The Great Debate

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.

There is no doubt that the spread between top earners and those below them has grown over time. The share of income earned by the top 1 percent in the United States has doubled since the early 1970s. The top 20 percent’s share  has risen, too, though the increase is much smaller and has leveled off since the 1990s.

Yet it is far from clear that inequality is a bad thing when it’s the result of market forces. Think about it: Do Bill Gates’ billions take bread from your mouth, or have Microsoft products allowed you to put bread in your wallet by making you more productive and the goods and services you buy cheaper?

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.

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%.

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.)

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.

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!

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.

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 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.”

Around 100 BC, a Roman nobleman calculated that it took about 100,000 sesterces a year to live comfortably. That was roughly 200 times the amount of money a poor city dweller needed to eke out a living. If an American needed the same multiple of the subsistence income to join the upper middle class today, the threshold would be $3.5 million. The United States economy has become less equal lately, but it remains much more egalitarian than the ancient Roman Republic.

The modern news on economic inequality is much more good than bad. The good news is very good. The greatest moral problem caused by inequality – the unequal access to the most basic economic goods, those which support life – has become less severe. The portion of the total population that suffers from this bottom-inequality is probably the lowest ever in history.

True, we do not know how many ancient Romans were on the wrong side of the bottom-inequality, but statistics for the most recent decades are encouraging. In 1970, 26 percent of the world’s population suffered from hunger, according to the UN’s Food and Agriculture Organisation. The proportion is now 13 percent – still scandalously high, but the gain in food-equality is clear. Nor is food an isolated example. Electricity is a relative new development, but the Soviet dream of universal electrification has already nearly become a reality; more than 80 percent of the world’s population can plug in, according to the International Energy Agency. Health care and sanitary living conditions are now considered basic goods – and access to them has become more equal. The average life expectancy at birth is 65 or above in countries accounting for roughly 80 percent of the world’s population.