Our Inequality: An Introduction

Our Inequality: An Introduction

Inequality is greater now than it has been at any time in the last century, and the gaps in wages, income, and wealth are wider in the United States than in any other democratic and developed economy. Yet we lack a clear and compelling account of how and why we arrived this point. Our current economic troubles have aimed a spotlight at our inequality problem, but they did not create it. What did?

This series is adapted from Growing Apart: A Political History of American Inequality, a resource developed for the Project on Inequality and the Common Good at the Institute for Policy Studies and inequality.org. It is presented in nine parts. This introduction lays out the basic dimensions of American inequality and interrogates the usual explanatory suspects. The next eight parts will develop a political explanation for American inequality, looking in turn at labor relations, the minimum wage and labor standards, job-based benefits, social policy, taxes, financialization, executive pay, and macroeconomic policy.

Americans today live in a starkly unequal society. Inequality is greater now than it has been at any time in the last century, and the gaps in wages, income, and wealth are wider here than they are in any other democratic and developed economy.

The dimensions of that inequality are both familiar and depressing. A smaller share of national income is flowing to wages and earnings, and—more important—inequality within that labor share is widening. As a result, wage growth has flatlined for a generation [click here for interactive graphic]. Middle-income workers make no more now than they did in the late 1970s; those in the lower wage cohort have lost ground over that span.

The growing gap in income (including non-wage income like returns on investment or capital gains) is even starker. Between 1979 and 2007, the real incomes of the richest 1 percent almost tripled, while the real incomes of the median household inched up only about 25 percent—and that almost all due to an increase in labor force participation and hours worked.

Inequality in wealth (the sum total of household savings, home equity, investments, and debts) is starker still [click here for graphic]. The richest 1 percent claims about a third of the nation’s wealth; the top 5 percent claim over 60 percent. These shares have grown steadily over the last generation. The recession took a big bite out of middle-class wealth (much of which is vested in home equity). And the gains of the recovery have flowed almost exclusively to the richest Americans.

On each of these fronts, inequality has grown more in the United States than it has elsewhere. Nowhere in the industrialized world is there a bigger gap between wage growth and productivity growth over the last two business cycles. Over the last twenty years, the richest Americans started with a bigger share of income than any of their well-heeled peers and gained more than any of them. Among the world’s wealthy countries (those with an average adult wealth of $100,000 or more), the U.S. ranks dead last on the relevant inequality measures.

To make matters worse, demography and geography widen those gaps for many Americans. The gender gap in wages, income, and wealth has closed very slowly, and much of that progress is driven by the collapse of male wages rather than real gains by working women. The racial gap in wages, incomes, and wealth has closed little, and it has widened for those caught up in the startling (and racialized) spike in incarceration in the United States. While racial segregation in our cities has abated somewhat over the last generation, economic segregation—the likelihood that Americans live in enclaves of wealth or poverty—has hardened. Economic mobility, by any measure, remains weak; the recent spike in inequality has simply hardened that dismal American admonition: “choose your parents wisely.”

How Did We Get Here?

For all the jaw-dropping comparisons—between rich and poor, between then and now, between the United States and other nations—we lack a clear and compelling account of how and why we arrived this point. Our current economic troubles have aimed a spotlight at our inequality problem, but they did not create it.

What did? Conventional explanations generally posit one or both of two plotlines. The first: somebody took the money. This version stresses Wall Street greed and the Bush-era tax cuts and features a plutocracy determined to claim more than its share of private wealth and shoulder less than its share of public goods. The second: something happened to the economy. This version has a backstory in the inexorable march of globalization and technological change, and a more recent plot twist: the recession that began in 2007 and—for most of us—has not yet ended. 

These accounts are not so much wrong as they are misleadingly incomplete, inattentive to longer-term historical trends and to the political choices made across that history. A fuller explanation starts to come into focus when we consider the political and economic conditions that prevailed right after the Second World War. At that historical moment, the United States displayed much narrower gaps between the rich and poor than we do now. The gains of economic growth back then were much more broadly distributed. And working families (at least white working families) enjoyed much greater economic security.

This was no accident or lucky combination of circumstances. It was the outcome of political struggle and policy choices that erected a foundation and a structure for shared prosperity. The inequality of the twentieth century’s early years actually began closing before economic growth took off in the 1940s, as a consequence of the political response to the Great Depression. Thanks to this response, federal support for collective bargaining rights sustained a surge in labor organization that dramatically improving the bargaining power of America’s workers. Other political innovations of the New Deal—ranging from Social Security to the minimum wage—secured a floor for working-class incomes. Postwar social movements, especially civil rights and second-wave feminism, then girded that floor by closing off avenues for discrimination.

