Timothy Noah: Why the Rich Are Getting Richer and the Middle Class Is Disappearing

The “Great Divergence” is a term coined by Nobel-prize winning economist Paul Krugman to describe the trend, over the past 30 years or so, of skyrocketing income inequality in the United States -- of the rich getting richer and the poor getting poorer and the middle class growing ever narrower.

Timothy Noah's new book by that name examines, in detail, the reasons for that divergence, digging into issues from tax policy to the decline of labor unions to globalization, pulling them all together to paint a picture of three decades of incremental change that have left many of us, at the end, wondering about just what hit us.

Noah doesn't just leave us in despair, however—he offers solutions for reversing the trend, including universalizing education and revitalizing the labor movement. Mostly, though, his book is a wake-up call for those who haven't yet felt the crisis in their personal lives: we all need to care about income inequality, because whether we like it or not, it impacts our entire society .

He took some time to talk to AlterNet about anger and resentment, about outsourcing and income taxes, student debt and the misperceptions many liberals hold about the labor movement.

Sarah Jaffe: I wanted to start with something you said at the end of the book about America being a meaner place today, how that may be fueled by resentments from the Great Divergence. I thought that was an interesting comment to make. Can you talk a little bit about that?

Timothy Noah: Sure. I think what I said was that America was an angrier place in the Sixties, but it’s a meaner place today. People were angry in the Sixties about injustices, but today I think, to some extent, the lack of anger reflects a kind of meanness and the resentment of other groups. By meanness I mean that kind of tribal hostility that’s grafted into American politics as the middle class and the affluent have become strangers to one another.

SJ: You make the point in the book that some people want to solve the income inequality crisis with socially unequal solutions, and that we need to recognize that income inequality is breeding social inequality and social distance.

TN: I do think that income-based inequality breeds social inequality. There are some people who say you can separate them – Mickey Kaus makes that argument – but I don’t think you can. If you look at societies that have a lot of social equality, they tend to have a lot of economic equality too. The US has a fair amount of social equality, but I think you could question whether that tradition is now being compromised by the advent of things like gated communities.

SJ: You go through, chapter by chapter, these different causes of the Great Divergence. Right now, during the presidential campaign, we're hearing a lot about outsourcing and its impact on the jobs we still have in this country. One of the interesting points that you made was that there are certain high-skill jobs that are just as easy to outsource as the low-skill jobs that we’re used to thinking of as vulnerable.

TN: Outsourcing will remain a problem for the American economy, but it may cease being a contributor to income inequality as more and more high-skilled jobs are outsourced. There’s an important caveat to that, which is that we have not yet seen how the affluent will wield their political power in order to prevent outsourcing . There is some evidence in the past, when something like this has come up, that the affluent have a much greater ability to control government policy. We may find that many of the same affluent who have been lecturing the working class for decades now about the virtues of free trade will change their views of free trade once it’s their jobs on the line.

SJ: When we start outsourcing economists?

TN: Right. (Laughs) In fact, Dean Baker is the person I quote making this point and I think it’s an interesting one.

SJ: You talk about the point he makes, that we could allow immigration in certain high-skill fields, and that would have an effect on income inequality.

TN: Yes, and that’s an interesting point of agreement between Dean Baker and Alan Greenspan. I think it’s the one idea in my solutions chapter that will probably be embraced more wholeheartedly by Republicans than by Democrats, because business has been pushing for more of these kind of H-1B visas over the years. I think there is an argument to be made for them based on equality.

SJ: Although in certain high skilled fields we are already seeing problems because of money. We have a primary care doctor shortage because medical students are going into specialties because they can’t afford to pay off their student debt as a primary care doctor – specialists make more money. So if we started allowing doctors to come into the country then we’re really going to have a problem with the wages going down in fields that are really expensive to become qualified for.

TN: Well, that speaks to a whole other issue, which is the rising cost of education. I don’t think you can fix that by fine-tuning a student loan program. I think you can only fix it by limiting the amount of debt that gets taken on in the first place and that means you have to limit tuition increases.

