Prior to giving it any serious thought, I would have thought that US wage income (not to be confused with total income) looked like the graph below with the top 1% earning about $560,000 with a linear distribution below that. The total area under the curve equals a bit over $8 trillion. A Middle Class between 25% and 75% makes perfect sense.
Additionally, this would lead to a Gaussian, or normal, distribution (see the σ=0.25 curve on the second figure below). Not unexpectedly, it isn't that way even though I thought so up until this year. I wonder why this is not a well known fact.
Given the notion of a more serious inequality, I might have a wishful thought of a distribution like the one below. A Middle Class between 25% and 75% also makes perfect sense except that getting the same $8 trillion gives the poorest $220,000 in income; $110/hr for flipping burgers?
This is more of a log-normal distribution like the σ=0.5 and σ=1 curves below; my friend Jack calls these skewed Gaussians.
One difference is the way the curves are plotted (population percentage on the vertical with income on the horizontal) but the idea is that peak income densities are skewed to the low side. However, it doesn't happen that way.
The reality is shown below based on an average 1% earner income of $717,000. Here, the Middle Class might be between 5% and 15%; only 10-11% of the population of earners.
The top 4% earn $1.5 trillion (19%), the Middle Class (the next-highest 11%) earns $3 trillion (37%) and the bottom 85% earns $4.5 trillion (56%). The top 10% earn $3.3 trillion (41%).
This is a power-law distribution and it shows that we don't really have a Middle class, just a small group between the haves and the have-nots. These are the folks who do well but aren't rock stars, movie stars, Wall Street financiers or professional athletes.
You can see that the same thing happens in the countries of the European Union even though the 50% (of GDP) average government spending is 25% higher than the 40% of GDP in the US.
You can see that the top 10% in France, for example, receive a 25% share compared to 41% here. However, government spending (income redistribution) in France is 56.6% of GDP, 41% higher than here, it seems everyone gets 10% of the year off on vacation and our top 10% pays its own medical bills.
It's worth noting that the economy of the EU is still sucking wind 5 years after the meltdown, arguably because of their socialist tendencies.
We are recovering slowly, perhaps because businesses are worried about the the results of the left turn we took starting in 2009.
Total Personal Income
It's hard to account for income from criminal activity. Despite the fact that nobody was jailed, the fiasco in 2007 sure seems criminal to me. This cost trillions of dollars, easily 20% of GDP. But I won't count it even though I'm sure it continues as I type.
Again, my US examples comprise income from wages alone.
If we include government social benefits (Table 1 in linked document), this adds another $2.4 trillion (Social Security, Medicare, Medicaid, Veteran's benefits, unemployment benefits, etc.) predominantly to the bottom 40%. There's also another $1.7 trillion in employer private pension contributions that is similarly power-law-distributed among, say, the top 70% as is $2 trillion in investment income, $1.3 trillion in proprietor income and $574 billion in rental income for a total of about $14 trillion this year.
Presumably, the other trillion or two (GDP minus personal income) is income overseas including the $400 billion in national debt payments.
The net effect is that the left side gets taller and the right side gets flatter and higher.
For example, the bottom 40% (40% of the 140 million who work) rises by a factor of 4 ($43,000 each assuming a laughable 100% efficiency of government redistribution) and the rest rises by $59,500 each. The final result is about like the curve below.
This curve suggests that if Welfare and Medicaid dollars were more efficiently distributed like Social Security (except for the theft), our poor would be doing better than our mythic Middle Class. Even though this sounds nice to the do-gooder in all of us, it's totally wrong.
A Real Middle Class
Instead, imagine the $2 trillion in state taxes from sales, fuel, sin and property taxes being used to fund the poor in a direct and efficient manner (not welfare & medicaid) where more than the current 30% goes to beneficiaries instead of middlemen (in the form of salaries, health benefits and retirement benefits), buildings, transportation and other government bloat.
This alone would boost the bottom 40% of earners by over 200% ($35,625 per earner). With this, they could buy their own health insurance and feed & house themselves. This is 56 million earners which more than includes the 45 million supposed Obamacare, Medicare, Medicaid and Welfare users when the dependents are added in.
Even though I'm opposed to government-run programs like Obamacare, I was hopeful that the automation promised for the health insurance exchange website would enable the long-sought efficiency of delivery I've outlined in previous posts. Instead, we got a typical social engineering outcome; no specification until 6 months before delivery of 5 million lines of code, a major spec change weeks before roll-out and obviously little or no testing. No one held responsible. Oh, and millions thrown out of what were perfectly fine insurance plans they were paying for themselves.
But I digress.
Also imagine being allowed to save your own 15.3% FICA in an interest-bearing account to save for your own retirement income and health insurance; no more pay-as-you-go nonsense.
Best of all, imagine the extra 14% or so of our income we'd be able to keep by cutting government spending from 40% to 10% and taking care of ourselves.
Here's how to get there.
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