Income Inequality

To no one's surpise, it's getting worse:

Lately economists have been using new data to look more closely within the top decile of American incomes. What they’ve found is startling. Here are some results from Ian Dew-Becker and Robert Gordon of Northwestern University. Between 1966 and 2001, median wage and salary income increased by just 11 percent, after inflation. Income at the 90th percentile (six minutes from the end of the hour-long parade) increased nearly six times as much—by 58 percent. At the 99th percentile (the last thirty-six seconds), the rise was 121 percent. At the 99.9th percentile (3.6 seconds before the end), it was 236 percent. And at the 99.99th percentile (0.36 seconds, representing the 13,000 highest-paid workers in the American economy), the rise was 617 percent. That is worth repeating: Over thirty-five years, the rise in wages and salaries in the wide middle of the income distribution was 11 percent. The rise in wages and salaries at the top of the income distribution was 617 percent.Such extreme skewness is new. It suggests that a huge proportion of the economy’s productivity gains are neither being passed on to consumers through lower prices—which would have the effect of raising real incomes very broadly—nor being distributed to investors as profit, nor even being used to raise the wages of most employees in industries seeing rapid productivity growth. Rather, they’re being diverted to a comparative handful of employees.

The author if this article contends that this is not a result of labor's declining share of national income, but not everyone agrees on that:

In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” ...For most of the last century, wages and productivity — the key measure of the economy’s efficiency — have risen together, increasing rapidly through the 1950’s and 60’s and far more slowly in the 1970’s and 80’s.But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.

Harold Meyerson at the Washington Post laments this trend:

The young may be understandably incredulous, but the Great Compression, as economists call it, was the single most important social fact in our country in the decades after World War II. From 1947 through 1973, American productivity rose by a whopping 104 percent, and median family income rose by the very same 104 percent. More Americans bought homes and new cars and sent their kids to college than ever before. In ways more difficult to quantify, the mass prosperity fostered a generosity of spirit: The civil rights revolution and the Marshall Plan both emanated from an America in which most people were imbued with a sense of economic security.That America is as dead as the dodo. Ours is the age of the Great Upward Redistribution.

So what's causing all this income redistribution? Here's Meyerson again, on globalization:

Clearly, globalization has weakened the power of workers and begun to erode the egalitarian policies of the New Deal and social democracy that characterized the advanced industrial world in the second half of the 20th century.For those who profit from this redistribution, there's something comforting in being able to attribute this shift to the vast, impersonal forces of globalization. The stagnant incomes of most Americans can be depicted as the inevitable outcome of events over which we have no control, like the shifting of tectonic plates.Problem is, the declining power of the American workforce antedates the integration of China and India into the global labor pool by several decades. Since 1973 productivity gains have outpaced median family income by 3 to 1. Clearly, the war of American employers on unions, which began around that time, is also substantially responsible for the decoupling of increased corporate revenue from employees' paychecks.

So globalization has helped to depress wages, but it's not the sole explanation. Here's a more general explanation, from a researcher at the afore-mention Economic Policy Institute:

“If I had to sum it up,” said Jared Bernstein, a senior economist at the institute, “it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth.”

But why the lack? Unions are clearly no longer as powerful as they once were. Could that be part of the reason?

Researchers argue union weakness is due to the spread of skill-based technology jobs. Unions have the greatest appeal when workers are equally skilled; technology skills destroy that equality. Consequently, it becomes less profitable to join a union. Also, increased political and managerial opposition to unions has played a role.Due to the declining power of unions, the increasing productivity of skilled workers has not raised the incomes of their less skilled counterparts, as it once did through labor contracts.

What about technological change?

Computers and the internet have reduced the demand for routine jobs that demand only moderate skills, such as the work of bank clerks, while increasing the productivity of the highest-skilled. Studies in Britain and Germany as well as America show that the pace of job growth since the early 1990s has been slower in occupations that are easy to computerise. But the scale of America's income concentration at the top, and the fact that no other country has seen such extreme shifts, has sent people searching for other causes. The typical American chief executive now earns 300 times the average wage, up tenfold from the 1970s. Continental Europe's bosses have seen nothing similar. This discrepancy has fostered the “fat cat” theory of inequality: greedy businessmen sanction huge salaries for each other at the expense of shareholders.

So technology is part of it, but can hardly explain all of it. What if add immigration in the mix? From a study of income inequality in California by the Public Policy Institute of California (pdf):

Immigration contributed to rising income inequality in the state because the proportion of immigrants in the state's male workforce has grown substantially and has grown most at the bottom and lower-middle of the income distribution.

That only makes sense. If you add enough lower-paid workers to the mix, you'll reduce average income. So economic and social trends are clearly at work. But what about political trends? Paul Krugman thinks it has a lot do with who's in charge in Washington:

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what's good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains....it seems likely that government policies have played a big role in America's growing economic polarization -- not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting.