SJ: You have another long thoughtful chapter on the college wage premium. But as student debt keeps going up, it’s going to start eating into that college premium, especially for people like me who had liberal arts degrees that don’t tend to have a great wage boost when you get out of school.

TN: Right, but the cost of not going to college is so great that it would take a lot to reverse that premium. The college premium is no longer growing, but it has given way to the grad school premium. The reason that tuition has gone up so much is the “because they can” argument that I quote. College tuition has to be really, really high to make it not worthwhile to anybody. What’s happening now is it remains worthwhile to a big segment of the population – it’s increasingly not even affordable or achievable to people at the lower end of the income scale.

SJ: It’s less that the college premium has gone up and more that we just don’t have the sort of union jobs that we used to have, the middle class job that you could do with a high school diploma and raise your family on. It increasingly doesn’t exist and so you have to go to college just to get a decent job.

TN: A lot of people think you shouldn’t talk about the education part of the Great Divergence because it somehow plays into the hands of conservatives who want to blame everything on the state of our education system. Conservatives don’t mind beating up on colleges for jacking up tuition because they don’t really like colleges in the first place.

That’s only half of the story. The other half of the story is the decline of labor because that has been an alternative path to a middle class income.

SJ: More people got a middle class manufacturing job than had gone to college and gotten a white-collar job up until not that long ago.

TN: Yes, it was this very good alternative path and it’s been dwindling because of the decline of labor unions. That is, I think, as large a problem as the problem of education being unaffordable at the top end and inadequate in the case of K through 12 years and the high school graduation rates not increasing sufficiently and so on. The decline of labor, it’s a pretty simple story, but it’s an important story and I think it’s the biggest challenge facing liberals today.

It’s the part of the book that liberals least want to hear. They just kind of make a face. Liberals have lost their faith in unions. They will defend them when they’re under attack from conservatives, but they have no great enthusiasm for them and the economic agenda has not been front and center for liberalism lately.

SJ: I think Democrats and mainstream liberals were really caught unaware by the economic crisis. And it made everybody aware of this trend that you write about, that has been going on for the last 30-odd years. Liberals had no response to the crisis, which is what I think gave us the Tea Party. And when Wisconsin happened and when we started to see labor uprisings – well, conservatives had known that they needed to attack unions, but liberals didn’t know that they needed to defend them.

TN: They’re massively ambivalent about unions. Partly because the liberals of today, like conservatives today, were reluctant to defend institutions in general. All institutions are susceptible to corruption and unions are no exception. We all can think of plenty of examples of horribly corrupt unions, but I think that’s where a lot of thinking among liberals stops. Also, unions were hard to defend in the 70s and 80s when they were seen as intransigent in facing competitive pressures. What a lot of people, including myself, couldn’t really see was that it was the labor movement itself that was under attack. It wasn’t just the particular demands of individual labor unions.

People didn’t see that the give-backs that were being sought were inevitable. There was no way they weren’t going to happen, but the unions weren’t going to get anything in return. They were merely going to be ground to dust by the capitalists.

I was born in the late Fifties and my assumption always was that labor would remain a powerful force in American life. It didn’t occur to me that “big labor” would cease to exist. When people use the term “big labor” today I always feel it’s kind of a cruel joke. I suppose labor is still big in the public sector, but it’s not big in the private sector and it’s not likely to stay big in the public sector unless it can be revived in the private sector.

So these are all the reasons why I think liberals have been reluctant to defend unions, but what they don’t realize is you’re not going to make any progress at all at on inequality unless you revive the labor movement.

SJ: You quote Frank Levy and Peter Temin, talking about unions not only as something that exists to pressure for better wages, benefits, and working conditions, but also to shape society’s attitudes. I think that’s a thing that also gets lost when we’re talking about mainstream attitudes towards labor. As labor gets smaller, it’s less able to shape society’s attitude towards these things.

