What's Causing America's Growing Income Inequality?

The United States of Inequality
THE GREAT DIVERGENCE:
ENTRIES
12
Introducing the Great Divergence
By Timothy Noah
Posted Friday, Sept. 3, 2010, at 3:06 PM ET


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In 1915, a statistician at the University of Wisconsin named Willford I. King published The Wealth and Income of the People of the United States, the most comprehensive study of its kind to date. The United States was displacing Great Britain as the world's wealthiest nation, but detailed information about its economy was not yet readily available; the federal government wouldn't start collecting such data in any systematic way until the 1930s. One of King's purposes was to reassure the public that all Americans were sharing in the country's newfound wealth.
King was somewhat troubled to find that the richest 1 percent possessed about 15 percent of the nation's income. (A more authoritative subsequent calculation puts the figure slightly higher, at about 18 percent.)
This was the era in which the accumulated wealth of America's richest families—the Rockefellers, the Vanderbilts, the Carnegies—helped prompt creation of the modern income tax, lest disparities in wealth turn the United States into a European-style aristocracy. The socialist movement was at its historic peak, a wave of anarchist bombings was terrorizing the nation's industrialists, and President Woodrow Wilson's attorney general, Alexander Palmer, would soon stage brutal raids on radicals of every stripe. In American history, there has never been a time when class warfare seemed more imminent.
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That was when the richest 1 percent accounted for 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income. What caused this to happen? Over the next two weeks, I'll try to answer that question by looking at all potential explanations—race, gender, the computer revolution, immigration, trade, government policies, the decline of labor, compensation policies on Wall Street and in executive suites, and education. Then I'll explain why people who say we don't need to worry about income inequality (there aren't many of them) are wrong.
Income inequality in the United States has not worsened steadily since 1915. It dropped a bit in the late teens, then started climbing again in the 1920s, reaching its peak just before the 1929 crash. The trend then reversed itself. Incomes started to become more equal in the 1930s and then became dramatically more equal in the 1940s. Income distribution remained roughly stable through the postwar economic boom of the 1950s and 1960s. Economic historians Claudia Goldin and Robert Margo have termed this midcentury era the "Great Compression." The deep nostalgia for that period felt by the World War II generation—the era of Life magazine and the bowling league—reflects something more than mere sentimentality. Assuming you were white, not of draft age, and Christian, there probably was no better time to belong to America's middle class.
The Great Compression ended in the 1970s. Wages stagnated, inflation raged, and by the decade's end, income inequality had started to rise. Income inequality grew through the 1980s, slackened briefly at the end of the 1990s, and then resumed with a vengeance in the aughts. In his 2007 book The Conscience of a Liberal, the Nobel laureate, Princeton economist and New York Times columnist Paul Krugman labeled the post-1979 epoch the "Great Divergence."
It's generally understood that we live in a time of growing income inequality, but "the ordinary person is not really aware of how big it is," Krugman told me. During the late 1980s and the late 1990s, the United States experienced two unprecedentedly long periods of sustained economic growth—the "seven fat years" and the " long boom." Yet from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent. Economic growth was more sluggish in the aughts, but the decade saw productivity increase by about 20 percent. Yet virtually none of the increase translated into wage growth at middle and lower incomes, an outcome that left many economists scratching their heads.
Here is a snapshot of income distribution during the past 100 years:

