Inequality is more relevant than ever this election

November 2, 2012

The issue of inequality doesn’t usually feature in U.S. presidential debates. Compared with those in Europe, Americans are more relaxed about seeing higher pay as the reward for effort and ability.

This time it is different. The Occupy movement reflected the general anger toward Wall Street bankers who raked in millions during the boom years and then got bailed out in the bust that they helped to create. Income inequality has been quietly rising in the United States for almost four decades. President Barack Obama plans to increase taxes on those with high incomes and Governor Mitt Romney is against such “class warfare.”

One of the main differences between the two candidates in this election is whether or not to raise taxes on the rich. But rather than talking about the underlying causes of increased inequality, the presidential candidates have focused on dealing with its consequences, particularly over taxes and welfare.

President Obama has pledged to keep all the 2001 Bush tax cuts, except for those households with income over $250,000 a year, and to restrict tax loopholes for millionaires. For example, the top rate of income tax for the rich will increase from 35 percent to 39.6 percent under Obama’s plan.

Governor Romney’s criticism of Obama’s plan is that these tax increases will mean lower incentives for entrepreneurs and wealthier individuals to work hard, and the result will be a drag on growth.

But what about the “American Dream?” What matters, Americans typically say, is equality of opportunity, not equality of outcomes. Although the United States has greater inequality than other wealthy countries, there is a notion that it is easier to rise up the ranks through hard work and the spirit that a free enterprise society allows.

Surprisingly, the effect of being born rich affects one’s future more in the United States than in almost every other rich country. The correlation of a son’s earnings with his father’s earnings at the same age is notably high.

Research shows that countries with higher inequality tend to have lower mobility. Some of this lower intergenerational mobility is because poor American kids struggle to get an education good enough that makes them competitive in the marketplace. If the rungs of the income ladder are as far apart as they are in the United States, then it is much harder to climb to the top. The “Great Gatsby” curve in the figure below is evidence of this: countries with higher inequality have less intergenerational mobility.

Countries with more inequality seem to have lower earnings mobility between generations.


Since the late 1970s, the shares of total income (labor and investment) held by the top 1 percent and top 0.1 percent of Americans have dramatically risen (see the figure below). In 1975, the top 1 percent had nearly 8 percent of the ‘income pie,’ but by 2007 this number had risen to nearly 24 percent. The last time inequality was so high was in 1928 on the eve of another great crash.

Share of income by individuals in the top 1% and top 0.1% 1918-2010.


In 1970, the richest tenth of men earned about 3.2 times as much as the poorest tenth; by 2010, this ratio had risen to 5.2. These differences are caused by what happened in the labor market (see the figure below).

Difference in weekly earnings ratio between the top 10% and bottom 10% (Full-time full-year, FTFY, 90-10).


Economic productivity as measured by real GDP per hour has increased over the past four decades, but average labor compensation has fallen behind since the early 2000s. This means that company profits are an increasing share of the income pie.

Median wages rose by a measly 20 percent between 1972 and 2010, less than average compensation, which grew by 71 percent. The upward march of wage inequality means that average wages have increased much faster than median wages. Also, non-wage parts of compensation, especially healthcare costs, have dramatically risen in that time.

Workers in the middle of the pay-scale have fallen behind those in the top 10 percent for over 40 years, but in the last 15 years they have also lost ground to the bottom 20 percent. Since it’s usually the middle that decides elections, this squeeze must be felt by politicians this election.

There is reliable evidence that technological change may be the main culprit for these inequality trends by massively increasing the demand for skills. Since the 1970s, the growth in job seekers’ average years of school has slowed. With not enough skilled labor entering the workforce, the premium for education has increased.

As well as education another challenge that faces American workers is trade with low wage countries like China. Both candidates want to impose tougher restrictions on imports from China. Governor Romney has vowed to label China a ‘currency manipulator’ and President Obama has been increasing trade sanctions. However, China joined the global economy long after inequality began to widen in the United States. China-bashing can only damage growth.

