The Price of Inequality: How Today's Divided Society Endangers Our Future (5 page)

Now, those who believe in trickle-down economics call this the politics of envy. One should look not at the relative size of the slices but at the absolute size. Giving more to the rich leads to a larger pie, so though the poor and middle get a smaller
share
of the pie, the piece of pie they get is enlarged. I wish that were so, but it’s not. In fact, it’s the opposite: as we noted, in the period of increasing inequality, growth has been slower—and the size of the slice given to most Americans has been diminishing.
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Young men (aged twenty-five to thirty-four) who are less educated have an even harder time; those who have only graduated from high school have seen their real incomes decline by more than a quarter in the last twenty-five years.
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But even households of individuals with a bachelor’s degree or higher have not done well—their median income (adjusted for inflation) fell by a tenth from 2000 to 2010.
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(Median income is the income such that half have an income greater than that number, half less.)

We’ll show later that whereas trickle-down economics doesn’t work, trickle-up economics may: all—even those at the top—could benefit by giving more to those at the bottom and the middle.

A snapshot of America’s inequality

The simple story of America is this: the rich are getting richer, the richest of the rich are getting still richer,
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the poor are becoming poorer and more numerous, and the middle class is being hollowed out. The incomes of the middle class are stagnating or falling, and the difference between them and the truly rich is increasing.

Disparities in household income are related to disparities in wages and in wealth and income from capital—and inequality in both is increasing.
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Just as overall inequality has been growing, so have inequalities in wages and salaries. For instance, over the last three decades those with low wages (in the bottom 90 percent) have seen a growth of only around 15 percent in their wages, while those in the top 1 percent have seen an increase of almost 150 percent and the top 0.1 percent of more than 300 percent.
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Meanwhile, changes in the wealth picture are even more dramatic. For the quarter century before the crisis, while everyone was getting wealthier, the rich were getting wealthier at a more rapid pace. As we noted, however, much of the wealth of the bottom and the middle, resting on the value of their homes, was phantom wealth—based on bubble housing prices—and while everyone lost out in the midst of the crisis, those at the top quickly recovered, but the bottom and middle did not. Even after the wealthy lost some of their wealth as stock prices declined in the Great Recession, the wealthiest 1 percent of households had 225 times the wealth of the typical American, almost double the ratio in 1962 or 1983.
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Given the inequality in wealth, it’s not surprising that those at the top get the lion’s share of the income from capital—before the crisis, in 2007, some 57 percent went to the top 1 percent.
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Nor is it surprising that those in the top 1 percent have received an even larger share of the
increase
in capital income in the period after 1979—some seven-eighths—while those in the bottom 95 percent have gotten less than 3 percent of the increment.
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These broad-spectrum numbers, while alarming, can fail to capture the current disparities with sufficient force. For an even more striking illustration of the state of inequality in America, consider the Walton family: the six heirs to the Wal-Mart empire command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. The numbers may not be as surprising as they seem, simply because those at the bottom have so little wealth.
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Polarization

America has always thought of itself as a middle-class country. No one wants to think of himself as privileged, and no one wants to think of his family as among the poor. But in recent years, America’s middle class has become eviscerated, as the “good” middle-class jobs—requiring a moderate level of skills, like autoworkers’ jobs—seemed to be disappearing relative to those at the bottom, requiring few skills, and those at the top, requiring greater skill levels. Economists refer to this as the “polarization” of the labor force.
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We’ll discuss some of the theories explaining why this is happening, and what can be done about it, in chapter 3.

The collapse of the good jobs has happened during the last quarter century, and, not surprisingly, wages for such jobs have gone down and the disparity between wages at the top and those in the middle has increased.
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The polarization of the labor force has meant that while more of the money is going to the top, more of the people are going toward the bottom.
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America’s economic divide has grown so large that it’s hard for those in the 1 percent to imagine what life at the bottom—and increasingly in the middle—is like. Consider for a moment a household with a single earner and two children. Assume that the earner is in good health and manages to work a full 40 hours a week (the average workweek of American workers is only 34 hours)
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at a wage somewhat above the minimum: say, around $8.50 per hour, so that after paying his Social Security tax, he gets $8 per hour, and thus receives $16,640 for his 2,080 hours. Assume he pays no income tax, but his employer charges him $200 a month for health insurance for his entire family and picks up the rest of the $550 per month cost of insurance. This brings his take-home pay to $14,240 a year. If he is lucky, he might be able to find a two-bedroom apartment (with utilities included) for $700 a month. This leaves him with $5,840 to cover all other family expenses for the year. Like most Americans, he may consider a car a basic necessity; insurance, gas, maintenance, and depreciation on the vehicle could easily take up some $3,000. The family’s remaining funds are $2,840—under $3 a day per person—to cover basic expenses like food and clothing, not to mention things that make life worth living, like entertainment. If something goes wrong, there is simply no buffer.

As America went into the Great Recession, something did go wrong, for our hypothetical family and millions of real Americans nationwide. Jobs were lost, the value of their homes—their major asset—plummeted, and, as government revenues fell, safety nets were cut back just when they were needed most.