Why don't Americans pay more attention to growing income disparity? One reason may be our enduring belief in social mobility. Economic inequality is less troubling if you live in a country where any child, no matter how humble his or her origins, can grow up to be president. In a survey of 27 nations conducted from 1998 to 2001, the country where the highest proportion agreed with the statement "people are rewarded for intelligence and skill" was, of course, the United States. (69 percent). But when it comes to real as opposed to imagined social mobility, surveys find less in the United States than in much of (what we consider) the class-bound Old World. France, Germany, Sweden, Denmark, Spain—not to mention some newer nations like Canada and Australia—are all places where your chances of rising from the bottom are better than they are in the land of Horatio Alger's Ragged Dick.
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All my life I've heard Latin America described as a failed society (or collection of failed societies) because of its grotesque maldistribution of wealth. Peasants in rags beg for food outside the high walls of opulent villas, and so on. But according to the Central Intelligence Agency (whose patriotism I hesitate to question), income distribution in the United States is more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States. Economically speaking, the richest nation on earth is starting to resemble a banana republic. The main difference is that the United States is big enough to maintain geographic distance between the villa-dweller and the beggar. As Ralston Thorpe tells his St. Paul's classmate, the investment banker Sherman McCoy, in Tom Wolfe's 1987 novel The Bonfire of the Vanities: "You've got to insulate, insulate, insulate."
In 1915, King wrote, "It is easy to find a man in almost any line of employment who is twice as efficient as another employee,"
but it is very rare to find one who is ten times as efficient. It is common, however, to see one man possessing not ten times but a thousand times the wealth of his neighbor. … Is the middle class doomed to extinction and shall we soon find the handful of plutocrats, the modern barons of wealth, lined up squarely in opposition to the propertyless masses with no buffer between to lessen the chances of open battle? With the middle class gone and the laborer condemned to remain a lifelong wage-earner with no hope of attaining wealth or even a competence in his old age, all the conditions are ripe for a crowning class-conflict equaling in intensity and bitterness anything pictured by the most radical follower of Karl Marx. Is this condition soon coming to pass? [emphasis his]
In the end, King concluded it wasn't. Income distribution in the United States, he found, was more equal than in Prussia, France, and the United Kingdom. King was no socialist. Redistributing income to the poor, he wrote, "would merely mean more rapid multiplication of the lowest and least desirable classes," who remained, "from the reproductive standpoint, on the low point of their four-footed ancestors." A Malthusian, he believed in population control. Income inequality in the United States could be addressed by limiting immigration (King deplored "low-standard alien invaders") and by discouraging excessive breeding among the poor ("eugenicists are just beginning to impress upon us the absurd folly of breeding great troops of paupers, defectives and criminals to be a burden upon organized society").
Today, incomes in the U.S. are more unequal than in Germany, France, and the United Kingdom, not less so. Eugenics (thankfully) has fallen out of fashion, and the immigration debate has become (somewhat) more polite. As for income inequality, it's barely entered the national political debate. Indeed, the evidence from the 2000 and 2004 presidential elections suggests that even mild economic populism was a loser for Democrats. (To sample authentic economic populism, click here.)
But income inequality is a topic of huge importance to American society and therefore a subject of large and growing interest to a host of economists, political scientists, and other wonky types. Except for a few Libertarian outliers (whose views we'll examine later), these experts agree that the country's growing income inequality is deeply worrying. Even Alan Greenspan, the former Federal Reserve Board chairman and onetime Ayn Rand acolyte, has registered concern. "This is not the type of thing which a democratic society—a capitalist democratic society—can really accept without addressing," Greenspan said in 2005. Greenspan's Republican-appointed successor, Ben Bernanke, has also fretted about income inequality.
Yet few of these experts have much idea how to reverse the trend. That's because almost no one can agree about what's causing it. This week and next, I will detail and weigh the strengths and weaknesses of various prominent theories as to what has brought about the income inequality boom of the last three decades. At the same time, I'll try to convey the magnitude of its effects on American life. The Great Divergence may represent the most significant change in American society in your lifetime—and it's not a change for the better. Let's see if we can figure out what got us here.
Click here to view a visual guide to inequality. Click here to subscribe to this series.
Next: Did race or gender inequality contribute to the Great Divergence? Tomorrow: Is immigration a culprit?
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HOME / THE GREAT DIVERGENCE : WHAT'S CAUSING AMERICA'S GROWING INCOME INEQUALITY?
The United States of Inequality
THE GREAT DIVERGENCE:
ENTRIES
12
The Usual Suspects Are Innocent
By Timothy Noah
Posted Monday, Sept. 6, 2010, at 9:27 PM ET




Most discussion about inequality in the United States focuses on race and gender. That makes sense, because our society has a conspicuous history of treating blacks differently from whites and women differently from men. Black/white and male/female inequality persist to this day. The median annual income for women working full time is 23 percent lower than for their male counterparts. The median annual income for black families is 38 percent lower than for their white counterparts. The extent to which these imbalances involve lingering racism and sexism or more complex matters of sociology and biology is a topic of much anguished and heated debate.
But we need not delve into that debate, because the Great Divergence can't be blamed on either race or gender. To contribute to the growth in income inequality over the past three decades, the income gaps between women and men, and between blacks and whites, would have to have grown. They didn't.
The black/white gap in median family income has stagnated; it's a mere three percentage points smaller today than it was in 1979. This lack of progress is dismaying. So is the apparent trend that, during the current economic downturn, the black/white income gap widened somewhat. But the black/white income gap can't be a contributing factor to the Great Divergence if it hasn't grown over the past three decades. And even if it had grown, there would be a limit to how much impact it could have on the national income-inequality trend, because African-Americans constitute only 13 percent of the U.S. population.
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Women constitute half the U.S. population, but they can't be causing the Great Divergence because the male-female wage gap has shrunk by nearly half. Thirty years ago the median annual income for women working full-time was not 23 percent less than men's, but 40 percent less. Most of these gains occurred in the 1980s and early 1990s; during the past five years they halted. But there's every reason to believe the male-female income gap will continue to narrow in the future, if only because in the U.S. women are now better educated than men. Ever since the late 1990s female students have outnumbered male students at colleges and universities. The female-male ratio is currently 57 to 43, and the U.S. Department of Education expects that disparity to increase over the next decade.
Far from contributing to the Great Divergence, women have, to a remarkable degree, absented themselves from it. Take a look at this bar graph by David Autor, an MIT labor economist:

