Inequality in America
- From: "peace dream" <peace.dream1234@xxxxxxxxxxxxxxx>
- Date: Mon, 19 Jun 2006 13:10:05 +0300
http://economist.com/opinion/displaystory.cfm?story_id=7055911
Inequality in America
The rich, the poor and the growing gap between them
Jun 15th 2006 | WASHINGTON, DC
From The Economist print edition
The rich are the big gainers in America's new prosperity
AMERICANS do not go in for envy. The gap between rich and poor is bigger
than in any other advanced country, but most people are unconcerned. Whereas
Europeans fret about the way the economic pie is divided, Americans want to
join the rich, not soak them. Eight out of ten, more than anywhere else,
believe that though you may start poor, if you work hard, you can make pots
of money. It is a central part of the American Dream.
The political consensus, therefore, has sought to pursue economic growth
rather than the redistribution of income, in keeping with John Kennedy's
adage that "a rising tide lifts all boats." The tide has been rising fast
recently. Thanks to a jump in productivity growth after 1995, America's
economy has outpaced other rich countries' for a decade. Its workers now
produce over 30% more each hour they work than ten years ago. In the late
1990s everybody shared in this boom. Though incomes were rising fastest at
the top, all workers' wages far outpaced inflation.
But after 2000 something changed. The pace of productivity growth has been
rising again, but now it seems to be lifting fewer boats. After you adjust
for inflation, the wages of the typical American worker-the one at the very
middle of the income distribution-have risen less than 1% since 2000. In the
previous five years, they rose over 6%. If you take into account the value
of employee benefits, such as health care, the contrast is a little less
stark. But, whatever the measure, it seems clear that only the most skilled
workers have seen their pay packets swell much in the current economic
expansion. The fruits of productivity gains have been skewed towards the
highest earners, and towards companies, whose profits have reached record
levels as a share of GDP.
Even in a country that tolerates inequality, political consequences follow
when the rising tide raises too few boats. The impact of stagnant wages has
been dulled by rising house prices, but still most Americans are unhappy
about the economy. According to the latest Gallup survey, fewer than four
out of ten think it is in "excellent" or "good" shape, compared with almost
seven out of ten when George Bush took office.
The White House professes to be untroubled. Average after-tax income per
person, Mr Bush often points out, has risen by more than 8% on his watch,
once inflation is taken into account. He is right, but his claim is
misleading, since the median worker-the one in the middle of the income
range-has done less well than the average, whose gains are pulled up by the
big increases of those at the top.
Privately, some policymakers admit that the recent trends have them worried,
and not just because of the congressional elections in November. The
statistics suggest that the economic boom may fade. Americans still head to
the shops with gusto, but it is falling savings rates and rising debts (made
possible by high house prices), not real income growth, that keep their
wallets open. A bust of some kind could lead to widespread political
disaffection. Eventually, the country's social fabric could stretch. "If
things carry on like this for long enough," muses one insider, "we are going
to end up like Brazil"-a country notorious for the concentration of its
income and wealth.
America is nowhere near Brazil yet (see chart 1). Despite a quarter century
during which incomes have drifted ever farther apart, the distribution of
wealth has remained remarkably stable. The richest Americans now earn as big
a share of overall income as they did a century ago (see chart 2), but their
share of overall wealth is much lower. Indeed, it has barely budged in the
few past decades.
The elites in the early years of the 20th century were living off the income
generated by their accumulated fortunes. Today's rich, by and large, are
earning their money. In 1916 the richest 1% got only a fifth of their income
from paid work, whereas the figure in 2004 was over 60%.
The not-so-idle rich
The rise of the working rich reinforces America's self-image as the land of
opportunity. But, by some measures, that image is an illusion. Several new
studies* show parental income to be a better predictor of whether someone
will be rich or poor in America than in Canada or much of Europe. In America
about half of the income disparities in one generation are reflected in the
next. In Canada and the Nordic countries that proportion is about a fifth.
It is not clear whether this sclerosis is increasing: the evidence is mixed.
Many studies suggest that mobility between generations has stayed roughly
the same in recent decades, and some suggest it is decreasing. Even so,
ordinary Americans seem to believe that theirs is still a land of
opportunity. The proportion who think you can start poor and end up rich has
risen 20 percentage points since 1980.
That helps explain why voters who grumble about the economy have nonetheless
failed to respond to class politics. John Edwards, the Democrats'
vice-presidential candidate in 2004, made little headway with his tale of
"Two Americas", one for the rich and one for the rest. Over 70% of Americans
support the abolition of the estate tax (inheritance tax), even though only
one household in 100 pays it.
Americans tend to blame their woes not on rich compatriots but on poor
foreigners. More than six out of ten are sceptical of free trade. A new poll
in Foreign Affairs suggests that almost nine out of ten worry about their
jobs going offshore. Congressmen reflect their concerns. Though the economy
grows, many have become vociferous protectionists.
