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CHAPTER

4

Unequal and Immobile

IN 2008, BARACK OBAMA WAS ELECTED PRESIDENT AFTER a largely issue-free campaign. There were serious issues out there, to be sure. The war in Iraq continued, but after the surge U.S. combat fatalities had fallen from 126 in May 2007 to thirteen in July 2008. The military mission would be scaled back, whoever won the election. The financial crisis, which began with the bankruptcy of Lehman Brothers in 2007, would turn out to be a defining challenge for the Obama administration; but it was not an issue that much divided the parties the next year, and the government bailout was authorized by legislation signed by George W. Bush.

The principal issue of the campaign was nothing so boring as that. Instead, the issue was the candidates, and in particular Obama, who ran as a charismatic leader. He had virtually nothing by way of legislative background, but offered hope and change and the promise that his election would signal “the moment when the rise of the oceans began to slow and our planet began to heal.” There was also the prospect of absolution for America’s historical racial injustices, coupled with the sly suggestion that his opponents were tinged with racism. They would dwell on his faults, he said, and then they would add, “Did I mention he was black?”

To many pundits, the election of a rock star president in 2008 seemed a one-off, not to be repeated. In future elections, Democrats would not be faced by a tired John McCain and life and politics would go on, not much changed. “This was a good Democratic year,” observed Bill Kristol, “but it is still a center-right country.”1 Within two years, however, Democratic majorities in the House and Senate had passed far-reaching progressive legislation: the Patient Protection and Affordable Care Act (Obamacare) and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Tea Party irruption and the 2010 Congressional election, which returned control of the House to Republicans, might have seemed to evidence Kristol’s beliefs about a conservative country, but if so the 2012 presidential election would have been a rude awakening. If the 2008 election was largely content-free, the 2012 election was fought over a single issue, that of income inequality and immobility, in which Obama and the Democrats employed the rhetoric of class warfare to pit the bottom 99 percent against the top one percent. The 2014 mid-term elections were again a turn to the Right, but the impuissance of Congress in a country with an increasingly presidential form of government focuses attention on 2016, and the prospect of another election for the highest office fought over income disparities by candidates both Left and Right.

In a signature 2011 speech in Osawatomie, Kansas, Obama described income inequality as the defining issue of our time. America’s grand bargain, he said, was that those who contribute to the country should share in its wealth. That bargain had made the country great, the envy of the world, but now it was betrayed by the “breathtaking greed” of the super-rich.

Look at the statistics. In the last few decades, the average income of the top 1 percent has gone up by more than 250 percent to $1.2 million per year. . . . And yet, over the last decade the incomes of most Americans have actually fallen by about 6 percent.2

The problem was worsened, he said, by a tax system whose shelters and loopholes gave the super-rich lower rates than the middle class. “Some billionaires have a tax rate as low as 1 percent. One percent. That is the height of unfairness. It is wrong.” And how did this happen? Because inequality gave the superrich who contribute to political parties an outsized voice in the way in which tax and other laws are written. Worse still, he said, the promise of income mobility, that a child born in poverty might through his own efforts rise to the middle class, had been broken.

Mitt Romney sought to deflect Obama’s message with a promise of a more entrepreneurial society, but this failed to arouse much enthusiasm. The Republican candidate, with his 59-point recovery plan, didn’t connect with the voters. What they wanted instead was a candidate who would speak to the issues of income inequality and income immobility. The Republicans weren’t interested in inequality—but inequality was interested in them. And so Romney lost, and this at a time when the economy was so weak that pundit George F. Will opined that, if Obama won, the Republicans should find another line of work.

The voters’ concerns were magnified by the severe job losses of the Great Recession. In the twenty-six months between December 2007 and January 2010, the economy shed 7.2 million jobs and those with a high school education or less accounted for four-fifths of the job losses.3 The community organizer—Obama—told them he had their back, while the asset fund manager—Romney—came across as the boss who was about to give them the pink slip.