TN: Labor was the most significant institution, by far the largest institution that supported liberalism and supported the Democratic Party. As it’s withered away, so to a great extent has the Democratic Party’s own power and certainly its hold on the white working class. There are all these warring interpretations about the political composition of the white working class, but what’s indisputable is that its allegiance to the Democratic Party has diminished. Whether the majority of the white working class supports the Democrats or not is one of those calculations you can make a million different ways depending on how you define “white working class,” but any way you look at it, a smaller proportion of the white working class supports Democrats. That’s because labor unions no longer wield sufficient power.

SJ: While I was preparing for this interview, I went back and looked at this chart that Matt Stoller at Naked Capitalism wrote about as Wisconsin was happening. It was a chart on the frequency of strikes in the US. When I went back and looked at it, the time that it dropped was also at the beginning of the Great Divergence, probably right around 1982, after PATCO [the Professional Air Traffic Controllers Organization].

TN: It’s sort of ironic because logically the breaking of the PATCO strike shouldn’t have had any effect at all on private sector labor. PATCO was a public union. But nonetheless it was a signal to management that the federal government would not hesitate to break a union. That, combined with the appointments to the NLRB of Donald Dotson, also under Reagan, that really was a very significant rollback to labor’s power and it capitalized on opportunities that had existed all the way back to 1947 as a result of Taft-Hartley.

SJ: When looking at your prescriptions for helping revive labor you talk about the need for labor and management to work together better. I was talking to Stephen Lerner recently, who is a long time organizer with SEIU, and he said, “Find me one boss who is willing to let his workplace voluntarily go union if we want to work in partnership and we’ll happily do it,” but no one is ever willing to do that.

TN: Partnership was an idea that became fashionable when the chips were down for management, but when the Rust Belt was the Industrial Belt, when it was riding high, managers would tell Walter Reuther that they agreed with his ideas, but they weren’t going to act on them because they were his ideas. That adversarial culture was the creation of management, not labor.

SJ: We were just talking about the decline of labor and what that has done to the Democratic Party. You look at the growth of inequality under both parties and find that Democrats are generally better for equality. But under Bill Clinton we got welfare reform, we got NAFTA, we got Wall Street deregulation. We got increasing inequality under Clinton, we just got enough of a wage bump for everyone that it didn’t occur to people to be upset about it.

TN: Well, it was significant that it was a wage bump for everyone because the previous boom of the 80s had not been a wage bump for everyone. But I would say that Clinton’s record is mixed. In the book I say there are really two divergences. There is the skills divergence you and I have been talking about so far and then there is this largely separate phenomenon of the 99 percent versus the 1 percent. Clinton’s record on skills-based divergence is quite good. His record on the 99 percent versus the 1 percent is notably bad. I think it was worse than Reagan. Although partly that was because many of the policies that Reagan had moved forward came to fruition under Clinton.

There is this very dramatic difference between the income gains under Democrats and Republicans – opposite trends. Under Democrats the biggest gains are at the bottom and they diminish as you go up the income scale. Under the Republicans the biggest income gains are at the top and they diminish as you go down the income scale. But if you look at the top you see that as you’re getting up to the 95th percentile that distinction starts to disappear. So the 99 percent versus the 1 percent part of the Great Divergence has proceeded under both Democrats and Republicans.

SJ: Since we’re talking about the 99 percent and the 1 percent, I want to talk about tax policy. One of the points that I think you made that was really worth noting is that the top 1 percent and the top 0.1 percent, their income increased much, much faster than just their tax cuts.

TN: I would say tax policy has certainly not helped, but it has not been nearly as big a contributor as most people think. This is a phenomenon that exists before you even take taxes into consideration. What is true is that to the extent that the government has been redistributing wealth through taxes and benefits, it does so less today than it did in 1979. Oddly though, you can only say that in talking about the totality of all federal taxes and all federal benefit programs. If you look just at income taxes – I don’t have this in the book, the data on this came out after the book came out – but if you just look at income taxes the income tax is actually slightly more progressive today than it was in 1979, which is very counterintuitive. Because, of course, there have been a lot of very regressive changes on the top marginal rates, but those have been more than balanced out by the removal of people from the tax rolls at the bottom, which was as a result of a conservative policy that favored rewarding the “deserving poor”. The earned income tax credit was embraced by Ronald Reagan and it became conservative orthodoxy. It was subsequently adopted by liberals too and became the most meaningful anti-poverty program under Bill Clinton. And of course, the great irony now, like Obamacare, it is yet another policy that conservatives invented and are now turning against because liberals like it. Also because they’re desperate to find a way to pay for even more tax cuts for the rich.

