“It’s easier to find a denier of global warming than of rising inequality,” quips economist Jared Bernstein. Maybe. But arguments over defining, describing, and deciphering the sources and consequences of that inequality—not to mention whether and how to deal with it—remain highly contested. Most Americans believe, like Bernstein, that inequality has grown. Two to one they consider its extent “unfair,” rate it an important voting issue, and wish that something would be done about it, including taxing the rich. And, although most say that they are satisfied with Americans’ opportunities to “get ahead,” they have become less sure of that since the turn of the century.
What Americans really care about is not inequality per se but inequality of economic opportunity.
What Americans seem to really care about, though, is not inequality per se but what it means for inequality of economic opportunity. Americans care about people getting their “just rewards.” Some, those in the Paul Ryan school, profess to care about poverty and middle-class struggles, but still take no issue with inequality of outcomes. In other words, it is not about the gap. If everyone were getting richer, why would it matter if the rich did so fastest? And conversely, if everyone were getting poorer, would a shrinking gap be any consolation? For many scholars, however, the issue is precisely the gap, because it itself has consequences. It may well be, for example, that inequality of outcomes undermines equality of opportunity, as many Americans fear. In this essay, I examine the recent research on growing inequality, whether inequality is itself harmful, and what might be done to counteract some of its effects.
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Almost any way that one calculates economic inequality, it has continually widened since the 1970s. But behind that capsule statement lies a morass of complexities. Do we mean inequality in wages, income, wealth, or living standards? Do the calculations include government help, which could moderate the change? And inequalities between whom: the poor and the middle class, the middle class and the wealthy, or the 99 percent and the 1 percent? Or perhaps we should not worry about inequality at all and only about a stagnating economy and poverty, however rich the rich are.
Annual income is the most common but not the best way to assess economic outcomes. In the 1970s and ’80s, widening differences were largely between low-income households and the rest. Since then the widening differences have been between households with the very highest incomes and the rest. In 1970 the average pre-tax income of the richest 1 percent of Americans was about 27 times that of the average income of the bottom 50 percent; that ratio rose to about 57 times in 2000 and then to about 80 times in 2014. In 1970 the highest 10 percent received about a third of all the national income and now they receive about half. Critics of such calculations often point out that they neglect after-market government taxing and spending that redresses inequalities. True, but those programs only modestly redistribute income (especially if we bracket the elderly). Indeed, program innovations in recent decades have moved money from the neediest groups, such as single mothers, toward the middle class, notably pensioners.
Annual income, in any case, fluctuates too much from year to year and evolves too much over time to be an ideal indicator of people’s overall economic situations. Net worth—people’s assets minus their debts—is a better measure. Wealth not only reflects lifetime income, it supplements earnings, gets access to credit, and provides a safety net for hard times. And in fact, wealth inequality is much greater than income inequality and has grown faster. In 1970 a family in the top 1 percent was “worth” about 70 times the average family in the bottom 90 percent; by 2012, about 170 times as much. The top 1 percent owned roughly 25 percent of all American wealth at the start of the era; now they own over 40 percent.
Almost any way you calculate it, economic inequality has continually risen since the 1970s.
On the other hand, inequality in what people consume is smaller than income inequality, in part because the rich save and the poor borrow. Nonetheless, consumption inequality, which had narrowed for much of the twentieth century, has also grown recently—with one interesting exception: low-income Americans have experienced a faster increase in leisure time than well-off Americans. Yet much of the increased free time for the former appears to be unwanted leisure due to a shortage of work hours.
At a deeper level, America’s widening inequality is about more than money. A 2015 National Academy of Sciences panel reported a growing gap in adult life expectancy associated with education and income. Moreover, the gap in the predictability of life expectancy has also grown. The advantaged have become better able to project—and thus to plan for—their deaths, while among the worst off lifespans have become more variable. Predictability makes plans for retirement and inheritance sensible and accomplishable; unpredictability not only shocks families, it also makes planning itself seem futile. Since about 1970, disadvantaged Americans have also experienced an increase in consequential non-economic disruptions, such as couple breakup and single parenthood. Family turmoil has increased substantially among the less educated but not among college graduates.