The Great Recession of 2007–09, and the job losses that ensued, threatened a core belief of ordinary Americans, the idea that this is a country of economic promise where everyone can get ahead. If that’s no longer the case something seems drastically wrong. Let’s start, then, by asking whether income inequality is really the problem it’s cracked up to be. We’ll never have perfect income equality, so long as people sort themselves out by their industry and talents, and any government that tried to mandate it would, if successful, deprive its citizens of the incentive to produce wealth. Everyone would be equal, but they’d also be very, very poor. Income disparities in themselves are not a problem, then, unless they rise to the levels described so effectively by Obama, where we’ve become immobile, where the rich shape the contours of the laws and prevent those at the bottom of the ladder from getting ahead. Is Obama’s America our America, then?

Inequality

To measure income inequality, one must first ask what one is looking for. Income might be pre-tax earnings, or it might be take-home pay after taxes. Pre-tax income provides a better measure of overall changes in the economy; post-tax income provides a better measure of the effect of the government’s tax and welfare policies. Taking it a step further to include the government’s entire safety net would have one include non-cash, in-kind government transfers, such as food stamps, school lunches, and subsidized housing.

All of these measures are of interest. We’d like to know whether recent changes in the economy have increased income inequality, and we’d also like to know what the government has done about it through its tax and welfare policies. For the moment what I want to know is whether current economic trends, excluding taxes and government safety nets, can explain the rise of inequality. I’ll subsequently look at what the government has done to adjust for this through its tax policies and welfare benefits.


Measuring Pre-tax Earnings

Pre-tax income might be raw income, one’s salary before taxes (including business income from partnerships and pass-through S corporations). Then there are capital gains, the benefit derived from the appreciation of one’s assets. Capital gains in turn might either be realized (where an asset is sold above cost during a fiscal year) or unrealized (where the asset isn’t sold but has simply appreciated in value).

It’s not really possible to measure pre-tax income shorn of how it’s affected by government policies. When marginal tax rates are higher than 90 percent, as they were in the 1950s, the very rich are going to slack off and earn less, or at least report less income on their tax returns.


Have we seen a run-up in pre-tax income inequality, then? The short answer is yes, at the very top end. If income were equally divided across households and we all earned the same, the top 5 percent of earners would get 5 percent of the country’s income. That’s never been the case, however, and especially today. Between 1968 and 2011, the top 5 percent’s share rose from 16.3 to 22.3 percent.4 That’s quite striking, but when Thomas Piketty and Emmanuel Saez looked more closely at the data they found that the strongest sense of inequality comes from the wealthiest million-plus American households, the much-reviled one percent who earned more than $394,000 in 2012.5 That’s an average Wall Street salary, more than what federal judges and 90 percent of law firm partners make. It’s also more than the average salary of a doctor with a medical specialty. As seen in Figure 4.1, the one percent take home about 17 percent of everyone’s earnings, and 20 percent when realized capital gains are included.


FIGURE 4.1

The One Percent’s Share of Total U.S. Family Pre-tax Income, 1913 to 2009


SOURCE: Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, The World Top Incomes Database, at http://topincomes.g-mond.parisschoolofeconomics.eu/.


Even amongst the one percent, there are enormous income disparities between the 1.35 million households earning $394,000 or more and the 135,000 households earning $1.6 million or more a year. The latter are the 0.1 percent. They include professionals at the top of their field, business executives, and your average NHL hockey player. The one percent earned 20 percent of the country’s household income, but of that nearly half went to 0.1 percent. Then there’s the 0.01 percent, who make more than $5.5 million a year, 100 times more than the median American (at the midpoint of the distribution). There are 13,000 of them, and they include finance executives, asset managers, and your average New York Yankee ballplayer. Together, they walked off with 4.5 percent of the household income of all Americans.

It wasn’t always been like this, and Figure 4.1 portrays the roller-coaster the one percent have been on. The Roaring Twenties were a great time for them, one of instant millionaires and of Great Gatsbys who rose from obscurity to riches. Beginning with the Great Depression and the New Deal, however, their share of the income stream fell by more than half, only to rise again after 1980 and return to heights not seen in 60 years. The 1950s and 1960s were a halcyon period of relative income equality, interposed between the bookends that preceded and followed them, with the one percent’s share increasing from 10 to 20 percent of the national income over the last 30 years.