Even before the crisis, America’s poor lived on the precipice; but with the Great Recession, that became increasingly true even of the middle class. The human stories of this crisis are replete with tragedies: one missed mortgage payment escalates into a lost house; homelessness escalates into lost jobs and the eventual destruction of families.
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For these families, one shock may be manageable; the second is not. As some fifty million Americans lack health insurance, an illness can push the entire family close to edge;
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a second illness, the loss of a job, or an auto accident can then push them over. Indeed, recent research has shown that by far the largest fraction of personal bankruptcies involve the illness of a family member.
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To see how even little changes in programs of social protection can have big effects on poor families, let’s return to our family, which had $2,840 a month to spend. As the recession continued, many states cut back on assistance for child care. In Washington State, for instance, the average monthly cost of childcare for two children is $1,433.
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If there is no public assistance for child care, this would immediately eat up
half
of what our family had left over, leaving less than $1.30 a day per person for everything else.

A labor market without a safety net

But the hardship faced by those who lost their jobs and couldn’t find another was even greater. Full-time employment declined by 8.7 million from November 2007 to November 2011,
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a period during which
normally
almost 7 million new persons would have entered the labor force—an increase in the true jobs deficit of more than 15 million. Millions of those who couldn’t find a job after searching and searching gave up and dropped out of the labor force; young people decided to stay in school, as employment prospects even for college graduates seemed bleak. The “missing” workers meant that the official unemployment statistics (which, by early 2012 suggested that the unemployment rate was “only” 8.3 percent) presented an overly rosy picture of the state of the labor market.

Our unemployment insurance system, one of the least generous in the advanced industrial world, simply wasn’t up to the task of providing adequate support for those losing their jobs.
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Normally, insurance extends for only six months. Before the crisis, a dynamic labor market at full employment meant that most of those who wanted a job could find one within a short time, even if the job wasn’t up to their expectations or skills. But in the Great Recession that was no longer true. Almost half of the jobless were long-term unemployed.

The term of eligibility for unemployment insurance was extended (typically after a very hard congressional debate),
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but, even so, millions are finding that they are still unemployed when the benefits expire.
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As the recession and the weak job market continued into 2010, a new segment of our society emerged, the “99ers”—those who had been unemployed for more than 99 weeks—and even in the best states, even with federal assistance, they were left out in the cold. They looked for work, but there just weren’t enough jobs to be had. There were four job seekers for every job.
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And given how much political capital had to be spent to extend unemployment insurance to 52, 72, or 99 weeks, few politicians even proposed to do anything about the 99ers.
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A poll by the
New York Times
late in 2011 revealed the extent of the inadequacies in our unemployment insurance system.
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Only 38 percent of the unemployed were then receiving unemployment benefits, and some 44 percent had never received any. Of those receiving assistance, 70 percent thought that it was very or somewhat likely that the benefits would run out before they got a job. For three-quarters of those on assistance, the benefits fell far short of their previous income. Not surprisingly, more than half of the unemployed had experienced emotional or health problems as a result of being jobless but could not get treatment, since more than half of the unemployed had no health insurance coverage.

Many of the unemployed who were middle-aged saw no prospect of ever finding another job. For those over forty-five, the
average
duration of unemployment is already approaching one year.
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The only positive note in the survey was the optimistic response that,
overall
, 70 percent thought it was very or somewhat likely that they would get a job in the next twelve months. American optimism, it seemed, still survived.

Before the recession, the United States appeared in some ways to be performing better than other countries. While wages, say, in the middle might not be growing, at least everyone who wanted a job could get one. This was the long-vaunted advantage of “flexible labor markets.” But the crisis showed that even this advantage seemed to be disappearing, as America’s labor markets increasingly resembled those of Europe, with not merely high but long-lasting unemployment. The young are frustrated—but I suspect that upon learning what the current trend portends, they would be even more so: those who remain unemployed for an extended period of time have lower lifetime employment prospects than those with similar qualifications who have been luckier in the job market. Even when they get a job, it will be at a lower wage than that of persons with similar qualifications. Indeed, the bad luck of entering the labor force in a year of high unemployment shows up in the lifelong earnings of these individuals.
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Economic insecurity

It is easy to understand the growing insecurity that so many Americans feel. Even the employed know that their jobs are at risk, and that with the high level of unemployment and the low level of social protection, their lives could suddenly take a turn for the worse. The loss of a job meant the loss of health insurance and perhaps even the loss of their home.

Those with seemingly secure jobs faced an insecure retirement, because in recent years, the United States has changed how it manages pensions. Most retirement benefits used to be provided through defined-benefit retirement schemes—where individuals could be sure of what they would get when they retired, with corporations bearing the risk of stock market fluctuations. But now most workers have defined-contribution schemes, where the individual is left with the responsibility of managing his retirement accounts—and bearing the risk of stock market fluctuations and inflation. There’s the obvious danger: if the individual had listened to financial analysts and put her money into the stock markets, she took a beating in 2008.

The Great Recession thus represented a triple whammy for many Americans: their jobs, their retirement incomes, and their homes were all at risk. The housing bubble had provided a temporary reprieve from the consequences that would have followed from falling incomes. They could, and did, spend beyond their income as they struggled to maintain their standard of living. Indeed, in the mid-2000s, before the onset of the Great Recession, people in the bottom 80 percent were spending around 110 percent of their incomes.
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Now that the bubble has broken, not only will these Americans have to live
within
their income; many will have to live
below
their income to pay back a mountain of debt. More than a fifth of those with mortgages are underwater, owing more on their house than it’s worth.
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The house, instead of being the piggy bank to pay for retirement or a child’s college education, has become a burden. And many persons are at risk of losing their homes—and many have done so already. The millions of families that we noted lost their homes since the crashing of the housing bubble lost not only the roof over their heads but also much of their life savings.
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