The nation’s tax system, meanwhile, and new regulatory obstacles to speculative finance erected something of a ceiling for higher incomes. And substantial public investments—the GI Bill support for access to higher education, mortgage subsidies for veterans, housing projects, the interstate highway system, and the Cold War—kept the rest of the structure in pretty good repair. 

Since then, that structure has essentially collapsed. This collapse is often recounted as an unfortunate but necessary response to changing economic conditions: the world has become a leaner, meaner, more competitive place. As a result, the policies of the New Deal—and the costs they imposed on business—had to go. But there is little evidence to actually support this account. Indeed, the initial handwringing over American economic decline came at a time when our principal competitors, Japan and Germany, boasted both higher wages and more expansive social programs than the United States.

Political choices, not economic necessity, dismantled the New Deal. Future Supreme Court Justice Lewis Powell would first sketch out the organizational and ideological dimensions of these choices in a now infamous 1971 memorandum to the U.S. Chamber of Commerce. The conservative ascendance in state and national politics affirmed these choices across the political landscape, with dramatic consequences: steep cuts in social spending, the political abandonment of organized labor, deregulation and privatization, tax cuts, punitive cycles of unemployment—all justified in the name of lowering business costs, capturing economic efficiencies, and unleashing markets. Such arguments, of course, camouflaged the real goal of the pushback against the New Deal: a redistribution of income upward via the erosion of the hard-earned bargaining power of ordinary Americans. Rising inequality was not a lamentable side effect of America’s new policy framework; it was its intent.

Why Does It Matter?

Such inequality, in the view of many economists, is not just the toll we pay for free markets, but an essential incentive within a market economy. People work hard to avoid poverty and even harder to get rich. Any pursuit of "equal outcomes" would stifle this initiative and, with it, the economic growth on which we all depend. The poor, as they like to say, will find themselves much better off with a thin slice of a growing pie than with a thicker slice of a small one.

There is little evidence—historical or economic—to substantiate such silliness. The “market incentives” argument holds water only as long as hard work is reliably rewarded in the short term (with wages) and in the long term (with economic mobility)—a prospect that has unraveled in the last decade. The economy does not need inequality to grow. In fact, nearly the reverse is true. In our own recent history, sustained economic growth is closely associated with a relatively equitable distribution of economic rewards.  Even the International Monetary Fund has conceded on this point, concluding recently that “lower net inequality is robustly correlated with faster and more durable growth.”

Stark and sustained inequality discourages those at the bottom of the income distribution ladder (whose hard work goes unrewarded), and encourages those at the top to engage in short-sighted speculation—much of which (think predatory lending and usurious credit card rates) exploits the poor and widens the gap. Inequality matters, most obviously and directly, to those whom it leaves behind. This includes the very poor—the “underclass” or “the truly disadvantaged,” in the social science literature—who have long been cordoned off from the rewards and opportunities enjoyed by most Americans, but also the broad middle class, for whom growing inequality has begun to erode wealth, incomes, living standards, and opportunities.

Inequality also matters more generally, to society at large and to the health and prosperity of all who live within it. The evidence on this point is overwhelming. Citizens in unequal societies, researchers have shown, are more likely end up sick, obese, unhappy, unsafe, or in jail. These social outcomes, bad in themselves, also undercut the productivity and efficiency of the economy, as the high costs of poor public health, heavy policing, and mass incarceration siphon off our resources and leave our human capital underprepared and underutilized.

More directly, at a certain point, stark income gaps begin to hollow out consumption. “A millionaire cannot wear 10,000 pairs of $10 shoes,” as one advertiser warned on the eve of the Great Depression in 1929, “but a hundred thousand others can if they’ve got the $10 to pay for them, and the leisure to show them off.” Rising inequality in the last generation has created the same tension, eased only temporarily by the availability of consumer credit and home equity. Such efforts to patch together substitutes for aggregate demand create their own inefficiencies—including a bloated and parasitic financial services sector, fed by both the desperate demand for credit from those falling behind and the frantic search for speculative returns by those leaping ahead.

Economic inequality breeds inequality in politics, whose highest goal, in turn, becomes policies that make economic inequality even worse.

Finally, economic inequality endangers democracy. Market power will always shape political outcomes, if only because the rich will always have both the wherewithal and the motive to play a role more influential than any individual votes they might cast. But pervasive or sustained inequality has broader political consequences. Massive inequality tends to tilt public policy toward shortsighted rewards or special treatment (deregulation, tax breaks) and away from the public or collective goods (education, infrastructure) essential to future economic growth. Economic inequality breeds inequality in politics, whose highest goal, in turn, becomes policies that make economic inequality even worse.

