For honest seekers of economic truth, the question about what went wrong that led to the recent great economic collapse has deep roots — but not complicated roots.
Our increases in wealth came at the expense of the poor and especially middle class, and they went to the tiny fraction of people at the very top who now own much of your nation.
Paul Krugman’s graphic of redistribution of wealth in the U.S., figures from the Congressional Budget Office
Our most vocal Nobel-winning economist, Paul Krugman noted at his blog:
The top quintile excluding the top 1 percent – which is basically the abode of the well-educated who aren’t among the very lucky few – has only kept pace with the overall growth in incomes. Just about all of the redistribution has taken place from the bottom 80 to the top 1 (and we know that most of that has actually gone to the top 0.1).
Much of our current difficulty in climbing out of recession can be told from this chart. People who would normally be spending money for food, gasoline, clothing, cars, home repairs and incidentals, simply don’t have the money to spend. Consequently, demand is down. Consequently, the top 1% will not invest their money in the U.S. to meet that non-existent demand. This is the ultimate failure of “supply-side” economics writ large. The very rich can consume only so much. Additional wealth stashed away, even in domestic accounts, will not be spent for more food, or more housing, or more transportation. Even the very rich can eat only so much, travel so much, and few of them behave exactly like Saddam Hussein, with palaces they will never even see. Meanwhile, the bottom 80%, which includes the middle class, lacks money to spend on education, housing, durable goods, and transportation — despite needing more of all of those things.
Below the fold, the CBO report’s highlights press release, from the Congressional Budget Office.
CBO said:
After-Tax Income Grew More for Highest-Income Households
After-tax income for the highest-income households grew more than it did for any other group. (After-tax income is income after federal taxes have been deducted and government transfers—which are payments to people through such programs as Social Security and Unemployment Insurance—have been added.)
CBO finds that, between 1979 and 2007, income grew by:
- 275 percent for the top 1 percent of households,
- 65 percent for the next 19 percent,
- Just under 40 percent for the next 60 percent, and
- 18 percent for the bottom 20 percent.
The share of income going to higher-income households rose, while the share going to lower-income households fell.
- The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
- Most of that growth went to the top 1 percent of the population.
- All other groups saw their shares decline by 2 to 3 percentage points.
Market Income Shifted Toward Higher-Income Households
Shifts in the distribution of market income underlie most of the changes in the distribution of after-tax income. (Market income—or income before taxes and transfers—includes labor income, business income, capital income, capital gains, and income from other sources such as pensions.)
- Each source of market income was less evenly distributed in 2007 than in 1979.
- More concentrated sources of income (such as business income and capital gains) grew faster than less concentrated sources (such as labor income).
Government Transfers and Federal Taxes Became Less Redistributive
Government transfers and federal taxes both help to even out the income distribution. Transfers boost income the most for lower-income households, while taxes claim a larger share of income as people’s income rises.
In 2007, federal taxes and transfers reduced the dispersion of income by 20 percent, but that equalizing effect was larger in 1979.
- The share of transfer payments to the lowest-income households declined.
- The overall average federal tax rate fell.
Of course, there is even more information in the full report from CBO. More unspun discussion at the CBO blog.
More information and related articles:
- The Progressivity of Taxes and Transfers (gregmankiw.blogspot.com)
- CBO: Trends in the Distribution of Household Income, 1979-2007 (taxprof.typepad.com)
- US Discontent Laid Bare as Stiglitz Assails Hubbard – Bloomberg (bloomberg.com)
- “Trends in the Distribution of Income” (economistsview.typepad.com)
Millard Fillmore's Bathtub 
You’re right, the evil is the theft. Those who work hard should get the fruits of their labor. We created a tax system that takes fruits from working people and gives it to others.
That should end.
You allege much else that is not in evidence. Quit hallucinating, Mr. Flag.
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No, sir, your posit is wrong.
It matters not one wit how rich your neighbor may or may not be.
It matters how rich you are (or not).
You complain “He is rich, therefore evil, because I am not rich”
But what you actually point out is government largess and government corruption – the thing you champion.
It is a sin to steal from a man for your benefit – no matter who steals and no matter who you steal from.
You weep when the government steals from people to benefit the rich.
You cheer when the government steals from the rich to benefit others.
Your moral compass is bent.
It is irrelevant who is rich and who is not.
The evil is the theft, no matter who is the victim of it
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