Widening Inequality

Posted on April 24, 2015

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Income and wealth inequality have been major topics debated recently, and I wanted to provide a cursory look at how the inequality has widened over the past four decades. From WWII until the mid-late 1970’s the U.S. experienced the rise of the welfare state, an expansion of labor unions and a decline of inequality, known as the great compression. However, with the election of Ronald Reagan came the implementation of supply-side economics, which meant lower income tax rates, lower spending for vital government services, and massive deregulation. This facilitated a rise in inequality and leads us to where we are today – a grossly unequal America.

Income Inequality. I start a brief overview of income inequality by examining the share of total income earned by the top 1% of families. In the late 1970’s their share of the income was less than 10%, but now that exceeds 20% as of the end of 2012. Additionally, the middle class hasn’t gotten a raise since the end of the Reagan administration, while CEO-to-worker compensation ratio has gone from 30-to-1 to 300-to-1 in the same time period. The top 10% control more than half of all income and economist Thomas Piketty, who wrote the classic Capitalism in the Twenty-First Century, projects they will control 60% of all income by 2030 (Figure 1). This great income inequality driven by supply-side economics principles has driven the wealth inequality gap to discrepancies not seen since the Gilded Age.

Figure 1: X Marks the Spot

https://www.motherjones.com/files/xmarksthespot-wm.jpg

Wealth Inequality. Greater income inequality drives wealth inequality. With the lower and middle-classes wages stagnant and the upper class wages rising precipitously, this ability to make more income means the ability to save more of that income. In fact, the top 1% of families save approximately 35% while the bottom 90% of families save zero. The share of wealth inequality has exploded over the past four decades, evidenced by Figure 2 (Source: Saez and Zucman (2014)) which indicates the wealth share owned by the top 0.1% richest families in the US from 1913 to 2012 approaching the all-time highs of the late 1920s.

Figure 2. The return of the Roaring Twenties

Additionally, the fall of middle-class wealth exhibited by Figure 3 (Source: Saez and Zucman (2014)), indicates the erosion of middle class wealth from 1917 to 2012 – to 1940’s levels.

Figure 3. The rise and fall of middle-class wealth

Furthermore, the rising wealth of the top 1% of families and the middle-class’s eroding wealth creates a divide seen in Figure 4 (Source: Saez and Zucman (2014)) , which indicates the average real wealth of bottom 90% (right y-axis) of families and the top 1% (left y-axis) of families from 1946 – 2012. These scales differ by 100x in order to plot both segments of the population on the same chart.

Figure 4. The new wealth divide in the US

Income inequality helps to drive wealth inequality. The widening gap of wealth inequality leads to an entrenchment of upper and lower classes, while hollowing out the middle class. This has significant consequences for society. How political leaders address widening inequality is the topic for future blogs.

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Posted in: Economics