The Price of Inequality: How Today's Divided Society Endangers Our Future (4 page)

C
HAPTER
O
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AMERICA’S 1 PERCENT PROBLEM

T
HE 2007–08 FINANCIAL CRISIS AND THE
G
REAT
R
ECESSION
that followed cast vast numbers of Americans adrift amid the flotsam and jetsam of an increasingly dysfunctional form of capitalism. A half decade later, one out of six Americans who would like a full-time job still couldn’t find one; some eight million families had been told to leave their homes, and millions more anticipate seeing foreclosure notices in the not-too-distant future;
1
still more saw their lifetime savings seemingly evaporate. Even if some of the green shoots that the optimists kept seeing were, in fact, the harbinger of a real recovery, it would be years—2018 at the earliest—before the economy returned to full employment. By 2012 many, however, had already given up hope: the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Middle-aged people, once confident of a swift return to the workforce, came to realize they were in fact forcibly retired. Young people, fresh out of college with tens of thousands of dollars in debt, couldn’t find any work at all. People who had moved in with friends and relatives at the start of the crisis had become homeless. Houses bought during the property boom were still on the market or sold at a loss; many more stood empty. The grim underpinnings of the financial boom of the preceding decade lay exposed at last.

One of the darkest sides to the market economy that came to light was the large and growing inequality that has left the American social fabric, and the country’s economic sustainability, fraying at the edges: the rich were getting richer, while the rest were facing hardships that seemed inconsonant with the American dream. The fact that there were rich and poor in America was well known; and even though this inequality was not caused solely by the subprime crisis and the downturn that followed—it had been building up over the past three decades—the crisis made matters worse, to the point where it could no longer be ignored. The middle class was being badly squeezed in ways we’ll see later in this chapter; the suffering of the bottom was palpable, as weaknesses in America’s safety net grew obvious and as public support programs, inadequate at best, were cut back further; but throughout all this, the top 1 percent managed to hang on to a huge piece of the national income—a fifth—although some of their investments took a hit.
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There was greater inequality wherever one sliced the income distribution; even within the top 1 percent, the top 0.1 percent of income earners was getting a larger share of the money. By 2007, the year
before
the crisis, the top 0.1 percent of America’s households had an income that was 220 times larger than the
average
of the bottom 90 percent.
3
Wealth was even more unequally distributed than income, with the wealthiest 1 percent owning more than a third of the nation’s wealth.
4
Income inequality data offer only a snapshot of an economy at a single moment in time. But this is precisely why the data on wealth inequality are so troubling—wealth inequality goes beyond the variations seen in year-to-year income. Moreover, wealth gives a better picture of differences in access to resources.

America has been growing apart, at an increasingly rapid rate. In the first post-recession years of the new millennium (2002 to 2007), the top 1 percent seized more than 65 percent of the gain in total national income.
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While the top 1 percent was doing fantastically, most Americans were actually growing worse-off.
6

If the rich were growing richer and if those in the middle and at the bottom were also doing better, that would be one thing, especially if the efforts of those at the top were central to the successes of the rest. We could celebrate the successes of those at the top and be thankful for their contributions. But that’s not what’s been happening.

Members of America’s middle class have felt that they were long suffering, and they were right. For three decades before the crisis, their incomes had barely budged.
7
Indeed, the income of a typical full-time male worker has stagnated for well over a third of a century.
8

The crisis made these inequalities worse in innumerable ways, beyond the higher unemployment, lost homes, stagnating wages. The wealthy had more to lose in stock market values, but those recovered reasonably well and relatively fast.
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In fact, the gains of the “recovery” since the recession have accrued overwhelmingly to the wealthiest Americans: the top 1 percent of Americans gained 93 percent of the additional income created in the country in 2010, as compared with 2009.
10
The poor and middle had most of their wealth in housing. As average house prices fell more than a third between the second quarter of 2006 and the end of 2011,
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a large proportion of Americans—those with large mortgages—saw their wealth essentially wiped out. At the top, CEOs were remarkably successful in maintaining their high pay; after a slight dip in 2008, the ratio of CEO annual compensation to that of the typical worker by 2010 was back to what it had been before the crisis, to 243 to 1.
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Countries around the world provide frightening examples of what happens to societies when they reach the level of inequality toward which we are moving. It is not a pretty picture: countries where the rich live in gated communities, waited upon by hordes of low-income workers; unstable political systems where populists promise the masses a better life, only to disappoint. Perhaps most importantly, there is an absence of hope. In these countries, the poor know that their prospects of emerging from poverty, let along making it to the top, are minuscule. This is
not
something we should be striving for.