Clearly, Soviet-style levels of equality would stifle individual incentives to succeed, but the United States is a long way from that. Indeed, some argue that high inequality in the United States squanders the potential of poor but talented children, as in the Great Gatsby curve. It is plausible that extremes of both equality and inequality will damage growth — and the United States seems to be moving into extreme inequality territory. A better focus would be on restoring America’s place as a world leader in public education, and tackling the human capital deficit that is at the heart of the inequality challenge.

GRAPHS: Sources are Atkinson, Piketty and Saez (2012) World Top Incomes Database; and Machin, Murani and Van Reenen (2012), calculations from March Current Population Survey, full-time full-year workers aged 18-60.


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I agree with your statement that “rather than talking about the underlying causes of increased inequality, the presidential candidates have focused on dealing with its consequences, particularly over taxes and welfare.”

However, I am disappointed that you, as an economist, do not seem to understand those causes either.

It is no accident that this dramatic shift in income inequality began in the late 1970s.

The REAL underlying reason, which no one seems to understand, is that the primary cause was the beginning of “free trade” with China that is responsible for this massive surge in the wealth of the 1%.

Since then ALL the trade, tax and banking legislation has been shifted towards capital investment in China (and other Asian nations) without ANY restrictions whatsoever.

As an economist you should know the US is NOT practicing Adam Smith’s version of free trade in which both nations benefit, but a twisted neocon version that is EXACTLY what Adam Smith warned us against in his Wealth of Nations.


From Wikipedia solely for the convenience of those who, like you, don’t understand what I am referring to by that comment.

“Smith’s belief (was) that when an individual pursues his self-interest, he indirectly promotes the good of society.

Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.

Nevertheless, he was wary of businessmen and warned of their “conspiracy against the public or in some other contrivance to raise prices.”[80]

Again and again, Smith warned of the collusive nature of business interests, which may form cabals or monopolies, fixing the highest price “which can be squeezed out of the buyers”.[81]

Smith also warned that a true laissez-faire economy would quickly become a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation.

Smith states that the interest of manufacturers and merchants “…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public…

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”[82]


As an economist you should also know that China is not and never has been practicing free trade but MERCANTILISM.

The ugly truth, which you are perpetuating, is that the US has been at war with China for over 30 years — an economic and trade war that has devastated this economy, just so the wealthy class can profit at the expense of the 99%.

This is NOT “rocket science”, nor is it difficult to explain to the American people IF one chooses to do so. But the wealthy class cannot afford to have the American people understand what they have done.

And thanks to the insane “economics” of the Bernanke Fed, is STILL doing.

My ONLY conclusion after reading this article is that you are either a fool or a liar.

Posted by Gordon2352 | Report as abusive

Your a very wise individual! Great lesson

Posted by idrislove | Report as abusive

I meant to explain my comment about mercantilism, as well as a connection between it and capitalism (i.e. free trade) today that no one “seems” to understand, which is very convenient for the wealthy class who profit from a neocon — neocon by 1987 being used as an abbreviation for the neo-conservative movement in the U.S. political sense — version of the worst of both economic theories.

(1) I explained capitalism above and mentioned it is a twisted version of the real free trade proposed by Adam Smith in his monumental economic treatise the “Wealth of Nations” (1776) in which he laid out a plan by which not only nations and the ruling class could become wealthy, but that free trade (if properly controlled) could also “spread the wealth” to ALL classes.

This was not by charity or taxes. “Smith’s belief (was) that when an individual pursues his self-interest, he indirectly promotes the good of society.”

HOWEVER, and this is the “catch”, when free trade is NOT controlled, it soon devolves into the nightmare economic conditions for the poor as the wealthy begin to collaborate to create “a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation”.

Unfortunately, the neocon (i.e. neoconservative movement in the US) has become EXACTLY what Adam Smith warned us about in 1776.

Human nature does not change and excess power must be guarded against or we will lose everything we have to the wealthy class.

(2) The best example of the type of conditions that results from an economic system that completely fails to care for its poor, that treats them as less than animals, is that of England in the period of the 1700-1800s — for example, think of an unrepentant “Ebenezzer Scrooge”, an image that lives on long past it accurately described the bankers of the era — which was a country of debtors prisons, workhouses and forced exportation of its “excess” population to overseas colonies like Australia.