The graph demonstrates that during the past three decades, women have outperformed men at all education levels in the workforce. Both men and women have (in the aggregate) been moving out of moderately skilled jobs—secretary, retail sales representative, steelworker, etc.—women more rapidly than men. But women have been much more likely than men to shift upward into higher skilled jobs—from information technology engineer and personnel manager on up through various high-paying professions that require graduate degrees (doctor, lawyer, etc.).
These findings suggest that women's relative gains in the workplace are not solely a You've-Come-a-Long-Way-Baby triumph of the feminist movement and individual pluck. They also reflect downward mobility among men. My Slate colleague Hanna Rosin, writing in the Atlantic, recently looked at these and other data and asked, "What if the modern, postindustrial economy is simply more congenial to women than to men?"
She might have asked the same about the modern, postindustrial family. The declining economic value of men as Ward Cleaver-style breadwinners is a significant reason for the rise in single parenthood, which most of the time means children being raised by an unmarried or divorced mother. The percentage of children living with one parent has doubled since 1970, from 12 percent to more than 26 percent in 2004 (see Table 2). Conservatives often decry this trend, and they rightly point out that children who grow up in single-parent homes are much likelier to be poor. "Single mothers seldom command high wages," confirmed David Ellwood and Christopher Jencks, both of Harvard's Kennedy School of Government, in a 2004 paper. "They also find it unusually difficult to work long hours." But it would be difficult to attribute much of the Great Divergence to single parenthood, because it increased mostly before 1980, when the Great Divergence was just getting under way. By the early 1990s, the growth trend halted altogether, and though it resumed in the aughts the rate of growth was significantly slower.
Also, single parenthood isn't as damaging economically as it was at the start of the Great Divergence. "That's mostly because the percentage of women who are actually working who are single parents went up," Jencks told me. In a January 2008 paper, three Harvard sociologists concluded that the two-thirds rise in income inequality among families with children from 1975 to 2005 could not be attributed to divorce and out-of-wedlock births. "Single parenthood increased inequality," they conceded, "but the income gap was closed by mothers who entered the labor force." One trend canceled the effects of another (at least in the aggregate).
While we're on the topic of single versus two-parent households, perhaps we ought to consider what a "household" is.
Stephen J. Rose is a labor economist at Georgetown best-known for publishing, since the 1970s, successive editions of Social Stratification in the United States, a pamphlet and poster much revered by the left that depicts economic inequality in the United States. In his recent book Rebound, Rose made an apparent 180-degree turn and argued that worries about rising income inequality and a disappearing middle class were overblown. Rose built his case largely on the notion that the Census Bureau's preferred metric—"median household income"—was misleading.
The trouble, Rose wrote, was that households varied greatly in composition and size. A household might consist of a single young man just starting out on his own or an elderly widow in retirement. Neither would likely enjoy a high income, but that would be a function of mere circumstance (the young man was just beginning his climb up the greasy pole; the retired widow no longer worked at all) and need (neither was likely to be responsible for any children). Another problem, Rose suggested, was that some households were bigger than others. Couples tended to have larger household incomes than single people, but that was because they likely collected two paychecks rather than one. The proportion of Americans living alone had for various reasons increased over time; that needed to be taken into account, too. Correcting for all these factors, Rose calculated that median household income was 30 percent higher than the Census' official figure (about $50,000 in 2007).
That was the good news. The bad news was that even with these new calculations, Rose couldn't deny the existence of a Great Divergence. "Under all circumstances," he wrote, "inequality has risen considerably, and this is a bad thing for America. Those at the bottom of the income ladder have benefited only minimally from the significant gains in overall production over the past three decades."
Back, then, to the drawing board. Conventional liberal and conservative explanations about what ails society can neither explain the Great Divergence nor make it go away.
Click here to view a visual guide to inequality. Click here to subscribe to this series.
Tomorrow: Is immigration a culprit?
Become a fan of Slate on Facebook. Follow us on Twitter.
THE GREAT DIVERGENCE:
ENTRIES
12
The Usual Suspects Are Innocent
By Timothy Noah
Posted Monday, Sept. 6, 2010, at 9:27 PM ET