Samantha Cadena and her daughters await free back-to-school supplies in Los Angeles.CreditLucy Nicholson/Reuters
On December 6, 2016, Patricia Cohen writes in The New York Times:
Even with all the setbacks from recessions, burst bubbles and vanishing industries, the United States has still pumped out breathtaking riches over the last three and half decades.
The real economy more than doubled in size; the government now uses a substantial share of that bounty to hand over as much as $5 trillion to help working families, older people, disabled and unemployed people pay for a home, visit a doctor and put their children through school.
Yet for half of all Americans, their share of the total economic pie has shrunk significantly, new research has found.
This group — the approximately 117 million adults stuck on the lower half of the income ladder — “has been completely shut off from economic growth since the 1970s,” the team of economists found. “Even after taxes and transfers, there has been close to zero growth for working-age adults in the bottom 50 percent.”
The new findings, by the economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, provide the most thoroughgoing analysis to date of how the income kitty — like paychecks, profit-sharing, fringe benefits and food stamps — is divided among the American population.
The Income Gap Continues to Widen
Since 1980, the share of total income going to the top 1 percent of earners has doubled, while the bottom half’s share has narrowed. Stagnant wages for many Americans are a major culprit. In three and a half decades, their incomes have barely changed while those at the top have tripled. The source of that income gain has also shifted at the top; more is coming from returns on investments rather than wages. That makes it harder for the bottom half, with much less capital, to catch up.
Stagnant wages have sliced the share of income collected by the bottom half of the population to 12.5 percent in 2014, from 20 percent of the total in 1980. Where did that money go? Essentially, to the top 1 percent, whose share of the nation’s income nearly doubled to more than 20 percent during that same 34-year period.
Inequality has been a defining national issue for nearly a decade, thanks in part to groundbreaking research done by Mr. Piketty at the Paris School of Economics and Mr. Saez at the University of California, Berkeley.
But now a new administration in Washington is promising to reshape the government’s role in curbing the intense concentration of wealth at the top and improving the fortunes of those left behind.
During his tenure in the White House, President Obama pushed to address income stagnation by shifting more of the tax burden from the middle class to the rich and expanding public programs like universal health insurance.
Both strategies are now targeted by President-elect Donald J. Trump and Republicans in Congress, led by House Speaker Paul Ryan. Like many conservatives, Mr. Ryan argues that aid to the poor is ultimately counterproductive because it undermines the incentive to work. Proposals put forward by Republican leaders, though short on details, make clear that they want to roll back benefits like Medicaid and the Affordable Care Act, which primarily help the poor, and direct the largest tax cuts to the wealthiest Americans.
About 30 percent of the country’s income is channeled to federal, state and local taxes. Apart from military spending and performing basic public services, much of that is distributed back to individuals through various programs and tax benefits in the form of Social Security checks, Medicare benefits and veterans’ benefits. But until now, no one has truly measured the full impact that tax payments, government spending, noncash benefits and nontaxable income together have on inequality.
Abundant documentation of income inequality already exists, but it has been challenged as incomplete. Studies have excluded the impact of taxes and value of public benefits, skeptics complained, or failed to account for the smaller size of households over time.
This latest project tries to address those earlier criticisms. What the trio of economists found is that the spectacular growth in incomes at the peak has so outpaced the small increase at the bottom from public programs intended to ameliorate poverty and inequality that the gap between the wealthiest and everyone else has continued to widen.
Average incomes, adjusted for inflation, grew by 61 percent from 1980 to 2014. But nearly $7 out of every additional $10 went to those in the top tenth of the income scale.
Inequality has soared over that period. In 1980, the researchers found, someone in the top 1 percent earned on average the equivalent of $428,200 a year in 2014 dollars — about 27 times more than the typical person in the bottom half, whose annual income equaled $16,000
By 2014, the average income of half of American adults had barely budged, remaining around $16,000, while members of the top 1 percent brought home, on average, $1,304,800 or 81 times as much.
That ratio, the authors point out, “is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, the war-torn Democratic Republic of Congo, Central African Republic and Burundi.”
The growth of incomes has probably increased a bit since 2014, the latest year for which full data exists, said Mr. Zucman, who, like Mr. Saez, also teaches at the University of California, Berkeley. But it is “not enough to make any significant difference to our long-run finding, and in particular, to affect the long-run stagnation of bottom-50-percent incomes.”
Tax credits and programs like Medicare and disability payments have helped families at the lower half of the income scale. But they have just nipped at the heels of the underlying trend.
“It confirms the surge in income at the top,” said Raj Chetty, an economist at Stanford unaffiliated with the project, who called the work “terrific and very important. And it shows government redistribution doesn’t really change the picture.”
Lawrence Katz, an economist at Harvard who also independently reviewed the research, agreed that the data underscored the inadequacies of programs that try to redress inequities after the fact. “It suggests that if you don’t do something earlier in the market, before distribution, through better education or greater bargaining power, it’s really tough to offset completely,” Mr. Katz said. “Countries with less inequality do some of both.”
Mr. Katz and Claudia Goldin, a Harvard economist, have argued that advances in technology, while crucial to improving productivity and generating economic growth, also have exacerbated inequality by driving down wages of low-skilled workers. The rewards of education are greater than they have ever been, but advancement nationwide has slowed and the system confers many of its favors on the children of the affluent.
