The Great Debate

How do we measure whether Americans are better off than in the past?

Are you better off than you were twenty years ago? Probably not relative to very rich people today, but what about relative to you, or to someone your age and position twenty years ago? Income inequality has been called the defining issue of our time. Powerful leaders, from President Obama to Pope Francis, have cited it as evidence that the unfettered capitalism that has enriched the wealthy hasn’t been shared. Of course, there’s a difference between the gains in income being shared evenly, shared a little, or making everyone else poorer. In many ways the average American is much better off than he used to be; in other ways he’s worse off.  But even if we focus on what’s gotten better, we may still need to worry about the future.

The most common metric used to measure changes in our economic condition is income, but several other factors determine quality of life: health, consumption, leisure time, financial security, and prospects for the future. Which of these factors matters most comes down to personal values. Some people prefer more leisure to income. If they work less, even at the cost of lower earnings, they’ll be happier. Some people are more comfortable with risk; health care coverage and financial security matter less if they can buy more stuff.

In order to assess economic improvement, we must also consider demographics. Over the course of your lifetime, you will probably see an increase in earnings and wealth and accumulate goods. Most people get pay raises as they age and acquire more skills. They also become more risk averse and have more years to collect wealth. In this respect, the relevant question is: are your finances improving at the same rate they used to? Or did people your age used to have more than you do now?

Income statistics are not a sufficient indicator of well being, but they are a good place to start. It’s fairly well known that median household income in America has stagnated since the 1980s. That means while it’s not worse off, the typical American household’s income didn’t grow as much this century as it did in the 20th century. The picture darkens when you consider demographics. Since the 1970s, the median age in America increased about 8 years. You would expect income to increase too. Stagnating income could mean we’re worse off relative to earlier decades. Alternatively, income does not fully capture compensation. When you consider household size, taxes, and the value of non-monetary benefits (like health care) income has increased since the 1970s by some estimates more than 30 percent.

These income figures all account for inflation. That’s because it’s not income itself that matters; it’s what you can buy with it. Some economists argue that even if income has stagnated, people are still better off because they buy more and better things.  Flat-screen TVs, air-conditioning and air travel have become ubiquitous among the middle class. David Weinstein, Christian Broda, and Ephraim Leibtag point out that historically, inflation was not measured properly because it only considered prices for a fixed basket of goods. This method doesn’t allow for new, cheaper, and better quality products, and this shortcoming over-estimates inflation, thereby understating real income growth.

Examine inequality’s causes before prescribing solutions

Fear and loathing of income inequality is both totally understandable and ultimately misplaced.

It’s understandable because everywhere around us it seems as if top income earners ‑ those latter-day kulaks vilified as the “1 Percent” by the Occupy crowd and populist politicians ‑ are gaining while the rest of us seem barely able to hang on to a lower-middle-class standard of living.

It’s misplaced because it glosses over strong evidence that the ability to rise above your starting place ‑ the American Dream, by most accounts ‑ is better than it was 40 years ago.

Government can reduce inequality, but chooses not to

This essay is a response to the Reuters special report The Unequal State of America.

Income inequality is a difficult story to get your arms around, and I think Reuters has done a splendid job. I was particularly intrigued to read about the hollowing out of middle-class jobs within the federal government in D.C. I wasn’t aware that the government had so thoroughly followed the private sector’s lead in this regard.

It is important to acknowledge that while government has played an enormous role in creating the trend toward growing income inequality in the U.S., surprisingly little of that role has involved the most obvious ways government affects income distribution, i.e., taxes and benefits. Overall, the federal government redistributes about one-quarter less today than it did in 1979. But the inequality trend is more pronounced when you look at changes in income before taxes and benefits are taken into account. For example, the share of the nation’s income going to the top 1 percent of households more than doubled from 1979 to 2008. For years economists concluded that such findings meant that income inequality was market-driven. But they failed to ask whether government policies might be shaping the course of the market.

Everything you know about inequality is wrong

This is the fourth response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here, the second here, and the third here

Plutocrats is a provocative, articulate summary of the income inequality crisis having spawned the 1% crowd that “pulls up the ladder” available to others.   Honestly, I found myself wanting to read more, like a guilty pleasure.  If only it all were true.

There is such broad consensus that income inequality exists that to suggest otherwise feels ridiculous (Please, no global warming analogies).  For example, the Obama campaign emphasizes millionaires must pay their fair share.  Research by academics such as Piketty-Saez propose a top tax rate of 70 or even 80%.

