Income Inequality
A Moral Economy #3. Part II: What do we have?
This continues a three part series of excerpts from Social Security Basic Income: A Safety Net for All Americans, which I published in March 2020. Part I: What would it look like? concluded with #2. Part III is How do we get from here to there? This essay includes text from Chapter 2 What’s the Problem? Refer to #1 in the series for a brief introduction of my purpose and perspective on this subject.
Growing income insecurity and inequality
For the last 100 years, the U.S. has been first among nations by many measures of prosperity. However, impressive aggregate measures of prosperity such as GDP, stock market capitalization, and average income levels hide the fact that most Americans share the burdens but not the rewards implied by these statistics.
Consider this conclusion of a United Nations Human Rights Council (UNHRC) report:
[America’s] immense wealth and expertise stand in shocking contrast with the conditions in which vast numbers of its citizens live. About 40 million live in poverty, 18.5 million in extreme poverty, and 5.3 million live in Third World conditions of absolute poverty. It has the highest youth poverty rate in the Organization for Economic Cooperation and Development (OECD), and the highest infant mortality rates among comparable OECD States. Its citizens live shorter and sicker lives compared to those living in all other rich democracies, eradicable tropical diseases are increasingly prevalent, and it has the world’s highest incarceration rate, one of the lowest levels of voter registrations in among OECD countries and the highest obesity levels in the developed world. The United States has the highest rate of income inequality among Western countries…. The United States has one of the highest poverty and inequality levels among the OECD countries, and the Stanford Center on Inequality and Poverty ranks it 18th out of 21 wealthy countries in terms of labour markets, poverty rates, safety nets, wealth inequality and economic mobility. But in 2018 the United States had over 25 per cent of the world’s 2,208 billionaires. There is thus a dramatic contrast between the immense wealth of the few and the squalor and deprivation in which vast numbers of Americans exist.
The report slams a number of US policies that it claims mire unfortunate Americans in a quicksand of poverty. The critique includes disenfranchisement of minorities, discriminatory mistrust of the poor, inadequate health care, criminalization of the homeless, justice system fines and fees, and punitive drug abuse policies. It also challenges the assumption that jobs are available to the poor that can make them independent.
Low national unemployment rates are cited as evidence of plentiful jobs, even though they exclude people who have lost hope and quit looking for work; moreover, all jobs are counted the same, regardless of hours worked or wages paid. Unfortunately, labor statistics have become measures of gifts from the “job creators” to the people. Symptoms of the national malaise include 1) increasing income inequality and capital/income shares, 2) unequal income distribution in the US vs. other developed nations, and 3) alarming levels of income redistribution from younger to older Americans (see charts below).
As indicated in the chart below from an article by Piketty, Saez, and Zucman, before 1980 the poor fared better than the middle class and wealthier individuals on an after-tax basis. Since then, even after paying taxes, richer Americans have seen their income grow much faster than the poor, whose income hardly grew at all. They add that “[A]ll the growth in posttax bottom 50% income owes to the increase in income for the elderly. For the working-age population, posttax bottom 50% income has hardly increased since 1980.”
The Washington Center for Equitable Growth used the same data for the chart below to compare income growth rates by percentile to their averages before and after 1980.
According to the Federal Reserve’s triennial Survey of Consumer Finances, “[T]he rising income share of the top 1 percent mirrors the declining income share of the bottom 90 percent of the distribution, which fell to 49.7 percent in 2016.”
As Thomas Piketty explains in Capital in the Twenty-first Century, capital is far more flexible than labor; this explains why its advantage has led to steady substitution over hundreds of years — a trend that shows no signs of slowing. Couple this with the fact that capital is always more unequally distributed than labor, and increasing inequality of wealth and income is no mystery.
We do not know whether there is an ideal ratio of capital to national income. What we do know is that in recent decades, the US has managed to accelerate the process. Thomas Piketty sees nothing to prevent continuation of this trend and expresses concern, with references to Karl Marx, that capitalism may undermine itself by provoking revolution.
[F]rom 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase in national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year. These figures are incontestable, and they are striking; whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve closer scrutiny. It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.
The supply side economic argument that policies favoring wealth creation also benefit the poor is controversial. I have already presented time series data that show this may not be the case. The chart below suggests that our economy behaves very differently from other comparable countries. While no one is likely to be surprised that the richest Americans manage to capture the largest share of incomes, it may be surprising to learn that their gains do not benefit those at the lower end of the income distribution. If they were really creating good jobs through investing their wealth, one would expect to see the US in the lower right quadrant of the chart with Switzerland.
