The marked increase in the inequality of how income is distributed in our country is perhaps the most important problem our society faces and one of knottiest.
It interlaces with other challenges, including federal fiscal issues and the long-run rate of growth of producing goods or services to meet the needs and wants of our people.
But the phenomenon is complex and there are no simple solutions, even though some on both political wings think that there are.
All this stems from a recent report by French-born University of California-Berkeley economist Emmanuel Saez detailing the degree to which the total increase in income in recent years has gone to the very richest fraction of society.
This is nothing new, merely the continuation of a 30-year trend. Saez’s paper is an update, only the latest of several he has written over the past decade detailing the phenomenon. (An Internet link to Saez’s research is at the end of this column).
But while the trend is old and much discussed, the dimensions of inequality are striking. Of all of the increase in U.S. national income from 2009 through 2012, 95 percent went to the highest-income 1 percent of households. Incomes for this top 1 percent grew by 31.4 percent while those for the other 99 percent grew 0.4 percent.
These years cover most of the recovery from the recession, as strictly defined by the National Bureau of Economic Research, which followed the financial crisis that began to smolder six years ago and burst into flame in the fall of 2008.
Saez also tabulates recessions, such as 2008, in which the richest 1 percent took proportionally greater income losses than the rest of the population. But considering all of the last two decades, 1993 through 2012, recessions and expansions combined, incomes for this 1 percent, adjusted for inflation, grew by a total of 86 percent while those of the all the rest only 6.6 percent
If one breaks down this top 1 percent, other changes are striking. At its low point in the mid-1970s, the top 1/100 of 1 percent household income earners garnered about 0.5 percent of total national income. Now this select group, some 16,000 families out of a total of 120 million, gets about 5.5 percent. Except for the year just before the financial crisis began to unfold, this is the highest proportion in the 100 years for which we have reasonably good data.
Some see no problem with this. Relying on the introductory econ tenet that incomes reflect the value that a worker contributes to output, or “marginal productivity,” they argue that the high incomes enjoyed by a very few households at the very top of the distribution simply reflect the fact that these people work harder or are more creative. These complacent observers include some prominent economists like Greg Mankiw, an economic adviser to former President George W. Bush.
Most economists, including many on the right who generally favor a minimal role for government, are skeptical. Income does reflect marginal productivity of a worker under the highly stylized assumptions of an abstract pure-competition model. But as one works with assumptions closer to situations in the real world, there are many ways in which some can obtain a far greater share of total income than they “deserve” from their marginal contribution.
Moreover, there are simple questions that knock holes in the “it’s because they work harder and smarter than the rest of us” argument. Did top income people really works so much harder than the rest of us that they caused 95 percent of our nation’s total economic growth over three years, 19 times more than the 118 million or so households that make up the other 99 percent? Were they particularly lazy in the high productivity growth decades from 1948 through 1973 when their shares were at much lower and stagnant levels? Are U.S. corporate executives so much smarter than colleagues in other industrialized countries who, while earning high incomes, do not reach the stratospheric levels enjoyed by top management at even poorly-performing second-rank companies? Did a small cadre of Wall Street traders really make enormous contributions to overall growth of output?
However, if, like some on the left, you accept the argument that a small group of high earners has somehow managed to hijack the fruits of economic growth, you need a coherent explanation of why and how this happened after decades of relatively equal distribution.
Base on graphs of income shares over time, some liberals look at the 1980s, when the elite’s gains really began to grow, and proclaim “It’s all Reagan’s fault.” But the increase started a couple of years before he was elected and continued apace during the Clinton administration. So it was not just one administration.
Those conservatives who acknowledge this is a problem, blame it on government action that favors Wall Street. In a New York Times op-ed calling for Republicans to grasp the rising inequality issue, Sheila Bair, former FDIC head and a long-time top aide to Republican Sen. Bob Dole, asserts: “I fear that government actions, not merit, have fueled these extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich.”
It is clear that an underlying cause is that the share of income going to owners of capital as opposed to providers of labor has increased worldwide. This is due, at least in part, to increased international trade in goods and fewer restrictions on flows of capital among nations. For 30 or more years after World War II, there were significant bars on capital flowing across national borders in search of high returns. Those are nearly all gone.
Moreover, the collapse of the Soviet Union, China’s turning toward a semi-market economy and India’s opening itself to the global economy added a billion or more workers to the global labor pool. It would be impossible for this large increase in the labor supply to occur without imposing downward pressure on returns to labor.
It all goes beyond this however. There have been many societal and policy changes that have given rise to what economists Robert Frank and Phillip Cook have termed “the winner-take-all society.” This applies in sports and entertainment as well as on Wall Street. But that is the subject of another column.
(To view Saez’s most recent paper and several others on the same or related topics, go to http://elsa.berkeley.edu/-7/8saez/. Some are highly technical, but others, including slides from an endowed lecture he gave at Stanford last January are not. Spreadsheet files containing the data on which his reports are based are also available through links in the papers themselves.)