Inequality in America

On October 11, 2013, in Latest News, by The Somerville Times

Part 1:  Its dimensions
*

shelton_webBy William C. Shelton

(The opinions and views expressed in the commentaries of The Somerville Times belong solely to the authors of those commentaries and  do not reflect the views or opinions of The Somerville Times, its staff  or publishers)

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

  1. Wealth is equally distributed among each fifth of the population, i.e., each fifth owns 20% of the society’s wealth.
  2. The richest fifth owns a third of national wealth, and the rest is relatively evenly distributed among the other four fifths.
  3. 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

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

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.

 

10 Responses to “Inequality in America”

  1. Pixie Pocohantas says:

    Bill,

    Where’s your story on gentrification as promised? We already know the bankers and WS have turned our country into an underdeveloped nation of civil unrest taking orders by corporate dictatorship.

  2. Mememe says:

    There are two main schools of inequality. The first is inequality in outcomes the other is inequality in opportunity. Over the last 20/25 years the seconds has gotten progressively worse as cronyism as been has snuck in, and lately become standard (not even hidden). If you fix the second the first will come back in line more, and everyone will gain.

  3. Matt says:

    Bill, thanks for a fact based background to set the stage for the next set of articles you are writing. Especially the difference between wealth and income which i don’t think is always well understood..

    The segment describing wealth disparities across the population was very interesting, not for the ignorance of wealth distribution in the states, but rather what people would like to see. I wonder why people lean towards a greater concentration of wealth at the top rather than an even distribution. I wonder it if is a belief that if it is bigger than they may have better access to it… I don’t know – of the choices I would rather the even distribution, and if I had my druthers a bell curve.

    Other tangents to consider are:1. how wealth impacts political voice as seen in citizens united and now with McCutcheon v. FEC. These are areas where wealth is creating a huge difference in political voice. 2. The Whats wrong with kansas scenario. This is something that plays out both at a local scale as well as a national scale.and 3. The reality on the ground in the boston area, which has fared far better than the rest of the US.

    Regarding a follow on to gentrification maybe you could collaborate with pixi to put together a piece that talks about gentrification in general looking at statistics and facts for crime, education, social services etc while comparing and contrasting her and others experience with it.

  4. James Christensen says:

    Great article Bill. I’m looking forward to the next installment.

  5. Maria says:

    In my opinion, inequality of opportunity has gotten worse due to affirmative action. It is nearly impossible for a white kid to get anything whether it be an appointment to the police department, or a scholarship. Everything is geared to the minority, despite the fact that many areas are ‘minority majority’ now. Immigrants make it worse, as most legal and illegal immigrants are ‘minorities’.

  6. faxR4fools says:

    Maria: is the somerville police department only hiring non-whites these days? If so, I hadn’t noticed. But like the name says, faxR4fools.

  7. MarketMan says:

    Maria: Your name is ironic. Is that intentional? Your comment potrays as a someone bitter about something. If what you said was true, I would think that all the top schools and top professions would be non-white.

  8. Rush Limbaugh says:

    God I can’t stand the “whites can’t get on the fire department” line. I went to a firefighter academy graduation for two of my friends, both white. The overwhelming majority of the graduates were white, most of whom had relatives in the fire department.

  9. Bill,

    Don’t forget to include “outsourcing” as one of the main reasons we no longer have jobs in the U.S., due to corporations who are paying pennies on the dollar to people in foreign lands. The wonderful world of the internet brought new ways to impoverish millions while making a small percent, over-night billionaires. The wealthy are no longer creating jobs in this country because they don’t have to–but I predict in time, they will soon be targeting each other as their own group widens.

    I enjoyed your last article more. You lost my interest when you started listing percentages. Leave that for the boring statisticians, you can do better.

    Just cut to the chase–please explain the origin of gentrification and list real stories of how, why and the negative/positive results. I’d also like to see a list of once thriving “renewed” communities, turned into devastatingly impoverished ghost towns, once the gentrifiers have lost interest and moved on to conquer again. Can you also describe in detail the types of gentrifiers, where they come from, what their motive is and a generalization of character? Leave out the stats, it draws away from your otherwise great research and good story telling.

  10. ritepride says:

    A few years back there was an article in the newspapers re: a computer memory company in MA outsourced their work to a foreign country. after about a year the owner of the Ma company found that the outsourced company had copied his product and was underselling him on the market.
    When he went to go after them with lawsuits,etc., he found that there were no reciprocal agreements with the country the outsourcing work was being done. The foreign contry could violate his copyrights etc., and there was not a thing he could do about it.

    A company in RI outsourced work to China. Three of the companies he outsourced to disappeared as well as his product. One that did make his product, the Chinese government’s version of our U.S. customs has sealed the warehouse and the RI company cannot get that product.
    Thus the chinese will probably reproduce the product and sell it on the market at a cheaper rate and another American Co. will go out of business.

    Once the hackers go after the rich peoples $$$ hidden in foreign banks,
    Then you will see all this outsourcing and foreign investment of American dollars be put on hold. Meanwhile the rich are ruining this country and could care less until the Taliban or somebody else shows on our soil and goes after them.

Leave a Reply

*