You see this in the most recent Republican tax plan, that was voted on in the Senate last week, where they would eliminate the expansion of the earned income tax credit and the child tax credits – both the provisions that helped low-income people – but they would extend the Bush tax cuts for everybody, including those in the top brackets, and in addition, extend a preposterously low estate tax.

SJ: I think most people still don’t understand how marginal tax rates even work. I saw MSNBC tweet about the vote last week saying, “The Senate voted to extend the Bush tax cuts on all but the top earners.” And it’s like, no, the top earners got a tax cut too, it’s just that it's only on their first $250,000.

TN: Yes, the irony is even in the Obama plan the top earners get the biggest tax cut in terms of effective taxes. People don’t understand. There was a story a couple of weeks ago about Geithner having gone up to Capital Hill to talk about all this stuff to Democratic members of Congress, and he actually had to explain to them that marginal tax rates did not apply to all income, they only applied to income above a certain threshold. This is something that you would expect every member of Congress to be very familiar with.

SJ: And a lot of the media lets them get away with it, which is the frustrating part. Congress doesn’t know it, the reporters don’t know it so all this misinformation is getting out to everybody, so that no one knows it.

But also before we leave the tax subject, you do make suggestions in your solutions for creating new top tax brackets for, I think you called them the “the stinking rich.”

TN: While I absolve the income tax of principal responsibility for creating inequality, I think it would certainly be helpful to use the income tax to try and put more equality in the system. And I do think you need to create these new brackets to reflect changes in the demographics of the tax paying population. More of the money is going to those at the top and we need to change our tax brackets in order to reflect that.

Another thing is that taxes are probably going to have to go up on everybody in order to deal with the deficit problem and not slash away at existing programs. If the Obama administration is eventually going to have to raise taxes on the middle class, something they dare not talk about before the election, but I think will have to happen, then it will be all the more important to be able to demonstrate to the middle class that the rich are paying their fair share.

SJ: Right now with the massive unemployment crisis, people who are unemployed are not paying a whole lot of income taxes. Although unemployment is taxed – a thing that conservatives also don’t like to acknowledge. But we would have more tax revenue if the people who are making very little money right now were making more money.

TN: You haven’t asked me the question that a lot of people ask me. Which is, why should we care about income inequality at all?

I think it’s anthropologically interesting that that question even comes up. What I always say when I’m asked that, I start off with a little disposition on how this is not a question that over the last 100 years of American history people have felt obliged to ask. Because 100 years ago the elites were terrified that there would be an overthrow of the US government by socialists and anarchists. Fifty years ago the elites had to worry about income inequality because the US was battling the Soviet Union for the hearts and minds of other countries.

Today there’s no danger of anarchist overthrow of the US government and there’s no danger posed by Soviet Communism, or probably any communism at this point and so for the first time it has become possible to ask the question, “Why should we care?” And part of why we should care, I think, is that economically you have to incentivize the middle class. If the middle class no longer has an incentive to improve its productivity, after a dozen years when productivity has gone up and median income has not gone up, people working at the median are going to notice that and it’s going to affect their attitude toward their work and their attitude toward their companies. They may have no reason to care whether their companies prosper and they have no reason to care why the country prospers except fear of getting fired or losing their job some other way.

So I think that there’s a strong argument to be made for caring about income inequality simply from the perspective of economic self-interest. That’s before you even take into account the more common argument that the purchasing power of the middle class has diminished and that you need to pay people in order create consumption.