By itself this might explain why income inequality became a hot issue in 2012, but that wasn’t the half of it. It wasn’t simply that the one percent became wealthier—it’s that no one else seemed to move up very much, even after progressive taxes meant to shift wealth from the rich to the poor. The non-partisan and highly-respected Congressional Budget Office (CBO) reports that the top one percent enjoyed real after-tax income gains (including realized capital gains) of 275 percent over 1979–2007. The 81st to the 99th centile gained only 65 percent, and Americans in the middle of the distribution at the 21st to the 80th centile gained only 37 percent. For the 20 percent of Americans in the lowest quintile, the increase was only 18 percent.6

More recently, the wealth gap became greater still. After the Great Recession of 2007, the one percent took a hit. Much of their earnings come in the form of realized capital gains, which shrank because of the decline in share prices. Nevertheless, over 1993–2011 they enjoyed real pre-tax income gains of 57.5 percent, ten times more than the 5.8 percent of the bottom 99 percent.7 The one percent fared even better over 2009–11, when all the income gains went to them. Their income grew by 11.2 percent while that of the remaining 99 percent fell by 0.4 percent.8

Apart from inequalities in income streams, there are stark differences in American wealth holdings. Thomas Piketty estimates that the top ten percent of wealth holders own more than 70 percent of the country’s assets, and that the top one percent hold more than 30 percent.9 That’s down from Gilded Age heights of 1910 (80 percent for the top ten percent, 45 percent for the top one percent), but it’s still a remarkably unequal split in wealth.10

The American middle class has been hardest hit in all of this. The very rich are doing well, and the poorest Americans are propped up by a generous welfare system as we’ll see in Chapter 11. At the bottom end of the income distribution, people are also finding jobs. It’s the jobs in the middle that have cratered, a phenomenon economists call “jobs polarization.” Highly paid jobs have expanded, but then so too have poorly paid, low-skilled jobs.11 We’re talking about hands-on jobs such as food service workers, janitors and gardeners, cleaners, home health aides, hairdressers and beauticians. They don’t require a high degree of education, they’re not unionized, and they won’t make you rich, but the jobs are there. It’s all very well to be in the one percent, but one still needs people to mow the lawns and mop the floors, and that’s not going to be done by computers or machines. What we haven’t seen, however, is job growth for the kinds of people whose high school diploma used to get them a decently paying factory job.12

Today, America has the smallest middle class in the First World, defined as households with an income between 75 and 150 percent of the country’s median (midpoint) income. Only 38.6 percent of Americans are in that category, fewer than in Sweden (59.7%), Canada (46.2%), Britain (45%), and all of the twenty-four other First World nations surveyed.13 There’s also been a shift of wealth to the very rich in all advanced economies, as seen in Figure 4.2, but it’s happened more in America. Over the last twenty years, the one percent increased their share of total income (including realized capital gains) in each of Canada, Germany, and Sweden, but not nearly as much as America’s one percent.


FIGURE 4.2

The One-Percent’s Share of Total Pre-tax National Income: Four First World Countries


SOURCE: Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, The World Top Incomes Database, at http://topincomes.g-mond.parisschoolofeconomics.eu/.


America and Europe have traded places. While there was greater wealth inequality in Europe in 1910, now there’s more of it in the United States. That doesn’t mean that America’s 99 percent, or even the average American, is poor, by world standards. It’s only when ordinary Americans are compared to the top American one or five percent that the inequalities stand out. Were the median American family, with its earnings of $50,000 a year, matched against people across the world, it would find itself in the global one percent. In the lottery of life, nearly all Americans are amongst life’s great winners, and seem poor only in comparison with the richest Americans. But then it wouldn’t occur to compare oneself with the average Kenyan.

The picture that emerges from all of this is of a society that offers tremendous financial rewards for the very rich. It’s also a picture of a middle class that has been squeezed from both ends. The rewards of a sound economy have flowed disproportionately to those at the very top end, with generous welfare benefits going to those at the bottom.

