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Economic Inequality in the U.S. Is Far Worse Than You Thought

Want to know where it all went wrong? Start with Ronald Reagan.

By Jared Keller


Workers converge on Wall Street to protest against financial intuitions and inequality on June 22nd, 2011, in New York City. (Photo: Spencer Platt/Getty Images)

We’ve long understood that there’s something fundamentally broken about the United States’ modern economy, from the uneven distribution of net household wealth to the growing disparities in incomes between the 1 percent and everyone else. But new research from three top economists paints an even grimmer picture, by putting to bed one of the biggest myths about one of the most advanced economies on the planet: The American Dream of hard work and equal opportunity is long gone.

Research conducted by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman for the Washington Center for Equitable Growth reveals that nearly half of earners in the U.S. have been “completely shut off” from nearly 50 years of economic gains.

(Chart: Washington Center for Equitable Growth)

As the chart to the left shows, the average national income grew 61 percent after the advent of the Reaganomics era in the 1980s, but the bottom 50 percent of adults in the income distribution saw a pre-tax increase of barely 1 percent.

By contrast, top earners saw massive increases in their income, from 121 percent for the top 10 percent of earners and 205 percent for those 1 percenters. Indeed, the data shows that the gains for the top “job creators” — 636 percent for the top 0.001 percent of earners! — unleashed by deregulation in the name of “trickle-down” economics, didn’t actually trickle down at all. For an entire generation, the bounties of economic progress were swallowed whole by a small segment of the population while the average American has worked harder and longer for less.

The authors offer this depressing anecdote to capture the dismal status quo for an entire segment of American workers:

In 1980, adults in the top 1 percent earned on average of 27 times more than the bottom 50 percent of adults. Today they earn 81 times more. This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi.

(Chart: Washington Center for Equitable Growth)

The other problem, according to Piketty et al., is the boom in capital income that’s driving this trend. As they put it:

It looks like the working rich who drove the upsurge in income concentration in the 1980s and 1990s are either retiring to live off their capital income or passing their fortunes onto heirs.

(Chart: Economic Policy Institute)

And they’re not wrong: As the chart to the left, from the Economic Policy Institute, illustrates, the share of total capital and business income held by the bottom 90 percent of Americans has only declined since the 1980s, while the percentage held by the top 1 percent has grown from 33.5 percent to 54 percent.

Certainly, federal officials are making strides: The Obama administration announced in September that household incomes in the U.S. grew (and poverty fell) at the fastest rate since the Census Bureau began reporting such data in 1967, and that most of the largest household gains were among those at the bottom of the income distribution scale. But, at the same time, the top 1 percent of households have continued to capture more than 50 percent of post-Recession real income growth, according to a separate study by Saez published in June, despite higher top tax rates that took effect in 2013. When it comes to broader trends in income distribution, job creation programs are enough.

Sadly, the potential for the federal government to even the playing field through broad tools like taxation and redistribution is frighteningly paltry. According to the authors’ analysis, government policy only boosted the average post-tax income of the bottom 50 percent of earners by 21 percent. Unfortunately, this comes “entirely from in-kind health transfers and public goods spending”; most cash transfers were essentially canceled out by taxes anyway. As a result, the authors recommend that policy discussions among local, state, and federal officials focus on “how to equalize the distribution of human capital, financial capital, and bargaining power rather than merely the redistribution of national income after taxes.”

So what can we do? Well, nothing: The fact remains that none of these discussions are likely to happen with Donald Trump in the White House. While the Trump administration’s appeal to the logic of charter schools has potential to boost long-term human capital growth, the president-elect’s tirade against immigrants and minorities on the campaign trail — primarily to appeal to his white base — may keep the U.S. from benefiting from the world’s best and brightest.

When it comes to bargaining power, Trump has unleashed colorful fusillades against unions and a livable minimum wage. And when it comes to financial capital — well, that’s a bit obvious. Just take a look at the people he’s surrounding himself with. Considering that a Tax Policy Center analysis of President-elect Trump’s tax plan as early as last December suggested it would primarily benefit high-income taxpayers, an inequality-responsive economic plan from the Trump White House seems improbable at best.