Who's Gorging and Who's Getting Roasted in the Economic Barbecue?

By James M. Cypher, Dollars and Sense. Posted March 26, 2007.

Economic inequality has been on the rise in the United States for 30-odd years. Not since the Gilded Age of the late 19th century -- during what Mark Twain referred to as "the Great Barbeque" -- has the country witnessed such a rapid shift in the distribution of economic resources.

Still, most mainstream economists do not pay too much attention to the distribution of income and wealth -- that is, how the value of current production (income) and past accumulated assets (wealth) is divided up among U.S. households. Some economists focus their attention on theory for theory's sake and do not work much with empirical data of any kind. Others who are interested in these on-the-ground data simply assume that each individual or group gets what it deserves from a capitalist economy. In their view, if the share of income going to wage earners goes up, that must mean that wage earners are more productive and thus deserve a larger slice of the nation's total income -- and vice versa if that share goes down.

Heterodox economists, however, frequently look upon the distribution of income and wealth as among the most important shorthand guides to the overall state of a society and its economy. Some are interested in economic justice; others may or may not be, but nonetheless are convinced that changes in income distribution signal underlying societal trends and perhaps important points of political tension. And the general public appears to be paying increasing attention to income and wealth inequality. Consider the strong support voters have given to recent ballot questions raising state minimum wages and the extensive coverage of economic inequality that has suddenly begun to appear in mainstream news outlets like the New York Times, the Los Angeles Times, and the Wall Street Journal, all of which published lengthy article series on the topic in the past few years. Just last month, news outlets around the country spotlighted the extravagant bonuses paid out by investment firm Goldman Sachs, including a $53.4 million bonus to the firm's CEO.

By now, economists and others who do pay attention to the issue are aware that income and wealth inequality in the United States rose steadily during the last three decades of the 20th century. But now that we are several years into the 21st, what do we know about income and wealth distribution today? Has the trend toward inequality continued, or are there signs of a reversal? And what can an understanding of the entire post-World War II era tell us about how to move again toward greater economic equality?

The short answers are: (1) Income distribution is even more unequal that we thought; (2) The newest data suggest the trend toward greater inequality continues, with no signs of a reversal; (3) We all do better when we all do better. During the 30 or so years after World War II the economy boomed and every stratum of society did better -- pretty much at the same rate. When the era of shared growth ended, so too did much of the growth: the U.S. economy slowed down and recessions were deeper, more frequent, and harder to overcome. Growth spurts that did occur left most people out: the bottom 60% of U.S. households earned only 95 cents in 2004 for every dollar they made in 1979. A quarter century of falling incomes for the vast majority, even though average household income rose by 27% in real terms. Whew!

The classless society

Throughout the 1950s, 1960s, and 1970s, sociologists preached that the United States was an essentially "classless" society in which everyone belonged to the middle class. A new "mass market" society with an essentially affluent, economically homogeneous population, they claimed, had emerged. Exaggerated as these claims were in the 1950s, there was some reason for their popular acceptance. Union membership reached its peak share of the privatesector labor force in the early 1950s; unions were able to force corporations of the day to share the benefits of strong economic growth. The union wage created a target for nonunion workers as well, pulling up all but the lowest of wages as workers sought to match the union wage and employers often granted it as a tactic for keeping unions out. Under these circumstances, millions of families entered the lower middle class and saw their standard of living rise markedly. All of this made the distribution of income more equal for decades until the late 1970s. Of course there were outliers -- some millions of poor, disproportionately blacks, and the rich family here and there.

Something serious must have happened in the 1970s as the trend toward greater economic equality rapidly reversed. Here are the numbers. The share of income received by the bottom 90% of the population was a modest 67% in 1970, but by 2000 this had shrunk to a mere 52%, according to a detailed study of U.S. income distribution conducted by Thomas Piketty and Emmanuel Saez, published by the prestigious National Bureau of Economic Research in 2002. Put another way, the top 10% increased their overall share of the nation's total income by 15 percentage points from 1970 to 2000. This is a rather astonishing jump -- the gain of the top 10% in these years was equivalent to more than the total income received annually by the bottom 40% of households. To get on the bottom rung of the top 10% of households in 2000, it would have been necessary to have an adjusted gross income of $104,000 a year. The real money, though, starts on the 99th rung of the income ladder -- the top 1% received an unbelievable 21.7% of all income in 2000. To get a handhold on the very bottom of this top rung took more than $384,000.

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James M. Cypher is profesor-investigador, Programa de Doctorado en Estudios del Desarrollo, Universidad Autónoma de Zacatecas, Mexico, and a Dollars & Sense associate.