THAT is mercantilism!

It is a political, economic and philosophical theory that is based on “survival of the fittest” (i.e. Social Darwinism).

In economics, mercantilism is the doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the state.

In particular, it demands a positive balance of trade.

Mercantilism dominated Western European economic policy and discourse from the 16th to late-18th centuries.[1]

Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion.

Favours for powerful interests were often defended with mercantilist reasoning.

British mercantilism — the best example of mercantilist philosophy — meant that the government and the merchants became partners with the goal of increasing political power and private wealth, to the exclusion of other empires.

The government protected its merchants—and kept others out—by trade barriers, regulations, and subsidies to domestic industries in order to maximize exports from and minimize imports to the realm.

The goal of mercantilism was to run trade surpluses, so that gold and silver would pour into London.”

Now, of course, fiat money has replaced gold and silver, thus creating even more power by simply printing money whenever the wealthy class destroys the economy — which it has quite often if you care to look up the history of financial panics and crashes in the US alone — just like Bernanke is doing for them now.

I want to make a final point below, so I would ask you look up the Opium Wars:

THIS is the greatest example of mercantilism in action by the European nations in vying for each other for power.

Basically, because Britain refused to pay China in silver for the trade goods they bought, the British tried to destabilize the Chinese government by getting the Chinese people hooked on opium.

They succeeded after many years of war with China, and that is why China is “communist”.

(3) What is worse even worse than either than neocon capitalism or mercantilism?

Why, a combination of the two of course!

THAT is what we have in the US right now.

THAT is why the US since WWII has pursued an aggressive military policy (i.e. the “Military/Industrial Complex” President Eisenhower warned us about in his final speech), just as the British Empire did when they ruled the world.

THAT is why all the US jobs have been outsourced to overseas locations — the “new” US colonies.

THAT is why the US economy has spiraled out of control and crashed in 2007-08. The housing bubble was due ENTIRELY to excessive speculation driven SOLELY by Alan Greenspan and his ilk (including Bernanke, who was his assistant) in order to keep the US economy expanding beyond what it could sustain so the wealthy could continue to profit at the expense of the American people.

THAT is why our “entitlement” programs are broke. The government “borrowed” the money and never bothered to repay it. So, yes, you baby boomers out there, you have NO money for retirement. The country is BROKE.

THAT is why the US is reduced to printing money to survive. Bernanke is committed to the same insane QE policies — to protect the wealthy class, all at our expense when clearly they don’t work — except for the wealthy class, of course, which is why the stock markets are now at or near the same identical level they were just before their greed caused them to crash in 2007-08.

THAT is why the US economy will NEVER recover.


(4) Around 1980, when their communist government experiment had run its course China figured out how to get revenge on the European nations who had devastated their country and tried to totally destroy their culture.

They began a new policy of “free trade” with the US, except it has never been free trade at all, just a “revived” version of mercantilism.

In their greed, our wealthy class fell for it “hook line and sinker”, and now we are nearly bankrupt because of it.

It is ironic, if you think about it, that the Chinese used the same lessons of European greed that nearly destroyed them to destroy us.

And that, folks, is the REAL truth!

Posted by Gordon2352 | Report as abusive

Investing in *education* and training is a good way to remedy a root cause of inequality

Posted by Decatur | Report as abusive


Well said.

Posted by AdamSmith | Report as abusive

@ Decatur —

Investing in education and training is pointless if there are no jobs for those who graduate.

This is nothing but a standard Republican ploy to make people think they have a solution, but it leads to a dead end with MASSIVE student loan debts.

Since student loan debts are now the ONLY debt not dischargeable in bankruptcy, it leads to lifelong crushing indebtedness to the bankers who lent the money knowing there are no jobs.

Education in the US today is a massive SCAM.

Posted by Gordon2352 | Report as abusive

Not public education, and not the more focused public education I see gaining ground in my own fairly backward state. There are an increasing number of AP, magnet and technology/vocational programs within middle and high schools and dedicated schools. All parents and students need is the fortitude to get up for early bus transfers to the more distant schools – not vouchers or private tuition.