I think Krugman is trying to avoid being too partisan, because it's clear that government policy can have a profound effect on income inequality. Let's start with those Bush tax cuts:

As it happens, Citizens for Tax Justice, a national think tank, just completed a study of the latest federal tax cuts. The study analyzed the benefits generated by these tax cuts vs. the national debt incurred to finance them, as well as the ultimate distribution of the final net benefits and costs across, horror of horrors, different income classes. The findings are thought-provoking. According to the study, 99 percent of Illinois families are net losers under these debt-financed tax cuts. Only the wealthiest 1 percent of Illinoisans -- folks with an average annual income of $1.44 million -- come out ahead.

It helps to have numbers to back it up, but it's common-sense that if you give more money back to the wealthy, thus increasing their share of income, then you're going to widen the gap between them and the poor and the middle-class, who get far less or nothing at all back from the tax cuts. "Starving the beast" also result in less public services to those with lower incomes (no, the tax cuts don't pay for themselves) furthering income inequality. Then there's the minimum wage, which as a result of the failure of Congress to increase it for ten years now, has declined in real purchasing power:

One way the United States addresses inequality is through the federal minimum wage. In 2005, minimum wage workers earned only 32% of the average hourly wage. Barring a minimum wage increase, we are poised to break a record in 2006 for the greatest inequality between minimum wage and average wage workers since the end of World War II.

So which party has been in charge for those ten years, and has deliberately stifled any effort to increase the minimum wage? (That's a rhetorical question.) This goes hand in hand with efforts to alter regulatory requirements for overtime pay that would reduce the take-home pay of millions of workers. And while the power of unions have weakened for reasons that have little to do with whose in office, without question Republicans continue to push changes that would weaken them still further.Lax governmental regulation of corporations as a result of Republican policies has also contributed to rising income inequality:

A clear example of such manipulation are the banking scandals of the 1980's. Under this scheme, the government implemented a deregulation plan which permitted banking institutions to offer unreasonably high interest rates to investors. These investors were overwhelmingly wealthy interests who purchased "brokered accounts" under the $100,000 federal insurance limit. The agency responsible for monitoring the investments of these institutions, the Federal Deposit Regulatory Commission, was understaffed and there was political interference with their activities. When numerous institutions failed, the government "bailed out" the many wealthy depositors. The total cost of the bailout according to a recent Federal Reserve report was $153 billion. The net result is a shift of this money from ordinary taxpayers to wealthy investors.

That's not even the most recent corporate scandal. Let's not forget the shenanigans of the likes of Ken Lay...or how some other corporate CEO's have managed to amass such hefty paychecks as a result of lax governmental regulation. Then there are the little ways that the current administration wants to make things a little easier on "the have-mores", such as making it a lot harder to collect taxes from wealthy tax cheats:

The federal government is moving to eliminate the jobs of nearly half of the lawyers at the Internal Revenue Service who audit tax returns of some of the wealthiest Americans, specifically those who are subject to gift and estate taxes when they transfer parts of their fortunes to their children and others. The administration plans to cut the jobs of 157 of the agency’s 345 estate tax lawyers, plus 17 support personnel, in less than 70 days. Kevin Brown, an IRS deputy commissioner, confirmed the cuts after The New York Times was given internal documents by people inside the IRS who oppose them.

You can pass all the laws in the world, but if you don't have enough police to enforce them, who's going to obey them, right? Which in this situation, is exactly the point.

This is at the same time that the administration is going to send debt collectors after poorer tax cheats, at greater expense than what it would cost to have the IRS' own agents do the job (a shining example of both Republican tax policy and the failure of privatization.)So...what have we learned? Income inequality can be the result of entirely natural economic and social trends. But at the root of income inequality lies human nature, and the simple fact that people who acquire wealth want to use their wealth to acquire still more wealth. If left to their own devices, they'll acquire as much as they can given the particular political circumstances; at the same time though, the wealthy will also use (or corrupt) the political process to make it easier to acquire more wealth (pdf). So why is this a problem? Back to The Economist:

Privately, some policymakers admit that the recent trends have them worried, and not just because of the congressional elections in November. The statistics suggest that the economic boom may fade. Americans still head to the shops with gusto, but it is falling savings rates and rising debts (made possible by high house prices), not real income growth, that keep their wallets open. A bust of some kind could lead to widespread political disaffection. Eventually, the country's social fabric could stretch. “If things carry on like this for long enough,” muses one insider, “we are going to end up like Brazil”—a country notorious for the concentration of its income and wealth.

The authors of this particular study say that generally, democracy has a negative effect on income inequality...but that reverse is true as well (pdf):

A skewed income distribution, in turn, could lead to a skewed distribution of political power, which negates democracy and therefore its effect on inequality.

In other words, income inequality tends to perpetuate itself, and it could potentially be a threat to our democratic system. Income inequality in some fashion is inevitible, and not necessarily undesirable. But severe income inequality that produces a permanent underclass of poor and reduces upwardly mobile opportunity is not only unjust, but a danger to American democracy. The consequences of current economic trends and political policy may be hard to visualize, as they may be some decades distant, but were things to continue unchanged it's not that hard to imagine a country where the wealthy enjoy a sytem of privileges entirely different from what the rest of us enjoy, aided and abetted by those in power who are like them or who serve them. What will that country look like and what will remain of the way of life that we've come to value as uniquely American? I for one would rather not find out.

Update: It's a little worse than we thought (via Kevin Drum.)