Democratic institutions, at their best, provide a basic physical, legal, and fiscal infrastructure in which markets can thrive. These institutions can ameliorate or regulate the excesses of market competition and provide the public goods and services that markets are unable or unwilling to generate on their own. Under conditions of stark economic and political inequality, all of this begins to unravel.

Engines of Inequality?

Inequality is a consequence of a wide (and often bewildering) array of factors and circumstances. Understanding the relative weight of these factors is important—not only because we want a decent and credible explanation of what has happened, but because there is so much at stake in the details of that explanation. Understanding the roots of inequality is the starting point for any political response.

Before turning to the political roots of American inequality, we need to dispense with some common—and mistaken—explanations: the globalization of the American economy, recent technological change, and the demographic transformation of the American family.

I. The World Is Flat

The first culprit for rising inequality is often globalization, or the ease and speed with which goods and services, money, information, production, and labor can move across national borders. In this view, the collapse of American leadership in the world economy in the 1970s yielded a form of globalization that was both more intense and more heterogeneous than what came before; its rewards flowed to emerging or resource-rich economies, and to private interests rather than nations.

With globalization, we see a general trend toward declining inequality between countries and rising inequality within them. In this flat new world, production follows lower labor costs across borders and oceans (most notably in clothing and consumer electronics). The threat of flight or plant closing becomes a pervasive and effective strategy in labor relations. The impact has been starkest on American manufacturing—where we have seen sustained competitive pressures from labor-intensive imports, a diversion of domestic investment, and unrelenting pressure on wages. The local impact in regions and communities more directly exposed to low-wage competition from abroad has been devastating: markedly steeper unemployment, lower labor-force participation, slower wage growth, and higher demands on public services and support.

These are pretty dismal consequences (and prospects). But it is important to understand globalization—and its discontents—in a broader economic and political context. As an explanation for economy-wide wage weakness, the footloose mobility of capital is overdrawn. Much of the economy is rooted in place by labor markets, supply chains, or consumers. Sectors of the economy untouched by liberalized trade shed workers and dampened wages at pretty much the same rate as the rest of the economy in the twenty-five years after 1970. While globalization has accelerated since 1990, wage inequality at the bottom (between low-wage and median-wage workers) has actually slowed over that span. Most of the growth in inequality during this era has been driven by gains made by very high earners—a pattern unlikely to be shaped much by trade.

More to the point, all countries face the forces and consequences of globalization, and yet wage and income inequality is starker in the United States than in most other settings. Indeed, the United States is less exposed to trade than any of its OECD peers, and yet more unequal than almost all of them. It is not globalization (as an abstract and inevitable force) that generates or explains inequality, but the political response to globalization in particular countries.

The demands globalization places on the labor market can lead to a race to the bottom, but they need not. Indeed, globalization widens the wage gap (within and across countries) not universally, but when and where labor protections are weak. It is not trade that generates inequality, but its political terms.

II. The Computer Did It

Others have argued that shared prosperity is undone by technological change. In this view, skill-biased technological change displaces “routine” manual tasks such as working on a production line and creates new tasks and occupations for which skilled workers are better adapted. But it does not displace non-routine, low-wage service jobs. As a result, those with skills and advanced degrees hoard any economic gains and everyone else falls farther and farther behind. We see losses in the middle of the labor market (in sectors like administration, production, and fabrication), accompanied by growth at the edges—in low-wage, low-skill jobs at one end, and in high-wage, high-skill jobs at the other. 

If nothing else, this is a politically attractive kind of explanation for inequality. Technological innovation or change (like globalization) is not something you can control, so there seems little political recourse but to occasionally lament the quality of American education. But, on closer examination, it is not that compelling an explanation.

Despite all the handwringing about our underprepared workforce, the returns on education are not that clear. While those with some college education or better pulled away from the pack in the 1980s and 1990s, that advantage has slowed dramatically. Workers with some college education or a college degree are much more likely now to remain mired in low-wage work than workers with the same educational background a generation ago. The last fifteen years have seen significantly slower growth in high-skill, high-wage jobs than in the economy at large. Even those with the right skills are pounding the pavement.

The evidence linking technological change and inequality is weak with respect to the timing and the nature of that inequality. Over the long haul, technological change has tended tend to push job growth to the margins, but this has occurred monotonously, across eras of relative equality and inequality. The modern trajectory of wage inequality, by contrast, is sharply discontinuous—widening most dramatically between low and median wage workers in the 1980s, and between median and high-wage workers in the last decade.

