Part 1: Its dimensions
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Once thought of as the land of opportunity, our nation is now the most unequal country in the developed world, and growing more so. Some economists say that comparable levels of inequality have not existed since 1928, the eve of the Great Depression. Others say that we haven’t seen them since the late 19th Century’s gilded age.
Either way, the consequences are dire for national economic growth, individual opportunity, public health, and democracy itself. Americas’ stark inequality may also help explain its people’s polarization, since social scientists find strong correlations between economic inequality and divisiveness.
Despite inequality’s increasing prominence in the news, most Americans remain unaware of its dimensions. Harvard Business School’s Michael Norton and Duke University’s Dan Ariely vividly demonstrated this in a clever 2011 study.
They presented a representative sample of 5,522 Americans with three different samples of wealth distribution in which
- Wealth is equally distributed among each fifth of the population, i.e., each fifth owns 20% of the society’s wealth.
- The richest fifth owns a third of national wealth, and the rest is relatively evenly distributed among the other four fifths.
- The richest fifth own 85% of wealth; the next richest, 11%, and the shares of the least rich two-fifths are too small to appear on the chart.
The researchers did not tell respondents that the second example was Sweden, and the third, the U.S. Instead, they paired each example with another one and asked respondents in which of the two countries they would prefer to live.
- 49% chose perfect equality versus 51% who chose Sweden.
- 77% chose perfect equality versus 23% who chose the U.S.
- 92% chose Sweden versus 8% who chose the U.S.
The researchers then asked respondents to propose an ideal distribution of wealth. The average response looked a lot like Sweden’s.
Finally, they asked respondents to estimate America’s actual distribution of wealth. The average response put the richest fifth’s share at a little under 60%. Shares declined with each succeeding fifth, with the bottom two fifths owning 10% of the nation’s wealth.
In fact, the richest fifth of Americans owns 85% of the nation’s wealth. The poorest two-fifths, together, own 0.4%.
The findings for both sets of questions were surprisingly consistent across differences in gender, personal income, and Presidential candidate preference, demonstrating that Americans are largely unaware of inequality, but would like a more egalitarian distribution of wealth than what we have. So it’s probably worth shining some light on the dimensions of U.S. economic inequality.
Wages and earnings
Although the education levels and productivity of American workers have steadily increased over the last forty years, their wages have stagnated. The share of national income represented by wages and salaries steadily declined, while that represented by dividends and interest increased.
And over that period, capital gains came to be taxed at a lower rate. While households that receive wages and salaries are spread across the income distribution, income from interest, dividends and capital gains is concentrated in the wealthiest households, as are the highest salaries.
From 1947 until the mid 1970s, worker compensation rose in lockstep with productivity. But since 1973, worker productivity has increased by 80%, while wages and earnings growth has stalled. Low- and middle-wage workers actually lost ground all across the period, except during the late 1990s. With these declines came declining job quality, decreased job security, shorter job tenure, longer periods of unemployment, more part-time work, and reduced benefits. Since 2007, the great majority of new jobs are in lower wage occupations than were those that existed before the Great Recession.
Income includes wages and earnings as well as returns on investment, capital gains, interest, and dividends. Here again, income for all groups grew proportionately with the economy during the first thirty years after World War II. Since then, upper income groups have captured almost all of the gains.
The Congressional Budget Office reports that incomes for the lower 80% of Americans grew little after 1979, inched up in the late 1990s, and then flattened again until the Great Recession began in 2007. Over this period, income for the top 1% tripled.
Since the “recovery” began in 2009, 95% of the economic gains have gone to the top 1%. The median household is worse off now than it was in 2009.
Wealth is net worth—cash, home value, investments, and savings, less debt. Wealth differences are much more determinative of how people live than are income differences. A family may have a decent income but can be made insolvent by a job loss or bankrupt by a medical emergency. They may not be able to educate their kids. A family with wealth can sell some part of it to meet their needs or fulfill their wants.
And inequalities of wealth are much more extreme than those of income. In 2010 the richest 1% owned a third of the nation’s wealth. The richest 5% owned over 60%. The poorest 40% owned less than 1%.
The great recession hit the middle class hard, since housing equity was the main source of their wealth. Between 2007 and 2011, median family net worth fell by half.
Credit Suisse’s 2012 annual Global Wealth Report tells us how the U.S. compares to its peers in wealth distribution. Of the 29 countries that have average adult wealth of $100,000 or more, the U.S. is 27th in median wealth and last in equality.
These numbers don’t fully convey the effects of inequality. That is the subject of the next installment.