Middle-class workers are suffering, too, from lack of opportunity and income insecurity. Women make up far more of the workforce today than they did a few generations ago. However, progress on gender equality may have contributed to rising income inequality. Since the late 1970s, women’s gains have largely been offset by men’s losses in earnings, and high-earning men and women tend to marry one another. For those without college degrees, marriage rates fell as divorce rates rose. As shown in the chart below (data from the U.S. Census Bureau), as the number of workers grew by 55 percent (since 1980), median household incomes grew by just 22 percent while mean incomes grew by 44 percent. The growth differential between the number of earners and the median income indicates more workers are needed to maintain moderate household incomes. The growth differential between the median and mean incomes indicates that for high earners, household income has grown proportionally to the number of people working. Whatever the cause, it is further evidence of growing income inequality.
According to the 2019 “U.S. Private Sector Job Quality Index,” growth in household incomes is unequal because, over the last three decades, jobs offer increasingly fewer working hours at lower relative wages. Service sector employment, which was 58 percent of all private sector employment in the 1960s, grew to 83 percent in the Great Recession, where it has remained since — indicating “peak” service employment. Service sector jobs have, also since the 1960s, paid much less than goods-producing jobs. Over the last decade, the ratio of weekly earnings for production and non-supervisory service sector employees to those in goods-producing sector has been just under 75 percent.
Fifty years ago, poor and middle-class Americans assumed each generation would prosper compared to their parents. Yet according to the MIT Task Force on the Work of the Future, by 2009 the US had one of the lowest rates of intergenerational economic mobility among wealthy democratic countries. And, as indicated in the chart below from the Federal Reserve Board, real incomes of American households whose head is 55 or older increased significantly from 1989 to 2016 while younger households’ incomes have not.
I would expect earnings to increase with age until retirement and then decline, which is exactly what the relative levels in the chart tell us — in 1989. Incomes nearly double as we move from the under 35 group to the next age group, and then they rise slightly in what is known as the peak earning years of 45–55. In that era, most workers were retired by age 65, so it is no surprise that earnings fell sharply for the next age group and even further for the 65–74 group, in which few remained in the workforce. By 75, virtually everyone was living on pensions, savings, Social Security, and other unearned income sources.
By 2016, the data tell a very different story. The most obvious difference is that the range narrowed from almost $50,000 per year to less than $30,000. In 1989, the median under 35 household income was 50 percent higher than the median 75 or older household, but by 2016 they were virtually identical. Incomes of age 65–74 households caught and left behind the under 35 group. In 1989, their median income was 78 percent as high; in 2016, the same ratio was 124 percent. The worrisome part of these statistics is that the younger households’ incomes hardly grew at all. Hooray for older households that are doing well due to thrift and prudent investment, but for many of them, there is no question that at least some of their relative prosperity is due to payroll taxes levied on the younger workers.
Age 35–44 and 45–54 household median incomes actually fell in the 1989–2016 period, from $68,200 to $65,800 and $72,100 to $69,500, respectively. Meanwhile, median income for the age 55–64 households increased from $49,300 to $61,000. The older cohort includes a significant number of retired persons, but fewer in 2016 than in 1989, relatively speaking. Again, this is good news for older workers but we should be concerned about the experiences of workers in their prime.
Milton Friedman, in his book Capitalism and Freedom (1962), said of Old Age and Survivor’s Insurance (aka Social Security),
I do not see any grounds — liberal or other — on which this particular redistribution can be defended. The subsidy to the beneficiaries is independent of their poverty or wealth; the man of means receives it as much as the indigent. The tax which pays the subsidy is a flat-rate tax on earnings up to a maximum. It constitutes a larger fraction of low incomes than of high. What conceivable justification is there for taxing the young to subsidize the old regardless of the economic status of the old; for imposing a higher rate of tax for this purpose on the low incomes than on the high; or, for that matter, for raising the revenues to pay the subsidy by a tax on payrolls? [A program aimed at poverty relief] should be designed to help people not as members of particular occupational groups or age groups or wage-rate groups or labor organizations or industries.
The next essay in this series will continue Part II What do we have? It will include additional text from Chapter 2 What’s the Problem?
