Let me begin by proving that income inequality in fact exists. After nearly thirty years of broad-based prosperity wherein the incomes of virtually all Americans grew at around 2.5% annually, a new growth pattern emerged after 1979 that had not been seen since the Gilded Age.
Not only did income growth in general decrease, but the pattern of growth also became a lot more lopsided: incomes at the very top of the distribution began to rise much faster than incomes in the middle, while incomes at the bottom either stagnated or declined. Several sources clearly document this rise in income inequality over the past three decades. Figure 1 below uses Census data to show the annual growth rate of income for the household at the 20th, 40th, 60th, 80th, and 95th percentiles over select timeframes.
FIGURE 1 (click to make larger)
Source: U.S. Census Bureau, Current Population Survey, 1947-2007
The timeframe of 1947-1973 is what more evenly shared income growth looks like. The other timeframes were chosen because they coincided with business cycle peaks, what economists call measuring from peak to peak. Note that the four lower percentiles are split up in fifths (20th, 40th, 60th, and 80th) while the highest percentile represents the 95th. This picture is rather telling: for most households, income growth in the 1970s and 1980s was hardly noticeable and was actually negative for 60% of the population during the Bush years.
While the Census numbers provide a good baseline for thinking about income inequality, the data miss an important part of the distribution. In particular, the parts of the distribution where incomes are rising the fastest are in the top 1%, 0.1%, and even the top 0.01%. Perhaps the most relevant and accurate data for looking at this portion of the income distribution comes from the Congressional and the empirical work done by Thomas Piketty and Emmanuel Saez.
FIGURE 2 (click to make larger)
Source: Congressional Budget Office
Figure 2 uses CBO data to show the percent increase in average incomes for households in select percentiles of the income distribution from 1979 to 2005. The picture shows how remarkable the income gains at the very top of the distribution really are. The top 0.01% of households, for example, saw their average incomes rise nearly five-fold over the last three decades, more than the percentage increase in the average incomes of the bottom 99.5% combined. And to give you a sense of how rich the “very rich” actually are, while it requires an income of $368,238 (in 2008 dollars) to put a household in the top 1% it requires an income of $9,141,190 to put a household in the top 0.01%.
So what is causing this nearly unprecedented rise in the growth of income inequality? Several academic studies have focused on one of three things: the technological boom of the 1980s, the rise of globalization, or government policy, but it’s unclear that any of these are the leading factor. Research in this area has led some in the field to question whether income inequality is actually a problem: The reasons behind why the incomes of the very rich have soared are interesting, but does income inequality reflect an actual social issue that needs to be addressed, like the percentage of Americans without health insurance or rising poverty rates? Make no mistake, the drastic rise in incomes at the very top is a major economic problem, and I’ll show you why.
For starters, remember from Figure 1 that, for most families, income did not rise very fast in the 1980s and actually fell in the 2000s. In fact, according to Census data, real median household income was only 14.6% higher in 2007 than it was in 1979; that’s a pitiful annual growth rate of just 0.5%. But economists think they know why incomes overall grew slower than they did during the post-war boom: normally, productivity growth determines real income growth, and productivity growth tanked in 1973. Productivity growth averaged about 2.8 percent per year from 1947 to 1973 but fell to 1.1 percent after 1973, remained at only 1.4 percent through the 1980s and 2.1 percent through the 1990s. To this day the U.S. economy has failed to return to the 2.8 percent growth rate it experienced for nearly three decades before 1973.
However, just because productivity growth was slower it was by no means inconsequential. After all, as David will probably mention, we are certainly a much more productive country now than we were three decades ago. But to that extent, why isn’t the median household that much better off? Where has all the productivity growth disappeared to? The simplest answer is that average incomes have increased faster than median incomes, as illustrated in Figure 3. According to CBO data, average income grew by 42% from 1979 to 2005, more than triple the rise in median incomes.
Read Mr. Mitchell's Closing Statement
FIGURE 3 (click to make larger)
FIGURE 3 (click to make larger)
Source: Congressional Budget Office
Given figures 1 and 2, the divergence between mean and median household income should not come as a shock. The fact that average income is growing faster than median income suggests that a large portion of the productivity growth in the last three decades has gone, given figure 2, to the very top of the income distribution – and we can use data from Piketty and Saez to find out just how much. Average income in the United States has grown substantially from 1979 to 2005, but that doesn’t mean that everyone equally shared in the income growth like in 1947-1979: the top 1 percent’s average income more than tripled over this time period while the bottom 40 percent’s increased by a meager 10%. So the question is, when the economy grows, who exactly gains? Data from Piketty and Saez suggests that 60% of the difference in average income between 1979 and 2007 is accounted for by the top 1 percent of households. If the United States was a country of 100 households, that would be equivalent to the richest household earning 60 cents of every dollar the entire country earns.
So what does this mean? Since 1979, median income has failed to keep up with average income, or equivalently, most American households have seen little gain in income in the last three decades despite rising productivity growth. America as a whole has indeed gotten a lot richer since 1979, but the typical American family has not. So, is income inequality a problem? For the top 1% maybe not, but for the rest of us it certainly is. When speaking about economic growth, economists often imply that the benefits of that growth are shared by everyone: “A rising tide lifts all boats” is a common mantra. But if you’re the member of a typical American family in the last few decades you might be tempted to ask, “What tide?”
Read Mr. Weinberger's Closing Statement
Read Mr. Weinberger's Rebuttal
Read Mr. Mitchell's Rebuttal
Read Mr. Weinberger's Opening Statement