The Economy between 1980 & 1990

Many claims are made about the economy. "The rich got richer, the poor got poorer." Are such claims verifiable. Below we look at some graphs taken from IRS reported data. This data, as all data based on IRS statistics, is limited to the definitions of income, and the data gathering techniques used by the IRS.

Most people are use to using percentiles to help them understand data. So we start by graphing incomes from 1980 and 1990 as a function of percentile.

Percentile Graphs:

Here we can see that incomes increased for all percentiles between 1980 and 1990.

But who enjoyed the greatest increase?

To find this out we can plot the ratio between 1990 incomes and 1980 incomes.

Change in Income: 1980 - 1990

Here we look at change in incomes as a function of percentile. The top percentiles did, in fact, get the greatest increase.

Note1: the zig-zag in the middle of the graph is probably data "noise" arising from changes in the way incomes were reported.

Note2: A better comparison would normalize this data to the inflation rate.

Inverse frequency Plots

More can be learned from the data if its shown as an inverse frequency plot on a logarithmic grid. This makes it easier to see the incomes distribution of the rich (although it makes it harder to the the distribution for the poor.

Explanations:

1. Logarithmic Plot - each division between black lines represents an increase of 10 times. The lines represent numbers of that magnitude: ie: between 10 and 100 the green lines represent 20, 30, 40, 50, 60, 70, 80,90
2. Inverse Frequency Plot - each mark on the X-axis means that only one person out of that number earn more than that income. For example in 1980 (red line) only 1 out of every 10 earned more than 30,000. In 1990 (blue dash) only 1 out of 2 earned more than 20,000, and only 1 out of 20 earned more than 60,000.

Notice there is a greater separation between the two lines at the higher incomes. This, again, shows that the greater gains were at the higher incomes.

Note: this data is not normalized to inflation, or anything else.

Normalizing :

means assume some numbers represent the same value and adjust all the others accordingly. This is what is done when inflation numbers are reported. Below, we normalize the 1980 and 1990 incomes at the 1 out of 2 frequency.

Note: 1 out of 2 is the same as the 50 percentile

With normalization, no change is noticeable until the earner is doing doing better than about 1 out of 10 (90th percentile.)

That means IRS data implies that the the only real increases in standard of living occurred for top 10% of earners.

Distribution of Incomes:

A distribution plot tells us how many are at each level. We would expect that there are more middle class than rich, and we would desire that there are less poor than middle class. This description implies that ideally we should see the characteristics of a "band-pass filter."

Here the plots of incomes for 1980, 1984, 1988, and 1990 all look like low pass filters.

Thinkers challenge: what forces could have caused the corner income to be about 22,000 in 1980 and about 42,000 in 1990?

Derivative of Density:

a derivative means how much did it change from one level to the next. By looking at the derivatives of density for each year it is easy to see the corner incomes and some other interesting characteristics.

Data noise - fluctuation resulting from the way that the data is recorded, not from the data itself.

Notes:

some of the zig-zags before the corner incomes could be data "noise."

Thinkers challenge: why does the drop-off decrease for incomes above 60,000 for 1980, and above 130,00 for 1990? Could it be these are the incomes where it is hard to spend more than your return on your investments?