In this chapter, I lay out the scope of inequality in the United States and how it affects the lives of millions in different ways. I describe not only how we are becoming a more divided society but also how we are no longer the land of opportunity that we once were. I discuss the low chances that a person born at the bottom can rise to the top, or even the middle. The level of inequality and the absence of opportunity that we see in the United States today is not inevitable, nor is its recent rise simply the product of inexorable market forces. Later chapters will describe the causes of this inequality, the costs to our society, our democracy, and our economy of this high and growing inequality, and what can be done to reduce it.

T
HE
R
ISING
T
IDE
T
HAT
D
IDN’T
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IFT
A
LL
B
OATS

Although the United States has always been a capitalist country, our inequality—or at least its current high level—is new. Some thirty years ago, the top 1 percent of income earners received
only
12 percent of the nation’s income.
13
That level of inequality should itself have been unacceptable; but since then the disparity has grown dramatically,
14
so that by 2007 the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800.
15
The top 1 percent get in one week 40 percent more than the bottom fifth receive in a year; the top 0.1 percent received in a day and a half about what the bottom 90 percent received in a year; and the richest 20 percent of income earners earn in total
after tax
more than the bottom 80 percent combined.
16

For thirty years after World War II, America grew together—with growth in income in every segment, but with those at the bottom growing faster than those at the top. The country’s fight for survival brought a new sense of unity, and that led to policies, like the GI Bill, that helped bring the country even closer together.

But for the past thirty years, we’ve become increasingly a nation divided; not only has the top been growing the fastest, but the bottom has actually been declining. (It hasn’t been a relentless pattern—in the 1990s, for a while, those at the bottom and in the middle did better. But then, as we’ve seen, beginning around 2000, inequality grew at an even more rapid pace.)

The last time inequality approached the alarming level we see today was in the years before the Great Depression. The economic instability we saw then and the instability we have seen more recently are closely related to this growing inequality, as I’ll explain in chapter 4.

How we explain these patterns, the ebb and flow of inequality, is the subject of chapters 2 and 3. For now, we simply note that the marked reduction in inequality in the period between 1950 and 1970, was due partly to developments in the markets but even more to government policies, such as the increased access to higher education provided by the GI Bill and the highly progressive tax system enacted during World War II. In the years after the “Reagan revolution,” by contrast, the divide in market incomes increased and, ironically, at the same time government initiatives designed to temper the inequities of the marketplace were dismantled, taxes at the top were lowered and social programs were cut back.

Market forces—the laws of supply and demand—of course inevitably play some role in determining the extent of economic inequality. But those forces are at play in other advanced industrial countries as well. Even before the burst in inequality that marked the first decade of this century, the United States already had more inequality and less income mobility than practically every country in Europe, as well as Australia and Canada.

The trends in inequality can be reversed. A few other countries have managed to do so. Brazil has had one of the highest levels of inequality in the world—but in the 1990s, it realized the perils, in terms both of social and political divisiveness and of long-term economic growth. The result was a political consensus across society that something had to be done. Under President Enrique Cardoso, there were massive increases in education expenditures, including for the poor. Under President Luiz Inácio Lula da Silva, there were social expenditures to reduce hunger and poverty.
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Inequality was reduced, growth increased,
18
and society became more stable. Brazil still has more inequality than the United States, but while Brazil has been striving, rather successfully, to improve the plight of the poor and reduce gaps in income between rich and poor, America has allowed inequality to grow and poverty to increase.

Worse still, as we will show, government policies have been central to the creation of inequality in the United States. If we are to reverse these trends in inequality, we will have to reverse some of the policies that have helped make America the most economically divided developed country and, beyond that, to take further actions to lessen the inequalities that arise on their own from market forces.

Some defenders of the current level of inequality claim that although it’s not inevitable, doing anything about it would be just too costly. They believe that for capitalism to work its wonders, high inequality is an inevitable, even necessary feature of the economy. After all, those who work hard should be rewarded, and have to be, if they are to make the efforts and the investments from which all benefit. Some inequality is indeed inevitable. Some individuals will work harder and longer than others, and any well-functioning economic system has to reward them for these efforts. But this book shows that both the magnitude of America’s inequality today and the way it is generated actually undermine growth and impair efficiency. Part of the reason for this is that much of America’s inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others. It is thus not surprising that our growth has been stronger in periods in which inequality has been lower and in which we have been growing together.
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This was true not only in the decades after World War II but, even in more recent times, in the 1990s.
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Trickle-down economics

Inequality’s apologists—and they are many—argue to the contrary that giving more money to the top will benefit
everyone
, partly because it would lead to more growth. This is an idea called trickle-down economics. It has a long pedigree—and has long been discredited. As we’ve seen, higher inequality has not led to more growth, and most Americans have actually seen their incomes sink or stagnate. What America has been experiencing in recent years is the opposite of trickle-down economics: the riches accruing to the top have come at the
expense
of those down below.
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One can think of what’s been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 percent would get 1 percent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone else gets a smaller slice.