Explaining Inequality: The American Dream in Crisis

As an issue, income inequality has largely disappeared from the policy spotlight in recent months. Though once widely discussed, thanks largely to the Occupy Wall Street movement, few Americans are now truly aware of the degree to which money has accumulated at the very top.

Indeed, income inequality is as bad as it has ever been, and it is getting worse. 95% of post recession income gains have gone to the top 1%. The wealthiest 1% of households control 43% of the wealth. And, perhaps most strikingly, the wealthiest 400 households have more money than the bottom 150 million Americans combined.

But what is causing the increase in income inequality? A recent Harvard Political Review article examines some of the causes. As the article explains:

In some ways, a rise in inequality was inevitable. “The two principal causes are the financialization of the economy and the run-up in executive pay,” Timothy Noah, author of The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, told the HPR in an interview. “There was a movement in investment banks away from partnerships towards public ownership, which put a lot more money into the hands of the big banks,” Noah explained. As this happened, the American economy’s shift from “labor” to “capital” continued, and CEOs began receiving compensation in stock options, which allowed their pay to skyrocket.

Federal policy, including changes to the tax structure, has exacerbated the rise of the ultra-rich. “1977 was probably the peak year for progressivity,” Bob McIntyre, director of the non- partisan tax research and advocacy organization Citizens for Tax Justice, told the HPR. Since the late 1970s, tax cuts such as the Tax Reform Act of 1986 and the Bush Tax Cuts have disproportionately benefited the rich. As McIntyre explained in a 1992 paper, “Without tax cuts, the wealthy would have a much lower share of total pretax income,” given that these tax cuts have al- lowed the rich to increase their investment income.

But the narrative of inequality is not just one of rich and poor. “There’s not one divergence, there’s two,” Noah explained. “There’s the divergence of the one percent versus the 99 percent, and then there is the divergence between skilled labor and less skilled labor.” Two phenomena have played large roles in increasing the gap between skilled and unskilled workers. Most notably, the United States’ education system has not produced enough high school and college graduates. “It’s a story about the increasing demand for … workers who have a college education, and the failure of the supply of the workers with those skills to keep up with demand,” argues Scott Winship, a senior fellow at the Manhattan Institute. A shortage of skilled labor increased demand for those with college degrees while most others were left behind.

The decline of unions accentuated this divergence. Unions once provided a backbone for unskilled labor; they fought for higher wages and stronger benefits for their members, leading
to a more equitable society on the whole. “Holding a union card used to be the practical equivalent of holding a B.A., but a lot fewer people in the private sector hold a union card today,” said Noah. The weakening of organized labor has also had political ramifications. Unions were the working class’s most effective allies on Capitol Hill, but their waning power has left them less able to advocate for pro-labor and pro-equality government policies.

The article also takes a look at inter-generational wealth mobility. On this front, the United States is lagging badly. Only 8% of Americans born into families in the bottom fifth of income rise to the top fifth in their lifetimes. In Denmark, the figure is 14%. There is little equality of opportunity in the United States.

Perhaps more interesting, though, is that social mobility varies drastically across the United States:

The Equality of Opportunity Project, a study looking at economic mobility throughout the United States, found vast differences across the country. “What we found is that there is just tremendous variation across the United States in the extent to which kids rise out of poverty,” Nathaniel Hendren, a professor at Harvard University and one of the lead researchers in the study, explained. In San Francisco, California, for example, the odds of someone born in the bottom fifth of income distribution making it to the top fifth is 11.2 percent. Go to Atlanta, Georgia, and the probability sinks to four percent. In general, the South and Midwest have worse rates of mobility than the rest of the country.

Many factors are related to these variations in economic mobility. There are strong correlations between an area’s economic mobility and its income inequality, K-12 education quality, social capital, and overall strength of family structure.

Despite the fact that the media seemingly no longer pays attention to inequality, it still is a very important issue. The American Dream is largely based off of the idea of equality of opportunity. However, as the rich get richer and the poor get less opportunity, we must question whether the American Dream is even compatible with the American Reality.