Immobility

Income inequality might not seem much of a problem if everyone had an equal shot at the prize. That’s how most conservatives respond to liberal concerns about inequality. But what if there really isn’t much income mobility in the United States? What if Lincoln’s promise of opportunity for everyone proves false? In that case Americans might join in comedian George Carlin’s bitter laughter: It’s called the American Dream, he said, because you have to be asleep to believe it.

So just how much mobility is there in America? Historically, a lot, in Ragged Dick’s America. The nineteenth century was a golden age for income mobility, and in the 1950s and 1960s more people than ever before went to college, aided by the G.I. Bill. On graduation, they found good jobs waiting for them, and better homes than the ones they grew up in. Discriminatory barriers continued to impede women and minorities from moving up, but these began to recede with the rise of feminism and the civil rights movement. Since then, however, income mobility has slowed, and today there is much less chance for a family to move up the ranks.14


TABLE 4

Cross-country Immobility Rankings

COUNTRY IMMOBILITY
United Kingdom 0.50
Italy 0.48
United States 0.47
France 0.41
Spain 0.40
Germany 0.32
Sweden 0.27
Australia 0.26
Canada 0.19
Finland 0.18
Norway 0.17
Denmark 0.15

SOURCE: http://www.economicmobility.org/assets/pdfs/PEW_EMP_US-CANADA.pdf.


Table 4, taken from the Pew Economic Mobility Project 2011, ranks countries on an immobility scale, where a higher score means less mobility (a closer correlation between the incomes of fathers and sons). At zero there is no correlation and the society is perfectly mobile. Denmark has a ranking of 0.15 and is relatively mobile, while an immobile Britain has a ranking of 0.50. Surprisingly, the U.S. comes in at a relatively immobile 0.47. To put this in dollar terms, imagine a father who earns $100,000 more in income than the average family. Danish children will earn only $15,000 more than their peers, but British children will earn $50,000 more and American children $47,000 more.15 Remarkably, the U.S. is now one of the least mobile societies in the First World.

Over time, the earnings advantage dissipates, but for rich Americans it would still persist for several generations. At a ranking of 0.47, a father earning $400,000 (just over the one percent threshold) would assume that it would take four generations (great-great grandchildren) before his descendants fall into the middle class. Using more sophisticated estimation techniques, Bhashkar Mazumder reports that it would be more like five generations (great-great-great-grandchildren).16 That might not seem like a lot, but it’s a good run even when compared to the British aristocracy. Few British nobles can trace their titles back much before 1800, and before then most of their ancestors lived in obscurity.

This has to be troubling for Americans, who don’t want to see permanent classes of peers and peasants. That’s our idea of what Europe is or was, and we’ve always seen the U.S. to be better than that. We see America, not Denmark, as the land of opportunity. If it turns out that we are more class-ridden than the Europeans, then a core understanding of what it means to be American will have been lost.

Inequality Hardens into Immobility

A high measure of income immobility magnifies concerns about income inequality. People who think that there’s a lot of income mobility in America—children doing better than their parents—don’t worry about income inequality. They’re willing to accept it so long as their kids have an equal shot at getting ahead. That’s why the United States resisted socialism, thought Marx. As the most advanced capitalist country, America should have been the first place where socialism triumphed, according to Marxist theories of history. If that didn’t happen it was a bit of an embarrassment, which Marx tried to explain away by pointing to American social mobility. “True enough, the classes already exist, but [they] have not yet acquired permanent character, [and] are in constant flux and reflux, constantly changing their elements and yielding them up to one another.”17

But that was then. Today America is both unequal and immobile. As that becomes more apparent, we might begin to see the kind of class-consciousness that Marx thought was missing in 1850s America, and with this a greater support for wealth redistribution schemes. Perhaps that’s already started to happen. It’s what the 2011 Occupy movement and the one percent protests were all about, and the 2012 election too.


FIGURE 4.3

Income Immobility Tracks Income Inequality


SOURCES: Miles Corak, “Inequality from Generation to Generation: The United States in Comparison,” in Robert Rycroft (ed.), The Economics of Inequality, Poverty, and Discrimination in the 21st Century, ABC-CLIO (2013); CIA Fact Book.