SJ: Rick Perry was famously complaining about the fact that nearly half of Americans don’t pay any federal income tax. It’s like, honey, that’s because they don’t make any money. Meanwhile, they are paying payroll taxes, which are regressive, as well as state and local taxes.

TN: I did a column about the minimum wage a couple of weeks ago. I’m very frustrated that Obama is not doing anything about the minimum wage. Partly on the merits itself and partly because it’s such a great issue to torture Romney with, because Romney is on the record favoring pegging the minimum wage to inflation.

It’s actually one area where he hasn’t quite flip-flopped. He has sort of neutered his position on it, but he hasn’t changed it. He said that, well, you should take into account inflation, but you also should take into account 12 other things which justify not doing anything at all. But at least in principle, he still believes that the minimum wage should be taken out of the political arena and it should go up automatically. It’s perfectly logical. We index tax brackets, why shouldn’t we index minimum wage?

Anyway, Obama won’t raise it and I worry that one reason he won’t is that he’s half sold on the idea that it will create more unemployment. The most recent economic studies suggest that, yes, while it is true that if you raise the cost of hiring that will depress the amount of hiring that gets done, but there is a countervailing force, which is that if you pay people more money they are more productive and less alienated. What economists are starting to find is that the upside outweighs the downside, so that you don’t actually in the end see unemployment effects from raising the minimum wage.

SJ: You were just talking about how productivity and wages have been completely delinked at this point. At least for people in the working middle class, as productivity goes through the roof we’re not seeing wage increases pretty much at all.

TN: Right, and that’s a pretty recent departure from what had been the accepted, not just policy, but economic reality.

SJ: The problem there then is, if productivity has just been completely severed from wage growth, are things like education – like universal preschool, like you suggest or making college more available to all – are those going to help if we’ve already realized that people aren’t being paid based on what they produce at all? They’re not being paid on their skill or their effort or the time that they put in. They’re being paid based on what the boss can get away with paying them.

TN: Yes, but it’s easier to screw over less skilled workers than it is to screw over more skilled workers, and I emphasize in my book that there are a lot of things that have to happen. I would never pretend that any one of these solutions is the silver bullet. There are many things that happened at the same time to create this problem and there are many things that need to happen to make it go away. The only simple part of the story is actually the 1 percent versus the 99 percent. I don’t actually discuss the 1 percent versus the 99 percent all that much in my book because the causes are in that instance quite simple. It’s rising CEO pay and the financialization of the economy.

SJ: You wrote, “Wall Street ate the economy,” which was pretty funny and also entirely true. I was recently reading Thomas Frank’s book from 2000, One Market Under God. He makes a lot of the fact that the stock price of a company will go up every time they talk about layoffs and I thought of that when you mentioned that 75 percent of the increase in corporate profits is a decrease in wages and benefits. At first it makes no sense that the market would go up every time a company lays people off. You think, eventually that gets down to nothing and then you have no company to be buying stock in. But when you talk about the financialization of the economy and the increase in profit, along with the increase in the pay at the top and the decrease in the pay at the bottom it all sort of coalesces nicely into what our problem is.

TN: That statistic about the percentage of the GDP that goes to wages versus capital , that was from JP Morgan Chase. That’s from the horse's mouth.

But you know, that is exactly what you would expect to happen during a period when the power of labor unions was diminishing and the power of stockholders, at least collectively, is increasing. Individual stockholders may not have much say over how companies are run, but in general companies are much more oriented towards boosting their stock price than they are towards paying their workers.

SJ: I just read this wonderful book by a rank and file activist from the UAW, and his catch phase throughout the book is, “money isn’t lost, it changes hands.”

But talking about the stock market, you talk about Americans’ overconfidence in their own upward mobility. The overconfidence that gave us stock bubbles and the housing bubble was this inflated idea that things were just going to keep getting better for everybody because the stock market went up and they were going to get better for everybody because we could sell complicated derivatives based on mortgages that people were probably never going to be able to pay off. I think you make very good points about how central it is to our economy and our idea of ourselves.