Other rich countries are watching America's experience closely. For many
Europeans, America's brand of capitalism is already far too unequal. Such
sceptics will be sure to make much of any sign that the broad middle-class
reaps scant benefit from the current productivity boom, setting back the
course of European reform even further.
The conventional tale is that the changes of the past few years are simply
more steps along paths that began to diverge for rich and poor in the Reagan
era. During the 1950s and 1960s, the halcyon days for America's middle
class, productivity boomed and its benefits were broadly shared. The gap
between the lowest and highest earners narrowed. After the 1973 oil shocks,
productivity growth suddenly slowed. A few years later, at the start of the
1980s, the gap between rich and poor began to widen.
The exact size of that gap depends on how you measure it. Look at wages, the
main source of income for most people, and you understate the importance of
health care and other benefits. Look at household income and you need to
take into account that the typical household has fallen in size in recent
decades, thanks to the growth in single-parent families. Look at statistics
on spending and you find that the gaps between top and bottom have widened
less than for income. But every measure shows that, over the past quarter
century, those at the top have done better than those in the middle, who in
turn have outpaced those at the bottom. The gains of productivity growth
have become increasingly skewed.
If all Americans were set on a ladder with ten rungs, the gap between the
wages of those on the ninth rung and those on the first has risen by a third
since 1980. Put another way, the typical worker earns only 10% more in real
terms than his counterpart 25 years ago, even though overall productivity
has risen much faster. Economists have long debated why America's income
disparities suddenly widened after 1980. The consensus is that the main
cause was technology, which increased the demand for skilled workers
relative to their supply, with freer trade reinforcing the effect. Some
evidence suggests that institutional changes, particularly the weakening of
unions, made the going harder for people at the bottom.
Whether these shifts were good or bad depends on your political persuasion.
Those on the left lament the gaps, often forgetting that the greater income
disparities have created bigger incentives to get an education, which has
led to a better trained, more productive workforce. The share of American
workers with a college degree, 20% in 1980, is over 30% today.
The excluded middle
In their haste to applaud or lament this tale, both sides of the debate tend
to overlook some nuances. First, America's rising inequality has not, in
fact, been continuous. The gap between the bottom and the middle-whether in
terms of skills, age, job experience or income-did widen sharply in the
1980s. High-school dropouts earned 12% less in an average week in 1990 than
in 1980; those with only a high-school education earned 6% less. But during
the 1990s, particularly towards the end of the decade, that gap stabilised
and, by some measures, even narrowed. Real wages rose faster for the bottom
quarter of workers than for those in the middle.
After 2000 most people lost ground, but, by many measures, those in the
middle of the skills and education ladder have been hit relatively harder
than those at the bottom. People who had some college experience, but no
degree, fared worse than high-school dropouts. Some statistics suggest that
the annual income of Americans with a college degree has fallen relative to
that of high-school graduates for the first time in decades. So, whereas the
1980s were hardest on the lowest skilled, the 1990s and this decade have
squeezed people in the middle.
Getty Images -- First, pick your parents
The one truly continuous trend over the past 25 years has been towards
greater concentration of income at the very top. The scale of this shift is
not visible from most popular measures of income or wages, as they do not
break the distribution down finely enough. But several recent studies have
dissected tax records to investigate what goes on at the very top.
The figures are startling. According to Emmanuel Saez of the University of
California, Berkeley, and Thomas Piketty of the Ecole Normale Superieure in
Paris, the share of aggregate income going to the highest-earning 1% of
Americans has doubled from 8% in 1980 to over 16% in 2004. That going to the
top tenth of 1% has tripled from 2% in 1980 to 7% today. And that going to
the top one-hundredth of 1%-the 14,000 taxpayers at the very top of the
income ladder-has quadrupled from 0.65% in 1980 to 2.87% in 2004.
Put these pieces together and you do not have a picture of ever-widening
inequality but of what Lawrence Katz of Harvard University, David Autor of
the Massachusetts Institute of Technology and Melissa Kearney of the
Brookings Institution call a polarisation of the labour market. The bottom
is no longer falling behind, the top is soaring ahead and the middle is
under pressure.
Superstars and super-squeezed
Can changes in technology explain this revised picture? Up to a point.
Computers and the internet have reduced the demand for routine jobs that
demand only moderate skills, such as the work of bank clerks, while
increasing the productivity of the highest-skilled. Studies in Britain and
Germany as well as America show that the pace of job growth since the early
1990s has been slower in occupations that are easy to computerise.
For the most talented and skilled, technology has increased the potential
market and thus their productivity. Top entertainers or sportsmen, for
instance, now perform for a global audience. Some economists believe that
technology also explains the soaring pay of chief executives. One argument
is that information technology has made top managers more mobile, since it
no longer takes years to master the intricacies of any one industry. As a
result, the market for chief executives is bigger and their pay is bid up.