Since 1969 labor’s share of income has fallen most rapidly in those sectors where union presence withered, not where computers displaced labor.

The notion that inequality is generated by rapid technological change and skill shortages is not sustained by recent American experience. Since 1969 labor’s share of income has fallen most rapidly in those sectors where union presence withered, not where computers displaced labor. Across our last two business cycles, income concentrated not in sectors or regions where skills were most in demand, but where speculative bubbles bloomed and burst. During our most recent recession and recovery, the notion of a “skills shortage” was belied by the fact that job openings and available workers were distributed pretty evenly across the economy. Skilled workers saw no “bidding up” of their wages or increase in their work hours, as one would expect in a shortage. Indeed, most of the growth in wage inequality across the last generation can be found within occupations, and not in their relative share of the labor market. 

Whatever causal importance we assign to technological change, it is hard to see it as a credible account of the different trajectories of inequality across countries. Like globalization, technological change is a challenge faced by all economies. And yet differences across national settings (and especially the outlying status of the United States) remain profound. 

III. Calling Ward Cleaver

A final culprit is demographic trends—particularly changes in family composition. Since income is a “household” measure, the rising proportion of single-parent households is often invoked to explain inequality. Indeed, in the United States the most prosperous family units (married households with a woman in the labor force) are declining as a share of all families, just as the least prosperous (single, female-headed households) are rising as a share of all families. This has been accompanied by a rise in what social demographers call “assortative mating,” or the reluctance of men and women to cross an educational or income barrier when they get married. This further widens the gap between affluent dual-income families and all others.

But we need to be careful about what is being observed or explained here, and the mechanisms by which demographic change might contribute to economic inequality. On single motherhood, the United States shares top billing among its OECD peers with Sweden—a country noted for its relative equality. On assortative mating, the United States is in the middle of the pack. And on neither trend do gradual changes in family composition line up in any credible manner with the growth of inequality in the United States. 

The differences, it turns out, are political rather than demographic. Compared to their OECD peers, two-earner families in the United States do fairly well (only 5 percent fall below the poverty line). But American families with only one worker—over a quarter of which fall below the poverty line—are at a much sharper disadvantage than similar families elsewhere. At the same time, the presence of kids (in the absence of policies like family leave and publicly supported child care found in much of the rest of the world) is a distinct economic burden in the United States. While childless American households have one of the lowest rates of poverty incidence in the OECD, those with children have one of the highest. It is not the rise of single-parent households that feeds inequality but the stigma attached to single motherhood—and the policies that flow from that.

Finally, demographic explanations tend to confuse consequence and cause. Wages, income, and wealth are shaped by family structure but they also shape family structure. Those with lower incomes and lower educational attainment, for example, tend to marry earlier and divorce more often. In this sense, single motherhood is a reflection of inequality, not a cause. Finally, most of the measurable inequality (and insecurity) occurs within demographic categories. Inequality and insecurity cut across family types.  The gap is growing not between single moms and everyone else, but between (for example) some parents with kids and other parents with kids. 

Too much competition from China. A skills gap. Too many single moms. In most explications of the inequality problem, this is the conventional roundup of suspects. Yet, at best, this is a line-up of minor accomplices. And the case against each is surprisingly thin.

For starters, none of these explanations do a very good job of explaining the timing of increases in wage and income inequality across the last generation—either because the explanatory trends are continuous and the trajectory of inequality is not, or because movement in the explanatory trends do not line up in any chronologically plausible fashion with movement in different kinds of inequality. The suspicions are warranted, but the suspects have decent alibis. 

Each of these explanations is also rooted in global trends. They lack much explanatory weight, therefore, in explaining differences in inequality across national settings. Gradual, continuous, and global patterns of change cannot be used to explain discontinuous spikes in inequality within one national setting. They key variable here is not the broad social or economic trends, but our political response to them.

All of these economic and demographic changes are embedded in a larger institutional and political story. In order to understand U.S. inequality (its growth over time and its exceptionalism), and in order to think about redressing that inequality, we need to focus on differences that matter. The simplest way to do this is to go back to our midcentury sketch of the public policies and institutions—the “New Deal order”—that sustained both a floor for the bottom of the labor market and a ceiling for the top of it. What happened to those policies over the last half-century? How did their fate contribute to rising inequality?

Colin Gordon is a professor of history at the University of Iowa. He writes widely on the history of American public policy and is the author, most recently, of Growing Apart: A Political History of American Inequality.