “Cornered: The New Monopoly Capitalism and the Economics of Destruction,” John Wiley & Sons, 2010.
 Paul Krugman, The Return of Depression Economics and the Crisis of 2008, New York and London, W.W. Norton (2008), pp. 193-195.
 “The Recession of 2007-2009,” BLS Spotlight on Statistics (February, 2012), p. 8 (here).
 “Cumulative job losses for 2007 recession likely to be six times worse than any since WW II,” by Rob Levine, The Cucking Stool, November 7, 2011 (here).
 “Sequester Could Cost U.S. 750,000 Jobs, CBO Director Douglas Elmendorf Says,” Huff Post Business, February 13, 2013, quoting CBO Director Douglas Elmendorf (here).
 “The Sequestration Study: 956181 Small Business Jobs at Risk,”AIA (September 20, 2012), (here) updatating “The Economic Impact of the Budget Control Act of 2011 on DOD and non-DOD Agencies,” by Stephen S. Fuller with Churma Economics & Analytics (July 17, 2012).
 “Jobs Data Ease Fears of Sharp Slowdown in U.S. Economy,” by Nelson D. Schwartz, The New York Times, May 3, 2013 (here).
 “Keeping Up, Not Getting Ahead,” by Binyamin Applebaum, The New York Times, May 3, 2013 (here).
 “Median Household Income Index (HII) and Unemployment Rate by Month: January 2000 to April 2012,” Sentier Research, LLC (here). (Data are from the U.S. Census Bureau and the U.S. Bureau of Labor Statistics.)