In short, security has become increasingly unequal, with disadvantaged Americans facing increasingly greater life risks of all sorts while the lives of advantaged Americans have become surer. Moreover, the effects of an unexpected setback magnify the inequality. Some people can lose a spouse or a great $200,000 job and, between wealth, family support, and connections, ride things out until the next spouse or next $200,000 job. Others lose a spouse or a lousy $20,000 job and quickly end up on the street. A survey conducted by the Federal Reserve found that 47 percent of Americans could not afford an unexpected $400 expense.
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Many explanations for growing inequality are on the table. Technical and structural changes, such as computerization and globalization, have strengthened the market position of educated specialists while undermining that of uneducated workers. Business rearrangements, including the growing role of finance in the economy and of “shareholder value” in corporate affairs, enrich managers and asset-holders more than workers. Social trends, such as the increasing delay of marriage, more children raised by single parents, women’s entry into the professions, and growing marital “homogamy”—high earners marrying high earners—have also widened the economic gap between top and bottom.
Almost all the possible causes of growing inequality are, however, conditioned by policy. Inequality trends vary substantially among Western nations. Inequality has surged in the United States and a few other English-speaking countries since 1970, while other countries, such as Australia and France, have experienced only mild or even negligible increases in inequality. Even within the United States, states vary in the pace of increasing inequality, variation that seems connected to state policy. Economist Thomas Piketty, whose work has been interpreted as suggesting that rising inequality is inevitable, demurs: “The history of the distribution of wealth has always been deeply political. . . . It is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result.”
The history of the distribution of wealth has always been deeply political.
As British economist Tony Atkinson wrote in his last book, Inequality (2015), even the most seemingly technical or market forces are guided by government actions. For Atkinson the rise in inequality has been the joint result of market forces driving inequality (such as global trade) and weakening state action against such forces. Policy can affect earnings through, for example, rules for wages, corporate governance, and labor bargaining. The weakening of organized labor has been the key force, Atkinson argues, for worsening income inequality in the United States and the UK. And policy of course affects any post-market adjustments through taxes, subsidies, health provision, and so on. Policy even shapes social trends such as delayed marriage through provisions for housing and child care, equal rights laws, and the like.
Some countries have shown a preference for shaping inequality by intervening in the market, while others prefer to do so by correcting for the market. The United States has long been distinctive in doing little of either, a tendency that has only grown since the 1980s when Reagan launched his attacks on organized labor. One notable, successful post-market intervention, the Earned Income Tax Credit, explicitly supports families and jobholders, which is why it has received backing from both parties, but it excludes the jobless and poor workers without children. The Obama administration was a notable exception to this trend: it did more than any other recent administration to intervene in a redistributive direction through its stimulus package and Obamacare.
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Research to isolate the effects of inequality per se—to see whether it matters if a person is surrounded by more or less inequality—has been muddled, as I pointed out in a review of Richard Wilkinson and Kate Pickett’s influential book The Spirit Level: Why Greater Equality Makes Societies Stronger (2009). Pickett and Wilkinson returned in a 2015 article, in which they concluded not only that inequality correlates with poor health but that inequality actually causes it. A couple of recent studies in the United States suggest that county-level inequality may, by itself, undermine health, although another study found that it is local poverty, not inequality, that matters. Sociologist Lane Kenworthy suggests that such health consequences of inequality may be detectable but still minor.
And so with other possible consequences. Several scholars have assessed whether inequality is psychologically damaging or undermines happiness. The well-off are happier than the poor and that gap has widened, but on the question of whether the level of inequality substantively reduces a nation’s or a community’s general happiness, the evidence remains mixed. Many also worry that economic inequality breeds political inequality which, in turn, can reinforce economic inequality. Certainly the rich have far more clout than the rest of us. But whether the expansion of inequality has worsened that bias is not clear (and some would argue that Trump’s capture of the GOP belies the claim).
Unless educational policies particularly favor those from disadvantaged homes, more education is not likely to alter inequality.
In other words, whether the gap itself makes people sick, unhappy, or politically neutered is a complicated question. This much is clear: little research suggests that inequality does a community or its residents any good; most suggests that it could well be a detriment, even if only a modest one. The actual mechanism of how inequality harms us is a separate puzzle. Is it psychological, in the sense that seeing the very rich creates envy, disappointment, and stress? Is it institutional, because rich people can direct community resources (say, school counselors’ time) to their private ends? Researchers have yet to nail that down.