The education scam that I see growing is the lower-tier ‘private community college’ growth that heavily markets student loans. To a lesser extent these offer diluted supplemental degrees that let many professionals check the box for another degree without getting the same education as moreestablished schools provide. A third aspect of educational change that I see as a scam is the voucher movement, it’s more of a “starve the beast and stick the poor” strategy than an empowerment, along the lines of all the GOP voucher ideas.

If you think ‘mercantilism’ and the erosion of the skilled middle class over the last 30 years means we should quit trying to compete, I disagree.

Posted by Decatur | Report as abusive

Though I think calling John Van Reenen either a liar or a fool is neither civil nor fair, I do think the points brought out by Gordon2352 are more accurate and relevant than Van Reenen’s original op-ed. However, Van Reenen sheds light on information that’s important to our understanding of the heist that is taking place here in America. His problem is the same problem that cripples most journalists and well-intentioned politicians (and even artists, to some degree): Telling the unvarnished truth is dangerous to one’s career.

But I thank you, Gordon2352, for your presentation of that tough, unpopular truth, and in such a well-explained and educated way. I always considered “The Wealth of Nations” to be one of the preeminent capitalist manifestos, but of late it seems it’s being replaced by Ayn Rand’s “Atlas Shrugged,” which is consistent with the rightwing march off history’s cliff. After all, we replaced a President with George W. Bush, why not Adam Smith with Ayn Rand?

The plutocrats have been trying to paint this as wealth redistribution, among other things, because they know they can get a majority of Americans to oppose “redistribution of wealth”. It’s considered unAmerican. The ironic truth is that wealth redistribution IS going on and it’s going from the Middle Class to the wealthy. Sadly, nothing could be more unAmerican. It’s destroying this country, and not just because it’s destroying the buying power of the Middle Class.

The plutocrats are firmly in control, regardless of who wins the Presidential election. The difference is that Romney is one of their guys where as Obama gets in their way. Obama goes along with most of what they want–he has little choice–but he’s not one of them and they know that he knows what’s really going on in America. Obama just can’t talk about it without sacrificing his Presidency. Look how much resistance he’s gotten just for proposing a few things that don’t come from the plutocrat playbook, like raising taxes on the top income bracket from 35% to 39.6% and, of course, the Affordable Care Act. He’s a gadfly to the plutocrats and they don’t trust him. They want him gone and have been working to that end since Obama was first elected. A 24/7 smear campaign and a flagrant refusal to work with him on anything is powerful stuff. Then make the argument, hey, he couldn’t get anything done. Elect a Republican, i.e., Mitt Romney. They prey on our ignorance and it’s extremely effective.

There’s one other concern the plutocrats have with Obama’s Presidency and that’s the possibility that he could affect the balance of the Supreme Court. This matters to the plutocrats. They don’t want to see Citizens United and other recent plutocracy-backed SC decisions reversed. They don’t want to lose any ground this time. They want people like Lewis Powell (deceased), Milton Friedman (deceased), Grover Norquist and Karl Rove, Greenspan and Bernanke directing our “Republic,” along with organizations like the Chamber of Commerce and the Business Roundtable. They’ve gotten their wish.

To school yourselves on this topic I highly recommend Hedrick Smith’s “Who Stole the American Dream”. Here’s a link to a lecture he gave: GA&

Gordon2352: You should write a book.

Posted by flashrooster | Report as abusive

Regarding the idea of using education as a cure for America’s decline, I too see that as a fallacy. Rather education is a red-herring.

Take for example the career of engineering in America. Fifteen years ago, for American students willing to put in necessary hard study and dedication, engineering was a clear path to financial advancement.

The engineering curriculum was not easy then, or now. But engineering graduates could count on being able to afford to get married, buy a house, and raise a family.

The H1B Visa Program, lobbied for by American corporations, colluding in the manner predicted by Adam Smith and mentioned by Gordon2352, was passed by Congress, and changed the American engineering profession forever.

Using the H1B law American companies have imported over 1 million foreign engineering graduates, mostly from India and China, into America to drive down their labor costs.

