A third of a century ago, all of us economists confidently predicted that America would remain and even become more of a middle-class society. The high income and wealth inequality of the Gilded Age (1870-1929 ), we would have said, was a peculiar result of the first age of industrialization. Transformations in technology, public investments in education, a progressive tax system, a safety net, and the continued decline in discrimination on the basis of race and sex had made late-20th century America a much more equal place than early 20th century America, and would make early 21st century America even more equal — even more of a middle-class society — still.
We were wrong.
America today is at least as unequal as, and may be more unequal than, it was back at the start of the 20th century when Republicans such as President Theodore Roosevelt of New York condemned the power wielded by “malefactors of great wealth,” and Democrats such as perennial losing presidential candidate William Jennings Bryant of Nebraska denounced shadowy conspiracies that had somehow manipulated the financial system to rob the typical family of its proper share in America’s prosperity.
Four major and a host of minor factors have driven rising inequality over the past third of a century:
The progressivity of our tax system: we no longer tax the rich a significantly greater share of their income than we tax the middle class. The idea behind the cut in relative tax rates on the rich was that it would release blocked entrepreneurial energy and trigger a burst of more rapid economic growth. It did not happen: economic growth overall has been slower since President Ronald Reagan began the series of waves of tax cuts for the rich.
The decline in our willingness to invest in education: a generation ago, we were the best-educated country among the rich nations of the North Atlantic; today we rank 14th. With fewer well-educated people than the trend would have predicted, supply and demand have raised the salaries of the educated relative to trend; with more poorly educated people than the trend would have predicted, supply and demand have lowered the wages of the less-educated not just relative to trend but absolutely.
Add in more minor factors, such as the relative decline in the minimum wage and the coming of globalization, and the upshot is that the U.S. Bureau of Labor Statistics tells us that the typical white American male with just a high school diploma earns less today than his predecessor of the late-1970s, even though the country as a whole is 70 percent richer per capita. Thus the top fifth of America today outstrips the rest much more than it did a generation ago: their incomes are higher than their predecessors’ as they have kept up with the 70 percent tide of economic growth, while the statistics say that the rest are more-or-less treading water.
But there is more: two more factors have widened inequality not between the top fifth of America and the rest but between the top fifth and the 1 percent, and even more the 0.1 percent and the 0.01 percent.
The information revolution has transformed us into a winner-take-all society, in which the most skilled and luckiest leverage their skills and luck across immense customer bases. In earlier centuries, Charles Dickens and Enrico Caruso were superstars but not superwealthy. Today Stephen King and Placido Domingo and Oprah Winfrey are superwealthy indeed. We saw this a century ago whenever luck and economies of scale in production and a continent-wide market all came together: Andrew Carnegie and John D. Rockefeller became super-rich. But our Bill Gates is, and Sam Walton was, superricher.
The shift of economic focus into sectors that do not add but subtract value: 3% of the American economy today is excessive private health care administrative costs, which produces nothing useful but transfers money away from insurance customers and doctors whose bills are not paid to insurance companies that do not pay them.
Some 4% of the American economy today is excessive financial services: less-informed savers and borrowers who should not be buying or selling sophisticated financial products they do not understand losing their money to those better able to judge risks and values.
We can see the impact of these last two factors in the Romney family dynasty. American Motors President and Michigan Gov. George Romney typically made $300,000 a year in the early 1960s, roughly 40 times the typical income of Americans of his day. Bain Capital President and Massachusetts Gov. W. Mitt Romney typically makes $20 million a year today, roughly 400 times the typical income of Americans now — and relative to those he regards as his Wall Street peers, W. Mitt Romney is a relatively poor man.
A more equal economy would be a happier economy. The time and energy and work devoted to making, toasting and serving a $40 bagel at the Four Seasons Hotel on 57th Street in Manhattan would, in a more equal America, buy a full dinner for four at Sizzler Steakhouse for a family for which going to Sizzler is a once-a-month treat — and produce more human happiness thereby. A more equal America would be one in which claims that America has or is approaching equality of opportunity would be less of a sick joke.
A more equal America would be one in which macroeconomic catastrophes like the current 2007-whenever episode that currently robs 1 in 12 usually-working Americans of his or her job would be less likely and less destructive. Those who see themselves as falling behind their peers are inevitably prone to take extra risks as they “gamble for resurrection.”
This is a very human drive: it applies to those who go double-or-nothing repeatedly and lose $5 billion for the investment bank they work for as well as those who commit 50 percent of their income to mortgage payments in the hope of grabbing some equity for themselves in a housing boom.
This also produces an economy in which there is too-much, too-risky debt around that borrowers must save to pay down and that creditors don’t dare spend because they fear it will vanish. And such an economy in which nearly everybody is trying to spend less than they earn is one that is prone to depression.
What can be done to make America a more equal, more middle-class, happier, less fragile and vulnerable economy with more real equality of opportunity?
We really don’t want to do anything to restrict globalization. America is still a rich country in a poor world, and we have a moral obligation not to use our economic weight to close off others’ roads to prosperity.
We do want an America with higher taxes on the rich: when market income is more unequal, taxes on the rich should be higher to equalize — but because money talks and, after Chief Justice John Roberts’ intervention in American politics in the Citizens United case talks louder than ever, that is not the way it works. The road to a better tax system now looks like it will take at least a generation and require substantial turnover of the Supreme Court before it can even begin.
We can’t do anything about changing technologies that have produced the winner-take-all economy.
We can tax and regulate our health-care and financial systems to shift the resources of the 7% of the American economy that is currently subtracting from our national prosperity into something useful.
And we could renew our national commitment to education: we could strive to once again make America — and not Germany or Korea or someplace else — the country where education and thus roads to upward mobility are most comprehensive, best and cheapest.
But — and I hope this is just the growing pessimism of the middle-aged as more and more often your first thought on awakening is “my back!” — I don’t think that we will.