It’s not just that people worry more about inequality when there’s little income mobility. There’s also more real inequality in immobile societies. Immobility entrenches inequality. That’s the message from Figure 4.3, where the immobility rankings from the Table 4 data set (times 100) are paired against a cross-country measure of inequality (the economist’s Gini coefficient times 100).18 At the Figure’s lower left, Denmark is an egalitarian and highly mobile society. Brazil, on the upper right, is an unequal and immobile society. The United States is in the upper right quadrant, closer to Brazil than to Denmark.


How to Measure Inequality

The Gini coefficient is a single number between zero and one, with higher numbers representing more inequality. If everyone earned the same income (perfect equality), the Gini value would be 0; and if all the income went to the highest paid person (perfect inequality), the Gini ratio would be 1. No country is at 0 or 1, and in practice the range of Gini ratios is between .25 and .65. Clear data are hard to come by and there are significant measurement issues, but the Gini coefficient nevertheless provides a commonly accepted measure of cross-country income inequality.


Figure 4.3’s straight line reveals a nearly one-to-one relationship between immobility and inequality. (I explain how the line is derived in Appendix C.) Alan Krueger, the former chief White House economist, has labeled the line the “Great Gatsby Curve,” with a nod to F. Scott Fitzgerald’s tycoon. With more accuracy, it might be labeled the anti-Gatsby curve, since Fitzgerald’s eponymous protagonist came up from nowhere, and the message from the line is that this is less likely to happen in the United States than in Denmark. What the Figure portrays is inertia: egalitarian countries are likely to stay egalitarian, and unequal countries are likely to stay unequal. For highly unequal countries, that’s a recipe for peasants with pitchforks.

Does this describe the United States? To answer that, we’d want to move beyond cross-country comparisons to look at the relation between inequality and immobility at the local level in America. That’s what Raj Chetty and his co-authors did, and what they found is that unequal American communities are also more immobile, as the Great Gatsby curve would predict. Explaining what happened is more complicated, however. Were Obama right, the fault would lie with the one percent, who sucked all the oxygen and the money out of the room. But that’s not what Chetty et al. reported. Instead, they didn’t find any relation between the one percent’s share of the economy and income immobility in local communities.19

Chetty et al. also found that the chances of an individual child moving up from his parents’ earnings quintile hasn’t changed in the last twenty years, and more recent scholarship tells us there hasn’t been much change since 1980.20 Perhaps that’s not surprising. Always ahead of his time, Irving Kristol described the emergence of an aristocratic New Class in 1978, a term that Christopher Lasch also employed before his death in 1994.21 The causes I attribute to the rise of immobility in the last part of this book—the weakening of the public education system, a flawed immigration law, legal barriers to advancement—are moreover things that go back to at least 1980. The more recent rise of the one percent seems to be an epiphenomenon that serves to draw attention to the emergence of a class society without much explaining how we got where we are.

So why did we become so immobile, if it wasn’t the one percent? What happened, suggested Chetty and his co-authors, was the jobs polarization phenomenon, the shrinking of the middle class and the shift of people towards lower income jobs.22 In the bottom end of the income distribution, each person had the same chance to move up the ranks as he did twenty years ago, but now there were more people in the bottom end. That’s why, in absolute numbers, more people remained in the lower class.

Then there were the social pathologies that kept people back. The strongest predictor of upward mobility was family structure, such as the fraction of single parents in the area. Not merely is it better to come from a two-parent family, but children of married parents also have more upward mobility if they live in communities with fewer single parents. That’s not a novel insight. It’s one that conservatives have voiced at least since Charles Murray’s Losing Ground in 1984,23 without identifying a means of returning to the norms of an earlier, more hopeful society, and without persuading voters to follow them there. The other things contributing to immobility include the weakening of public education, a flawed immigration law, legal barriers to advancement, and these we’ll look at in the last part of this book.

The Great Gatsby curve has been seen as an invitation to despair. If we are so immobile as that, then we might be passing on our inequalities to future generations. But the curve moves in both directions. Suppose that we could, as suggested in the book’s last part, return to a country of high mobility. Then the promised land of equality might follow.

The Way Back

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