The permanent class divide

By Chrystia Freeland
March 22, 2013

The one thing pretty much all of us agree on is the importance of equal opportunity. Opinion is divided about the significance of rising income inequality per se. Some see it as a problem in and of itself. But for others, a growing economic divide, so long as it is meritocratic, is a healthy characteristic of a growing, entrepreneurial society.

Nowadays, though, no one is in favor of a caste-based society. Income inequality is one thing, but a permanent division into the haves and have-nots is an entirely different thing – and much less acceptable.

That is why new economic research, released at a conference this week at the Brookings Institution in Washington, is so important. The comprehensive study is by five economists, including two who work at the Federal Reserve Board, Vasia Panousi and Ivan Vidangos, and one, Shanthi Ramnath, of the U.S. Treasury Department. It draws on a powerful new data set: a one-in-5,000, random and confidential sample of the population of U.S. taxpayers.

Its conclusions are sobering: Rising inequality in the United States is “permanent.” It isn’t the function of a bad year, a temporary economic downturn, or personal decisions to move to new jobs or new places, with consequent dips in income. Instead, rising income inequality is the statistical reflection of an increasingly calcified society – the rich are staying rich, and the poor are staying poor, even as the gap between them grows.

This result is the most stark when it comes to male earnings. The “entire increase” in the inequality in male wages over the period the paper investigates, 1987 to 2009, was “permanent.”

The researchers thought that household income might cushion the blow. After all, this is how many traditional societies function. When the main bread-winner’s earnings falter, other sources of income – the work of other family members, cashing in family savings, income from family businesses – kick in.

In the United States, over the past 2-1/2 decades, the household provided a little bit of this type of insurance, but not much. “For total household income,” the study concludes, “the large increase in inequality over our sample period was predominantly, though not entirely, permanent.”

Another institution that could temper the consequences of the growing, structural inequality the authors document is the state. As it happens, like the family, the state softens the impact of permanent inequality a little, but not enough to change the broader trend of a growing and lasting divide.

“We find that the tax system helped mitigate somewhat the increase in household income inequality over the sample period, but this attenuating effect was insufficient to significantly alter the broad trend toward rising inequality,” the researchers conclude. They put a number on the cushioning effect of the American state: 15 percent.

This study is powerful partly because the data that supports it is so robust and because the researchers investigating that data are so deeply rooted in the American establishment. This is no Occupy Wall Street critique – it is a sober analysis done by economists at the Fed and the Treasury.

Their conclusion that rising income inequality is overwhelmingly permanent is also striking because this stratification is so strongly at odds with the increasing political openness of those same 2-1/2 decades. Even as class divisions have hardened, other forms of structural inequality have been eroded.

Full rights, including marriage, for gays and lesbians are swiftly becoming the status quo. Ethnic minorities have increasing demographic power, as reflected in their growing political strength on issues like immigration, or indeed in the fact that the president of the United States is black. The earning power of women is growing, and women are increasingly likely to be the breadwinners in their families.

This is the great paradox of our age – political inclusion of groups that were once beyond the pale is steadily increasing. But at the same time, the economic divide between the top and the bottom is becoming both wider and deeper.

This contradiction is the key to so much of the stress and polarization in today’s society. The widening political inclusion is real, and it makes an implicit promise – that equality of opportunity is rising, that the world is everyone’s oyster.

But the tax data the Brookings study draws upon is real, too, and it sends the opposite message. The gap between the rich and the poor is growing, and membership in each group is increasingly fixed.

Politics tells a story of increasing inclusion; economics tells a story of a widening and permanent class divide. You don’t need a PhD in economics to feel cheated by these clashing messages. Our public political ideology is promising – and delivering – ever-greater openness and inclusion. Our paychecks are cementing the class divide. No wonder people are so confused and American politics is so scrambled.

6 comments

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I would say many, if not most, Americans respect and admire entrepreneurs who became rich if they provided products or services that made life better or easier. However, how can you respect the “vampire squids” of the oligarchy from banks and other financial institutions “too big to fail” who reward themselves while they drive their companies into the ground?

