Has rising inequality actually hurt anyone?

By Scott Winship
October 18, 2012

The incomes of the top 1 percent — and especially of the top one-half of the top 1 percent — have skyrocketed over the past 30 years. The latest estimates from the Congressional Budget Office show that the inflation-adjusted average income of the top 1 percent of households was $340,000 in 1979 but $1.4 million in 2007, quadrupling over less than three decades. Popular discussion of the top 1 percent tends to highlight how different, say, Mitt Romney and Facebook founder Mark Zuckerberg are from typical Americans. In reality there is as great a disparity between Zuckerberg’s and Romney’s income as between Romney’s and yours. Disparities in income are so dramatic it is difficult to comprehend them.

Not that there’s anything wrong with that! Or rather, it’s not necessarily the case that there’s anything wrong with inequality levels. Whether American-style inequality’s costs outweigh its benefits remains an open question. Too many accounts of inequality today simply assume that it must be bad — that gains at the top have come at the expense of the middle class and bottom, that high inequality has diminished opportunity, that it has stunted economic growth or led to financial instability, or that it has turned our democratic system into a “plutocracy.” But there is scant evidence for each of these propositions.

Note, first, that the CBO data indicates that median household income — the income of the person in the middle of all households — rose by 46 percent from 1979 to 2007, and the income of the average household in the bottom fifth has risen by a similar amount. To be sure, that’s a smaller increase than Americans saw in the 1950s and 1960s and a much smaller increase than the top has seen. But it’s not the case that the middle class and poor have been doing worse over time. (Male earnings have not increased much over recent decades, reflecting the competing away of the union-based advantages that in earlier decades sent pay levels above what productivity gains would have dictated, but analyzed correctly, the data shows they have not fallen either. Female earnings have risen smartly.)

The poor and middle class are doing far better today than their counterparts in Pittsburgh during the Gilded Age, evoked by Freeland, and far better than their counterparts in most of the rest of the world. That may seem like an irrelevant comparison, but it is not. The reason that offshoring, for example, is profitable for companies despite all the costs incurred in employing workers thousands of miles away is that those workers are so much more productive relative to the pay they demand. This is not an indictment of the work ethic of the American worker — our standards have quite reasonably risen as we have become wealthier.

We are unwilling to sleep in company barracks, work on dangerous assembly lines unceasingly for 14-hour days, labor for Third World wages, accept environmental degradation, forgo weekends and holidays, or send our children into the workforce. We don’t have to — we can not only maintain but continue to improve our nearly peerless living standards with the high pay and benefits, strong worker and environmental protections, generous tax-payer-funded safety nets, tame work hours, and long retirements that we have.

Cross-national comparisons are tricky, but the evidence we have (from the Luxembourg Income Study) suggests that if you could line people up from richest to poorest in the United States, in Europe and in other English-speaking nations[r1] , Americans at every point in the richest 80 percent of households are better off than their counterparts occupying the same place in line in nearly every peer nation. Among the poorest fifth of households, this pattern breaks down, but it is hardly obvious that our inequality levels are to blame.

For one, inequality between, say, the poor and the middle to upper-middle class has not increased meaningfully since the 1980s. Second, to the extent inequality between the bottom and middle rose during the 1970s and 1980s, increasing single parenthood and rising out-of-wedlock births were a big part of the story. Third, it’s unclear that intergenerational mobility has declined over time — there is at least as much evidence that it has been unchanged as there is that it has fallen.

There are plenty of reasons to worry about inequality of opportunity — socioeconomic gaps in college-going are on the rise, and test-score gaps between rich and poor kids have similarly increased, to name just two examples. But the evidence that these problems would diminish if we could limit the top 1 percent’s incomes to those seen in other countries is nonexistent. (Incidentally, the incomes of the top 1 percent have been on the rise in our peer nations too, and middle-class income growth has slowed in those countries as well.) Studies on whether inequality hurts economic growth typically focus on developing countries, and research by, for instance, Christopher Jencks suggests that inequality across rich countries does not go hand in hand with lower growth. The latest research on whether inequality leads to financial crises concludes that it does not — rising inequality tends to co-occur with expansions in credit, but it is the latter that appears to lead to crises.

Similarly, the influential research of economists Daron Acemoglu and James Robinson argues that inequality leads to less democracy and reinforces itself through politics, but it too is based on developing countries. There has been hardly any research that rigorously tests whether economic inequality in the United States is associated with worse political or policy outcomes for the nonrich. In fact, policy preferences do not line up very neatly with the purported “class interests” of voters. The United States is simply not a banana republic.

I would like to see social policy do more to help the poor and to promote opportunity. But I don’t see much evidence that the gains among the top 1 percent have done anything to increase poverty or reduce opportunity. From 2007 to 2009, the average income of the top 1 percent fell by 37 percent while the median household income fell by 2 percent and the average income of the poorest fifth may have increasedslightly. If that reduction in inequality — the extent to which the “plutocrats” were taken down a peg — helped the middle class and the poor, it is not obvious. We should question, then, whether the earlier gains at the top hurt everyone else.

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