Global firms plainly do compete globally for talent: Alcoa's boss is a
Brazilian, Sony's chief executive is American (and Welsh).
But the scale of America's income concentration at the top, and the fact
that no other country has seen such extreme shifts, has sent people
searching for other causes. The typical American chief executive now earns
300 times the average wage, up tenfold from the 1970s. Continental Europe's
bosses have seen nothing similar. This discrepancy has fostered the "fat
cat" theory of inequality: greedy businessmen sanction huge salaries for
each other at the expense of shareholders.
Whichever explanation you choose for the signs of growing inequality, none
of the changes seems transitory. The middle rungs of America's labour market
are likely to become ever more squeezed. And that squeeze feels worse thanks
to another change that has hit the middle class most: greater fluctuations
in people's incomes.
The overall economy has become more stable over the past quarter century.
America has had only two recessions in the past 20 years, in 1990-91 and
2001, both of which were mild by historical standards. But life has become
more turbulent for firms and people's income now fluctuates much more from
one year to the next than it did a generation ago. Some evidence suggests
that the trends in short-term income volatility mirror the underlying wage
shifts and may now be hitting the middle class most.
What of the future? It is possible that the benign pattern of the late 1990s
will return. The disappointing performance of the Bush era may simply
reflect a job market that is weaker than it appears. Although unemployment
is low, at 4.6%, other signals, such as the proportion of people working,
seem inconsistent with a booming economy.
More likely, the structural changes in America's job market that began in
the 1990s are now being reinforced by big changes in the global economy. The
integration of China's low-skilled millions and the increased offshoring of
services to India and other countries has expanded the global supply of
workers. This has reduced the relative price of labour and raised the
returns to capital. That reinforces the income concentration at the top,
since most stocks and shares are held by richer people. More important,
globalisation may further fracture the traditional link between skills and
wages.
As Frank Levy of MIT points out, offshoring and technology work in tandem,
since both dampen the demand for jobs that can be reduced to a set of rules
or scripts, whether those jobs are for book-keepers or call-centre workers.
Alan Blinder of Princeton, by contrast, says that the demand for skills
depends on whether they must be used in person: X-rays taken in Boston may
be read by Indians in Bangalore, but offices cannot be cleaned at long
distance. So who will be squeezed and who will not is hard to predict.
The number of American service jobs that have shifted offshore is small,
some 1m at the most. And most of those demand few skills, such as operating
telephones. Mr Levy points out that only 15 radiologists in India are now
reading American X-rays. But nine out of ten Americans worry about
offshoring. That fear may be enough to hold down the wages of college
graduates in service industries.
All in all, America's income distribution is likely to continue the trends
of the recent past. While those at the top will go on drawing huge salaries,
those in the broad middle of the middle class will see their incomes
churned. The political consequences will depend on the pace of change and
the economy's general health. With luck, the offshoring of services will
happen gradually, allowing time for workers to adapt their skills while
strong growth will keep employment high. But if the economy slows,
Americans' scepticism of globalisation is sure to rise. And even their
famous tolerance of inequality may reach a limit.
"The Polarisation of the U.S. Labour Market", by David H. Autor, Lawrence F.
Katz and Melissa S. Kearney. NBER Working Paper No 11986. January 2006
"Trends in U.S. Wage Inequality: Re-assessing the Revisionists", by David
Autor, Lawrence F. Katz and Melissa Kearney. NBER 11627. September 2005
"The Evolution of Top Incomes: A Historical and International Perspective",
Thomas Piketty and Emmanuel Saez. NBER Working Paper 11955. January 2006
"Top Wealth Shares in the United States, 1916-2000: Evidence from Estate Tax
Returns", by Wojciech Kopczuk and Emmanuel Saez. National Tax Journal. June
2004
"Trends in the Transitory Variance of Earnings in the United States", by
Robert A. Moffitt and Peter Gottschalk. Economic Journal. March 2002
"Understanding Mobility in America", by Tom Hertz, American University.
Centre for American Progress. April 2006
"American Exceptionalism in a New Light: A Comparison of Intergenerational
Earnings Mobility in the Nordic Countries, the United Kingdom and the United
States", by Markus Jantti, Knut Roed, Robin Naylor, Anders Bjorklund, Bernt
Bratsberg, Oddbjorn Raaum and Tor Eriksson. IZA Discussion Paper No 1938.
January 2006
"Do Poor Children Become Poor Adults? Lessons from a Cross Country
Comparison of Generational Earnings Mobility", by Miles Corak. IZA
Discussion Paper No 1993. March 2006
"Where Did the Productivity Growth Go? Inflation Dynamics and the
Distribution of Income", by Ian Dew-Becker and Robert Gordon. NBER Working
Paper 11842. December 2005
"How Computerised Work and Globalisation Shape Human Skill Demands", by
Frank Levy and Richard J. Murnane. May 2006
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