If there is a bright spot in the new comprehensive research, it is that after taxes and government spending, the middle class is in better shape than previous studies had shown. That earlier research had missed growth in nontaxable income like employee benefits. “The real income of the middle class is a bit better than we thought,” Mr. Katz said.
As troubling as some may find inequality, it is not necessarily the fault of a rigged system, said N. Gregory Mankiw, an economist at Harvard who is familiar with the new research. He argues that large disparities in income more often than not accurately reflect widely varying economic contributions.
“Inequality is a symptom of a variety of things,” Mr. Mankiw said. Technological progress may be a cause, but it benefits society over all, whereas the weakness of the educational system is clearly negative.
Edward Conard, the author of “The Upside of Inequality” and a former business partner of Mitt Romney, agreed. “People say this is zero-sum game, and you’re taking money that would have gone to the other 50 percent,” he said. “That’s not what happened.”
Instead, Mr. Conard said, entrepreneurs in the United States have been willing to take big risks that have helped foster an infrastructure that promotes innovation, not just in Silicon Valley but in many other growing places around the country. “When rewards go up, people are more inclined to take risks,” he said. Some of those risks pay off and create wealth for everyone.
The new research challenges that contention, at least in part.
Mr. Piketty, Mr. Saez and Mr. Zucman concluded that the main driver of wealth in recent years has been investment income at the top. That is a switch from the 1980s and 1990s, when gains in income were primarily generated by working.
That divergence can slow innovation and further entrench inequities, said Heather Boushey, an economist at the Washington Center for Equitable Growth. When labor income provides the primary route to riches, it creates incentives for people to improve their education and work harder, Ms. Boushey explained. But if getting ahead requires already having a stockpile of cash or inheriting a windfall from your parents, then it is much harder to work your way up.
“If you’re closing off entryways, then you are basically shutting off avenues to competitiveness, innovation and growth,” Ms. Boushey said, “even if you don’t care about fairness.”
Correction: December 6, 2016
Because of an editing error, an earlier version of this article misstated the surname of the author of “The Upside of Inequality” on second reference. As correctly noted on first reference, he is Edward Conard, not Conrad.
Correction: December 7, 2016
An earlier version of a chart with this article showing the sources of income for the top 1 percent reversed the labels for labor and capital.
Yes, the wealthy are getting wealthier! But no one is addressing why?
The study of billionaires would certainly result in either inheritance of large sums of capital asset ownership stakes or savings accumulated to invest in wealth-creating, income-producing capital assets, on the basis that the investments paid for themselves. In either case, the key operative is “past savings,” which the vast majority of people do not have as they are dependent on jobs in which they earn insufficient income to meet their personal and family consumption needs. And because they are trapped in poverty or near poverty, or even in middle-class status, they cannot earn the income to satisfy their wants above their consumption necessities.
We need a national discussion on the topic of the importance of capital ownership and how we can expand the base of private capital ownership simultaneously with the creation of new physical capital formation, with the aim of building long-term financial security for all Americans through accumulating a viable capital estate.
What needs to be our focus is to adjust the opportunity to produce, not the redistribution of income after it is produced.
If only leaders would support education to enlightened all Americans and politicians to reform the monetary and financial system and enact legislation to provide an annual allocation into the capital credit account of EVERY child, woman, and man strictly for investment in new viable capital asset formation projects tied to the growth of the economy, which generate their own revenue stream to initially pay off the loan and following produce a full-earnings dividend for consumption (creating further demand for the economy’s growth).
Once the goal of broadening productive capital ownership becomes the national political focus we will see an unbelievable discussion of workable plans to realize the goal. Remember that planning begins with a vision and a goal. This is not rocket science but it does require national leadership. Implementation requires amending a few laws that basically authorize the transactions that will broaden capital ownership paid for with the future earnings of capital investment.
Of course, to achieve this goal, there needs to be a financial mechanism put in place that will guarantee loan risks; otherwise banks and lending institutions will not make the loans, and the system will continue to limit access to capital acquisition to those who already own capital — the rich. This is because “poor” people have no security or collateral, or sufficient income resulting in savings to pledge against the loan as security, and/or are disqualified on the grounds of either unproven unreliability or proven unreliability.
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security — those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer through their continuous accumulation of capital asset ownership, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.
Thus, the question is who pledges the security and takes the risk of failure to return the expected yield from which to repay the loan. The answer is capital credit loan security (collateral) requirement can be replaced with private capital credit insurance or a government reinsurance agency (ala the Federal Housing Administration concept).
Criteria must be created to qualify the corporations, both new start-ups and established ones, subject to this policy and those corporations that qualify overseen so as to insure that their executives exercise prudent fiduciary responsibility to generate loan payback. Once the guaranteed loans are paid back to the lending entity, the new capital formation will continue to produce income for existing and future owners.
The non-profit Center for Economic and Social Justice (www.cesj.org) is dedicated to such education to alleviate poverty and educate on the financial mechanisms and legislation necessary to put American on a path to inclusive prosperity, inclusive opportunity, and inclusive economic justice.
At the CESJ Web site are volumes of articles and proposed legislation focused on broadening individual capital asset wealth and income simultaneously with the growth of the economy, without redistribution by empowering EVERY citizen to be productive through their capital asset and their labor contributions to the economy.
The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