This year’s batch of H1B visas was issued about a month ago, on October 1, 2012. This fresh batch, 85,000 more engineers, are arriving here as we speak, by airline flights, to cities all across America. Every one of them will take job that would have otherwise gone to an American.

And of course nature has not rescinded the Law of Supply and Demand. These 85,000 newly arriving H1B visa engineers will depress American wage rates even further. Corporate profits will increase even further.

One might think, hmm… the pay of the very best American engineers will not be affected. But that is not the case. The wage rates of the very brightest American engineers are affected most of all. Because all engineers are debased by this flood of labor. Hundreds of thousands American engineers have lost their jobs, and virtually all American engineers have seen their career prospects plummet sincee the H1B program started 12 years ago.

That’s why I, too, take exception to the idea that improved education will somehow save America. India has 1.2 BILLION people. China has 1.4 BILLION. If America allows impoverished millions from all over the world to enter the US freely and compete on wage-rate for American jobs, then it is a certainty that the American middle class will be devoured.

Education will not help America at all if it does not control its borders. There is no other nation on Earth that permits the levels of immigration that America has over the past 15 years. No other nation has abandoned control of its borders the way America in the past 15 years.

Education is not the anwer. Education is a red-herring.

Posted by AdamSmith | Report as abusive

To #AdamSmith:

I don’t what branch (if any) of engineering you may have been involved in, however I spent 30 years in IC manufacturing (design [analog, digital and integration] as well as product, test and validation) in Silicon Valley, with 23 of those years as a hiring manager. For about the last 20 years (more than the 15 years you cite) I found it very difficult to find QUALIFIED American students to hire. I’d estimate that around 40% were Chinese, 40% Indian, about 10% from elsewhere around the world, and at most 10% from this country. In short, my experience was that Americans simply didn’t go into engineering, probably because it is (as you note) difficult.

Also, my experience with H1Bs wasn’t the style of “importation” you imply where the companies hire sight unseen (like brides from an 1880’s catalog) rather it was grad students directly from most American universities.

Furthermore, having had detailed knowledge of the salaries for everyone in my group, I know for a certainty that across my organization, and others where I had associates I could trust, that in the companies I worked for over those 30 years, engineers here in the US were paid the same regardless of who they were or where they came from (men AND women). In fact, just before the bubble burst, semiconductor companies were hiring anyone that met the qualifications for between $100k and $120k right out of school. That certainly wasn’t a “debased” income because of a “flood of labor”. It was desparation to get qualified individuals that could do the job (unfortunately, we took too many chances that didn’t pan out as well!).

Your “analysis” about letting China and India “flood” the high tech sector based on their combined 2.6 billion people is rather a joke. The majority of both Indians and Chinese out in the countryside can barely read. It is a very very small minority of very well educated individuals that compete for these high paid jobs, not the 2.6 billion in total.

The real problem is that Americans don’t want to spend the time and work in engineering. Engineering companies will NOT hire unqualified Americans (high school dropout, people with no college, or even with a soft degree that had no physics, math, or engineering. Universities get paid big bucks for out-of-country tuition so they actively recruit foreign students. I recall talking to an Indian woman at work one day and I asked her where she had graduated from. She answered, “University of Arkansas, Little Rock.” I was amazed that someone from India would have even known about such a school (not known as a major engineering school). Her reply: They had recruited her with scholarships and incentives.

I DO agree with your comment about controlling our borders. However, you seem to imply that we should NOT let in well educated people, so who is left? We only let in unskilled and uneducated people for fear that skilled and educated people will compete with our best talent? Part of the US’ success for the last 50 years has been that we’ve been able to attract the best and the brightest. Your approach seems to be to shun them and accept janitors and field hands. I don’t think that advances our economy.

As I said, I don’t know your experience in engineering so I’ve related mine. However, I CAN say that what you’re upset about is NOT universal, and I believe that you’ve made numerous associations that are not valid.

Posted by iq160 | Report as abusive

@ Decatur —

You state in response to my comment about the worthless effort to fix the school system that “”If you think ‘mercantilism’ and the erosion of the skilled middle class over the last 30 years means we should quit trying to compete, I disagree.”

