Share of Income Gains by Quintile - Great Depression til Now

I wish I could upvote this more. It constantly astounds me that people construct elaborate theories about the decay of morality amongst the elite of America when faced with such a powerful supply/demand argument. It's pretty simple really: the industrialized nations spent tremendous resources over a span of about 7 reducing each other to rubble. At the end of it, they wanted to rebuild, and the only country with industrial capacity remaining was the United States. Furthermore, the process of rebuilding was extremely labor-intensive, involving construction and manufacture of durable commercial and consumer goods in an environment with low automation. To top it all off, when the other nations were finally rebuilt and started to be competitive again, the size of the available labor pool simultaneously started to expand as women entered the workforce. The middle-class American dream was the result of a global labor market anomaly that lasted for several decades, which was long enough to convince everyone that it was the new normal, and the long decline since the late 70s was the result of that anomaly ending.

No one is worried about well educated, literate, healthy, young software engineers. And no one should be.

I don't post here about poverty for my own sake. Anyone here can handle themself.

I'm posting for all the people who are in trouble right now and facing homelessness because software engineers made their job obsolete and they have no money to re-educate, no job, and no government help. It's not right to just say these people deserve what they get and should find their own way out or die or become homeless. Our society is wealthy enough that no one should ever be without the basics.

Anyone who can afford $8000 is not in trouble. A huge portion of the population today cannot. (Also, most people don't have the tremendous unprecedented luxury of being able to make money online.)

I assume "productivity" is something like real GDP/capita but it would be nice if the graph had units.

The productivity/compensation line conveniently starts in 1947 and makes the post-'70s era look unusual. In fact, the baby boom era was unusual -- with the possible exception of the first industrial revolution in Britain (1700s), it is without precedent in history. Two underlying factors are responsible: 1. the destruction of all other industrial nations in WWII (and consequent international demand for the dollar), and 2. cheap energy.

In 1947 the US had the world's only intact industrial infrastructure. This created tremendous overseas demand for our goods and our currency. As reconstruction abroad rapidly succeeded, the demand for the latter began to outstrip demand for the former, and we were all too happy to supply Eurodollars to meet it. By 1972, foreign claims on US gold reserves were totally unsustainable and Nixon unilaterally ended the Bretton Woods agreement.

Lightning struck twice on our shores with a sustained period of unbelievably cheap petroleum, which also ended in the 1970s. Recent work in thermoeconomics suggests that technology improvements are deflationary unless society can increase its gross energy consumption. Today's ICs are thousands of times faster than those of 1980, but they do not cost more. This is an efficiency improvement - a deflationary effect. (This deflation is largely missed by typical macroeconomic measures, which don't handle "hedonic" change well. The classic demo is to let people spend inflation-adjusted dollars in a catalog from 1980, and one from 2011. Nobody buys much from the older catalog.)

Building tract homes by the millions, on the other hand, requires increased gross energy consumption and is therefore monetized and reflected in measures like real GDP/capita. A similar issue exists around funding for "R&D". You can only fund the R. Since 1980, there's been an outright explosion in the number of scholarly publications disclosing promising breakthroughs, but breakthroughs can't penetrate society without energy. They sit on the page.

Today, we are a people harboring postwar expectations in a world of global competition and expensive energy. President Obama's recent speech was, like many he's given before, a populist appeal for a protectionist return to postwar conditions, when a high school diploma and a pulse could confer property ownership. Such measures cannot succeed.*

One of the most important roles of government in industrial society is to subsidize the production of energy. For the past 40 years, our government has sat idle (or even enacted counterproductive policies) while the real cost (EROI) of our energy sources has skyrocketed.

A common claim in connection with such graphs is that changes around 1980 are due to tax policy. I personally favor progressive taxation (and models suggest it can help with income inequality) but to suggest that tax policy is solely responsible for changes seen since 1970 is ignorant at best. And such claims are seldom accompanied by notice that all income quintiles (and all races) have marginally higher real income today than at any time in the past (effects of the great recession aside)... a moderately reassuring fact that would be left out only by someone attempting to tell a story. Psychologists know that income inequality has real, negative effects, so we should try to address it. But we mustn't do anything that would disturb the modest Pareto growth we have.

* Greenspun's comments on Obama's speech are also excellent: http://blogs.law.harvard.edu/philg/2011/09/08/obamas-speech/

Same for small-scale computerized manufacturing. The educational requirements are slightly higher (shockingly few people know even the simplest shred of trigonometry) but it's still a great way for some who would otherwise be flipping burgers to support a family.

There are correct answers to questions like "will redistributing income from group X to group Y improve overall productivity?" but they're neither necessary nor sufficient criterion for policy formulation. (Keynesians, like their neoclassical economist critics tend to be favourably disposed towards assessing policy impact based on empirical evidence; Austrians on the fringe Right argue the economy is too complex to act as a testing ground)

Questions like "is better aggregate economic growth a justification for disproportionate tax increases for these people?" or "if the bottom percentile are hungry, should feeding them take precedence over growth objectives?" are inherently moral