An Interpretation of Income Inequality, from Kim Zussman

2010-09-28 · Kim Zussman, Tyler McLellan
Original source

Another interpretation of income inequality is compensation for risk. From updated Saez data, note that top 1% does better in good times, and much worse in recessions:

Real Annual Growth     Top 1% Income RAG      Bottom 99% RAG

Full period             1993-2008    1.30%                       3.94%                        0.75%

Clinton Expansion  1993-2000    4.0%                          10.3%                         2.7%

2001 Recession     2000-2002    -6.0%                        -16.8%                       -3.3%

Bush Expansion    2002-2007     3.0%                          10.1%                         1.3%

Great Recession   2007-2008     -9.9%                       -19.7%                          -6.9%

Tyler McLellan writes:

I did some work on this a few years ago and determined that the compounding over long periods of time dominates the skew, to be clear compounding of capital and the flow of income there from in any given year.

There is also a very good intuitive reason therefore why income inequality has historically fallen only during calamity, when the actual capital stock is destroyed/seized or more commonly the connection btwn financial assets and real assets is forcefully separated.