You obviously did not read my comments with any degree of comprehension.

The US “school system” CANNOT be fixed as things stand right now. It is a massive disservice to send our gullible young people into lifelong debt just to feed the wealthy class.

I said China is using mercantilism to destroy this nation, but the REAL problem is the growth of the neo-conservative movement in the US since Reagan was elected.

We cannot control China’s mercantilist trade, EXCEPT by taking steps to change the tax laws, free trade and banking legislation that has been responsible for the decline of the US economy.

Fixing ANYTHING in the US without plugging the massive hole in the bottom of our boat — in other words, ALL the legislation that benefits only the wealthy class is sinking our economy — means we will inevitably go down just like the Titanic.

THAT must be our number one priority, but the problem is the American people don’t even understand what the real issues are. And the Republicans are more than happy to keep them ignorant by focusing on “hot button” issues like schools.

Until we can understand the REAL underlying problem — which is the wealthy-controlled government promoting legislation that encourages employers to make capital investments in the third-world and do something about it — all we are doing is about as useful as “rearranging the deck chairs on the Titanic” would have been to keep it from sinking.

THAT is the point I was trying to make.

Posted by Gordon2352 | Report as abusive

@ iq160 —

Please, not the tired old lazy American excuse. I would say your comment is more prejudice-based than fact-based.

A major underlying reason for a shortage of US-trained “anything” in the sciences is that, as you unwittingly pointed out yourself:

“Universities get paid big bucks for out-of-country tuition so they actively recruit foreign students. I recall talking to an Indian woman at work one day and I asked her where she had graduated from. She answered, “University of Arkansas, Little Rock.” I was amazed that someone from India would have even known about such a school (not known as a major engineering school). Her reply: They had recruited her with scholarships and incentives.”

IF you want to begin with school reform, as some have suggested, then begin by CLOSING THE US SCHOOL SYSTEM TO FOREIGNERS.

These people are imported by the wealthy class so they can tap them as cheap labor.

AdamSmith’s comment immediately above yours is correct, while yours reveals a bias against American workers — that is another issue that must be addressed at another time, but it is part of the same problem.

Posted by Gordon2352 | Report as abusive

Yes, I agree, closing the US school system to foreigners would be a necessary step to America reasserting control over its borders.

Right now, all across America, Catholic schools are succumbing enmasse to the temptation of foreign money.

The school I graduated from is typical. It has about 600 students now, and now, for the past 3 years, approximately 50 of them are from China. That’s almost 10% of the student body.

The Chinese students are not Catholic. Their parents are wealthy Chinese, and are very able and willing to pay premium tuition rates. The schools need the money.

The Chinese students get American visas without any problems, and soon graduate. They then compete with the American students for American jobs, and for slots in American colleges. Meanwhile, their parents buy real estate in the vicinity, and gain citizenship.

This is happening in Catholic schools everywhere in America. The money is big, and the damage to America’s middle class is permanent.

But the Catholic schools are just like everybody in this life, they have to go with the money. And the greatest possessor of dollars in the world are the Chinese.

Bloomberg Business Week magazine, which is very pro-immigration, two weeks ago (Oct 1 – Oct 7 issue, pg. 22) reported that the city of Shanghai has over 370,000 dollar millionaires.

To reassert control of its borders, the first thing America needs is an American tariff of 25% on all manufactured goods. How can we expect the American middle class to survive if virtually everything on our store shelves is made in foreign countries?

America must abrogate its membership in WTO, and must abrogate NAFTA.

– Close American education system to foreigners
– 25% American tariff on all manufactured goods.
– Tear up WTO
– Tear up NAFTA.

For middle class America, it is a matter of survival, of life and death.

Posted by AdamSmith | Report as abusive

For all those worried about the demise of the American middle class, you do understand that over the last 40+ years, the number of middle class households lost has been almost exactly mirrored by the number of new upper income households we’ve added, ie middle class households are becoming more prosperous. m/2010/08/act-one.html

Posted by jambrytay | Report as abusive