Posted by bluepanther | Report as abusive

The vast majority of illegal aliens from Mexico and Central America are uneducated and illiterate in their native language. A look at California’s Central Valley shows that many stay uneducated for generations. And this is the fastest growing segment of our population.
Maybe we can get the left wing “Dudley Dorights” to accept the reality that our social welfare programs are responsible for much of the income gap!

Posted by Pilgrim1620 | Report as abusive

Chrystia, the growing class divide is almost 100% due to the US tax structure. While a middle class family has seen their total taxes rise by nearly 4x in the past 3 decades (social security, sales tax, real estate tax, excise taxes) coupled with huge increases in healthcare insurance and education costs (multiple of 10+ in 3 decades), the class of hedge fund managers, venture capitalists, corporate chieftains have seen their take home balloon due to the incredibly low tax rates on capital gains, dividends, and investment real estate.

If I add up all the taxes I pay on a low six figure income, my effective tax rate is over 55%. ANd that does not include healthcare insurance, education and funding my own retirement. Yet, as we know Mitt Romney and Warren Buffett have an effective tax rate under 15%.

It’s ironic that Brookings Inst. funded this research since they continually push for lower taxes on the rich and reduction on middle class entitlements like social security and medicare. Why? Because the rich that fund Brookings are the very same ones that fund the campaigns of Congress.

Posted by Acetracy | Report as abusive

One only has to look around to see the income gap. We are living in a false economy where the players are taking from the global workforce and have no loyalty to their countries of origins.
Global output is awarded to the lowest bidder. The wheel is coming off the cart, and soon it will be payback. IE: Eurozone fiasco..US financial ripoffs…Rise of China…War in all the wrong places for the wrong reasons. Little investment into the well being of poor countries…One day the rich will have no where to go, and the poor will be waiting…

Posted by Timmie | Report as abusive

One day the rich will have no where to go, and the poor will be waiting…

Then they should come & throw a class war in…. Aspen?

Dear Chrystia, I know you debated Walter Issacson at the Aspen Institute’s Aspen Ideas Festival in 2012. I live in Aspen 4 blocks from petty tyrants who also are billionaires.

Guess what? They own Aspen Skiing, and part of General Dynamics, a merchant of death, and Wall Street’s JP Morgan Chase.

Walter is … partial to them. Can you talk some sense in him? I’m a loud mouthed Texas artist who he banned from the Aspen Institute: See ROFL comments too: http://www.aspentimes.com/article/201212 13/NEWS/121219954&mode=comments

Posted by LeeMulcahyPhD | Report as abusive

Henry Ford, on beginning production, paid his workers more than the going rate. Braced by other owners of businesses, he explained he wanted his workers to buy Model T’s. Adam Smith emphasised that workers should be paid adequately, that owners might try to underpay them, but patriotism and ethics could restrain them. The Global Plutocracy has many members that consider themselves Global citizens, having no patriotism for any country. And Greed trumps ethics for many. The Plutocracy continues to gain wealth, even skimming “wealth” from the poor, the Middle Class, even from the mere millionaires. I have read that the 200 wealthiest persons have more wealth than the poorest half, 3.5 billion persons, of the World. Chrystia Freeland, in the Atlantic, has written that their gains will continue until the Plutocrats realize that they need the rest of us. (And see her “PLUTOCRATS THE RISE of the NEW GLOBAL SUPER-RICH and the FALL of EVERYONE ELSE”.) When the rest of us do not have the money to buy all of the production of the investments of the Plutocracy, production will decline, and their investments will decline in value. It appears to me that this has started. Will the Plutocrats now understand their course of action in gaining wealth from the poor, the Middle Class, and the mere millionaires, is self-defeating, and realize that they need the rest of us? Or, when many of us others have no money to buy bread, will Plutocrats tell us to buy cake? And will our “experts” finally realize that this is happening? I see no indication that they have. Our collective stupidity is mind boggling! o

Posted by BarryWJackson | Report as abusive