It is also not entirely clear how economic inequality undermines equal economic opportunity, a prospect that distresses Americans in a way that inequality alone does not. Perhaps it does so by reducing overall economic growth, thus hampering everyone’s chances to move up. Some analysts, such as economist Greg Mankiw, oppose this interpretation, arguing that inequality actually motivates individuals to innovate and invest, thereby growing the economy. Many others agree, though, that concentration of wealth in the hands of a few reduces overall spending (and perhaps ambition, as well). Generally studies suggest that inequality reduces economic growth.
Inequality of outcome could also affect equality of opportunity by decreasing the chances that children can change their relative positions on the class ladder. Countries and U.S. states with more inequality of outcomes tend have less relative mobility, mostly because affluent families provide educational advantages to their children and grandchildren—for example, by affording homes in good school districts. Indeed, in the United States today, education, not gifts or inheritance, is the main way that affluent parents bequeath affluence. Accordingly, then, circular mobility in the United States is lower than in comparable Western nations.
Economist Raj Chetty and colleagues have linked children’s to parents’ incomes in millions of American tax records and sorted them by labor market and county. Communities, they found, vary greatly in the chances that their children can move up the economic ladder. A key feature that distinguishes high- versus low-mobility areas is income equality: more inequality, less mobility. The researchers suggest that it is local inequality itself that hinders mobility. However, community inequality is so intermeshed with other community factors—notably the proportion of single-parent families—that isolating the gap itself as a cause is difficult.
Given the rapid rise of inequality since 1970, we might have expected a notable drop in young Americans’ chances to move up—just what Americans care about. Some evidence is emerging along those lines. One new study identifies a sizeable decline in the relative mobility of Americans entering the labor market before and after 1980, when inequality took off. Moreover, there was probably a coincident drop in absolute mobility: members of more recent cohorts earning lower real wages than their fathers did. Was growing inequality the cause, or was it other developments, such as the changing job market, that both reduced opportunities and widened the income gap? For now, it is reasonable to assume that widening inequality of outcomes impedes, or at least signals circumstances that impede, equality of opportunity.
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It matters more than it did a couple of generations ago whether a child is born onto one of the lower or one of the higher rungs of the economic ladder. And if one accepts that overall economic inequality—not just an individual’s economic disadvantage—is itself intrinsically harmful, then the question of what to do about it arises.
A politically popular solution is to give more young people more education. But unless educational policies particularly favor youths from disadvantaged homes, simply more education is not likely to alter inequalities of opportunity or of outcome much. This is because parents with advantages will, as they always have, find ways to get their children the level of education that is required.
Experts have offered long lists of other suggested fixes. Some involve more egalitarian post-market interventions, such as higher taxes on wealth and greater distributions of benefits, such as family allowances or a basic income. Some involve intervening in the market, including higher minimum wages, more apprenticeship programs, and the empowerment of unions.
Americans have long been averse to programs that appear to reward the undeserving (and for many Americans, being physically fit yet poor defines undeservingness). In the words of new Housing and Urban Development Secretary Ben Carson, “We do no favors for anybody. There are no extras for anybody.” One explanation for why Trump did well in distressed communities where many people rely on government assistance: the entitlement recipients did not vote but neighbors who had noticed and resented those entitlements did. Some interventions, such as a higher minimum wage, appear to reward virtue and have more popular support. During the last campaign, over two-thirds of Americans favored raising the federal minimum wage to twelve dollars or more. As mentioned earlier, taxing “the rich” is also a popular idea—even if it may not be politically feasible at the federal level.
What seems to succeed politically are universal public goods that indirectly redistribute wealth and security, albeit inefficiently and incompletely. The key example is Medicare, and, to a lesser extent, Medicaid and Obamacare. They seem to help people be a bit healthier; they certainly help people save money. So with public education, effective policing, pollution abatement, and the like. For this reason, a basic income might succeed as well. Such universality is political insurance, as Republicans discovered in the 1950s with Social Security and later with Medicare. Though under the current administration, we will be lucky to keep even the public goods we already have.