Income and Wealth Advisory Board Alan L. Carsrud ProfessorofIndustrialandSystemsEngineering,ClinicalProfessorofManagement, and Executive Director of the Eugenio Pino and Family Global Entrepreneurship Center Florida InternationalUniversity Alan Reynolds SeniorFellow Cato Institute Robert Spich Senior Lecturer in the Global Economics and Management Group and Faculty Program Director, Center for International Business Education and Research, An- derson Graduate School ofManagement University ofCalifornia,Los Angeles Wesley B.Truitt Chairmanand Series Editor Executive-in-Residence CollegeofBusiness Administration LoyolaMarymountUniversity Walter E. Williams John M. Olin Distinguished Professor ofEconomics George Mason University Charles Wolf Jr. SeniorEconomicAdviserand CorporateFellowinInternational Economics The RAND Corporation Income and Wealth ALAN REYNOLDS GREENWOOD GUIDES TO BUSINESS AND ECONOMICS Wesley B. Truitt, Series Editor GREENWOOD PRESS WESTPORT, CONNECTICUT (cid:1) LONDON LibraryofCongressCataloging-in-Publication Data Reynolds, Alan. Incomeand wealth / Alan Reynolds. p. cm. —(Greenwood guides to business and economics, ISSN 1559–2367) Includes bibliographical referencesand index. ISBN 0–313–33688–1 (alk. paper) 1. Income—United States. 2. Wealth—United States. 3. Income distribution—UnitedStates. I. Title. HC110.I5R478 2006 339.2'20973—dc22 2006021343 British LibraryCataloguing-in-Publication Datais available. Copyright # 2006 byAlanReynolds All rights reserved. Noportion ofthis bookmay be reproduced, by any process or technique,withoutthe express written consentofthe publisher. Library ofCongressCatalogCard Number: 2006021343 ISBN: 0–313–33688–1 ISSN:1559–2367 First publishedin2006 GreenwoodPress,88 Post RoadWest,Westport, CT 06881 Animprint ofGreenwoodPublishing Group, Inc. www.greenwood.com Printedinthe United States ofAmerica The paper used inthis book complies with the PermanentPaperStandardissuedby theNational Information StandardsOrganization (Z39.48–1984). 10 9 8 7 6 5 4 3 2 1 Contents Illustrations vii Series Foreword by Wesley B. Truitt ix Introduction 1 1. Concepts and Measures 9 2. Work Matters 25 3. A Vanishing Middle Class? 47 4. The Wage Stagnation Thesis 57 5. The Top 1 Percent 73 6. CEOs and Celebrities 115 7. Wealth Is Not Distributed 147 8. Consumption Inequality, Lifetime Income, and Mobility 161 9. Causes and Cures 183 Glossary 207 Online Resources 219 Index 225 Illustrations TABLES 1.1 Distribution of Persons by Family Type 12 1.2 Census Bureau Gini Ratios for Pretax, Pretransfer Money Income 18 1.3 Comparison of Income Distributions Producing the Same Gini Index 19 1.4 Before-Tax Household Income (in 2004 Dollars) 20 2.1 Average Household Income by Quintile (and Top 5 Percent) Census Bureau (Estimates in 2004 Dollars) 38 2.2 AverageAfter-TaxHouseholdIncomebyQuintile(andTop5 Percent)CongressionalBudgetOffice(Estimatesin2003Dollars) 39 4.1 Full-Time Wage and Salary Workers, 2004 60 4.2 Ownership of Consumer Goods 67 5.1 Estimated Income Share of Top 1 Percent 79 5.2 Dew-Becker and Gordon Estimates of Labor Income (Billions in 2000 Dollars) 94 5.3 Distribution of Tax-Deferred Account Holders by Marginal Tax Rates, 1998 101 5.4 Shares of Pretax Personal Income 106 7.1 Percent of Baby Boomers with Net Worth above $250,000 (in 2001 Dollars) 152 viii Illustrations 7.2 The Composition of Household Wealth in 1995 (Percent of Gross Assets) 156 8.1 Alternative Measures of Inequality (Gini Coefficients) 164 8.2 Increase in Mean Disposable Income Needed to Move to a Higher Group in 1992–1994 177 9.1 Number of Manufacturing Jobs (Thousands) 190 9.2 Average Hourly Earnings in December 2005 by Production or Nonsupervisory Workers 191 9.3 Maximum Marginal Tax Rates on Individual Income 202 FIGURES 1.1 Real Median Income of 4-Person Families and Households, 1975–2003 14 1.2 Lorenz Curve for U.S. Households, Pretax and Pretransfer Money Income, 2004 16 2.1 Mean Household Income by Number of Earners 30 3.1 Minimum Threshold for the Top 20 Percent and Mean Income above That Threshold 53 4.1 Real Average Weekly Earnings of Private Nonfarm Production and Nonsupervisory Workers 62 4.2 Average Weekly Wages Mislead When Weekly Hours Decline 63 4.3 Cumulative Annual Increases in Real Compensation per Hour, Since 1973 65 4.4 Real Per Capita Consumption in 2000 dollars, 1929–2004 68 5.1 Business Income’s Share of Total Income of Top 1 Percent and Top 0.1 Percent 83 6.1 Average CEO Compensation and the S&P 500 Stock Index 127 7.1 Average Real Net Worth of Households (Thousands in 2004 Dollars) 155 7.2 Share of ‘‘Augmented Wealth’’ Held by the Wealthiest 1 Percent of Households 157 Series Foreword Scanning thepages of thenewspaperon anygivenday,you’llfindheadlines like these: ‘‘OPEC Points to Supply Chains as Cause ofPriceHikes’’ ‘‘Business Groups Warn of Danger of Takeover Proposals’’ ‘‘U.S. DurableGoods Orders Jump 3.3%’’ ‘‘Dollar HitsTwo-Year High Versus Yen’’ ‘‘Credibility ofWTO at Stake in Trade Talks’’ ‘‘U.S. GDPGrowth Slows WhileFed Fears Inflation Growth’’ If this seems like gibberish to you, then you are in good company. To most people,thelanguageofeconomicsismysterious,intimidating,impenetrable. But with economic forces profoundly influencing our daily lives, being fa- miliarwiththeideasandprinciplesofbusinessandeconomicsisvitaltoour welfare. From fluctuating interest rates to rising gasoline prices to corporate misconduct to the vicissitudes of the stock market to the rippling effects of protests and strikes overseas or natural disasters closer to home, ‘‘the econ- omy’’ is not an abstraction. As Robert Duvall, president and CEO of the National Council on Economic Education, has forcefully argued, ‘‘Young people in our country need to know that economic education is not an option. Economic literacy is a vital skill, just as vital as reading literacy.’’1 Understandingeconomicsisaskillthatwillhelpyouinterpretcurrentevents that are playing out on a global scale, or in your checkbook, ultimately helping you make wiser choices about how you manage your financial resources—today and tomorrow.