TN: A number of people have asked me why are you interested in income, why aren’t you talking about wealth disparity which is actually worse than income disparity? And it’s true, I’m not very interested in wealth disparity and there are several reasons why I’m not. One is that there is no distribution of wealth in America. (Laughter) There’s no meaningful amount of wealth that’s held by anyone but a tiny percentage of Americans.

With income, you could say everybody has income, it’s just a question of redistributing it. But the question of wealth is a question of actually giving wealth to people who don’t have it which is extremely difficult to do. I think the wealth disparities are created by income disparities. When you compare how people got their money in 1913 to how people get their money today, most of them today get it by working, one way or another. They may or may not deserve the level of compensation they receive, but there aren’t very many people in American society who are extremely wealthy and are doing absolutely nothing. That kind of Bertie Wooster syndrome is not a central feature of our economy.

The other thing is that an emphasis on wealth versus income is really something that speaks to an earlier era in the country’s economic development. The liberals and the left were very slow to wean themselves off the idea of the distribution of wealth and towards the distribution of income, because income was a notion that only really became relevant after the Industrial Revolution. Wealth is all that matters in an agrarian economy because wealth means property and you need property in order to grow crops and feed your family. But in an industrial economy you don’t grow your own food, you buy your food with money that your boss pays you. And it was the Progressives that first recognized that, in effect, being the first to make their peace with the idea of an industrial economy.

I think it remains true in our post-industrial economy that income is the real indicator of economic well-being. It’s also just true that there aren’t very many policies that can be used to redistribute wealth. There’s the property tax, which is a clumsy instrument for the distribution of wealth and there’s the inheritance tax which I guess is a wealth tax, but I really think of it as an income tax. It’s a tax on the people who are inheriting windfalls and windfall is income.

SJ: You talk about the rise of debt as a substitute for wages and the debt-fueled consumption bubbles. And you asked “Was it income inequality that drove the worldwide economy to the brink of ruin?” – which I thought was a really interesting, provocative thing to say.

TN: This is the “let them eat debt” kind of argument. Debt is what was at the core of the economic crisis. There is an interesting chart that Daniel Alpert has produced – when you look at the comparison of debt and wages, you see debt rising as the median wage levels go down. Alpert is actually working on a book of his own about this and I think he makes a persuasive case that debt has been a byproduct of income inequality. It’s a creator of income inequality to the extent that we have substituted actual income.

SJ: Anyway, so the last thing I wanted to ask: somewhere you say, “An inequality trend driven by large and quickly growing income shares at the top is not capitalism’s norm.” I mean, the countries that we’re comparing the US to, most of them have a stronger labor movement, most of them have more regulation, most of them, as you pointed out, have more mechanisms for social equality. Things like a healthcare system, better education.

So my question is – is this actually what happens when we get unfettered capitalism? You mentioned before that we used to care about income inequality because we had American communists and anarchists or we had the Soviet Union. We had some sort of check on capitalism. Without it, is this just what we get?

TN: Well, yes. I think that government policy plays a huge role in the creation of income inequality. Not so much in a direct way when it comes to taxes and benefits, but in all sorts of indirect ways. Including regulation of Wall Street, including its policy towards labor unions, including whether the minimum wage goes up or down, and including Fed policy which is a trade-off between fears of inflation and fears of unemployment.

So I think that, yes, government makes a huge difference and the government of the United States today, compared both to governments as comparable, advanced industrial democracies today, and also compared to the government of the United States at mid-20th century, the government today fosters much more income inequality.

It is a global trend. You do have to make that caveat. Income inequality is on the rise in advanced industrial democracies around the world, but nowhere is it as great as it is in the United States and nowhere is it accelerating as quickly as in the United States. Another point worth making is that while it is a global trend, it is not a universal trend. You can actually identify some countries, some advanced industrial democracies where the trend is either towards greater equality or where it has remained level.

In my book I mention France as a place that’s becoming more equal. More recent data that just came out after the book that was published shows that there has been an uptick in income inequality in France, but it remains true that over 30 years the trend has been essentially flat. So government policy does have a big influence on how much income inequality you end up with.