Has rising inequality actually hurt anyone?

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 causes and consequences of plutocracy

This is the second response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here.

Today’s plutocracy, as described by Chrystia Freeland, can make for an ugly spectacle. It is an increasingly stateless and distant class. The very rich may sometimes dress scruffily or express an affection for common tastes, but their wealth naturally separates them from the rest of the public. It isolates them physically, as they flit from palace to palace in private jets. And it isolates them psychically, as they grow comfortable with the view that their wealth is not merely the fruit of talent and work but the mark of superiority.

Their wealth and isolation often contributes to a shortfall in empathy (or exacerbates a pre-existing condition, which may have helped raise them to plutocratic status in the first place). They are more likely to feel deserving of rewards, well-earned or ill-gotten. And they are less likely to feel a twinge of hesitation or regret when inflicting hardship on business partners or employees in the name of efficiency and profit.

Sympathy for the Plutocrat

This is a response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press.

It’s great to be what you people are now calling a plutocrat.  I know.  I am one.

We plutocrats live incredible lives, surrounded by luxury and insulated from risk and discomfort.  Things have gone very well for us over the last several years.  Since George Bush left office, the stock market has doubled, we got a (sweet!) $700 billion rescue of the financial system, and corporate profits are at a 50-year high.  BOOYA!

The billionaires next door

This is an excerpt from Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press.

Pittsburgh was one of the smelters of America’s Gilded Age. As the industrial revolution took hold there, Andrew Carnegie was struck by the contrast between “the palace of the millionaire and the cottage of the laborer.” Human beings had never before lived in such strikingly different material circumstances, he believed, and the result was “rigid castes” living in “mutual ignorance” and “mutual distrust” of one another.

The twenty-seven-story Mumbai mansion of the Ambani family, rumored to have cost a billion dollars, is just seven miles away from Dharavi, one of the world’s most famous slums, and the gap between these two ways of life is even wider than anything Carnegie could find in the Golden Triangle. So, for that matter, is the difference between Bill Gates’s futuristically wired 66,000-square-foot mansion overlooking Lake Washington, which is nicknamed Xanadu 2.0 and whose library bears an inscription from The Great Gatsby, and the homes of the poor of Washington State, where unemployment in 2012 was slightly above the national average.

First Gilded Age yielded to Progessives, can today’s?


C.K.G. Billings, a Gilded Age plutocrat, rented the grand ballroom of the celebrated restaurant Sherry's for an elaborate dinner on March 28, 1903. He had the floor covered with turf so that he and his 36 guests could sit on their horses, which had been taken up to the fourth-floor ballroom by elevator.

Mark Twain labeled the late 19th century the Gilded Age – its glittering surface masking the rot within. This term applies today for the same reasons: The rich get richer; most everyone else gets poorer. And the public thinks corruption rules.

New technologies similarly transformed the economy in that era and boosted productivity even as life for many Americans grew worse. Bloated tycoons? Desperate workers? A threatened middle class? Poverty amid the sweeping progress? Check, check, check and check.

But the silver lining of our current Gilded Age redux is that we left this stunning income inequality behind once. We can do it again. Americans eventually escaped the Gilded Age because they also made it a period of reform that ushered in the Progressive Era.

What exactly do we mean by ‘inequality’?

What do we mean by “inequality,” and why exactly is it bad for American democracy? Are we discussing inequality of wages within a given firm or industry? Or inequality in household income — i.e., the difference between the poor and the middle class, or between the rich and everyone else? What about political inequality — is it a cause or an effect of economic inequality?

These are not idle questions, and to contemplate even incomplete answers appears, on the basis of these two books, to reveal a kind of knowledge inequality. Unless you’ve got a PhD in economics or political science and what Princeton University political scientist Martin Gilens calls “a virtual army of research assistants,” there’s not much chance that you’re going to reach airtight answers on your own.

Gilens and James K. Galbraith are among the few experts who’ve been working on the subject for more than a decade. Their conclusions reinforce the fears of those of us who’ve suspected that inequality is a blight on American society. Indeed, the damage to democratic values is not in some distant dystopian future: Gilens states plainly that the relationship between the policy desires of the wealthiest 10 percent of the population and actual federal public policy over recent decades “often corresponded more closely to a plutocracy than to a democracy.”