US Economic Inequality Rises to Highest Levels Since 1928: Why does it Matter?

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(image produce by Dorsey Shaw; Source: Emmanuel Saez, UC Berkeley)

US income inequality is at its greatest for nearly a century and is rising, as the income gap between the bottom 90% and top 1% of Americans reaches its largest since 1928.  When compared globally, the US is the second most economically unequal society (behind Chile).  But what does economic inequality mean for average Americans?

Income inequalities within a developed country result in radically skewed life outcomes, including poorer health, and vastly reduced social mobility. And this is in spite of the fact that once a nation reaches the absolute economic development of the OECD countries, the income differentials between countries do not amount to much. It is absolutely the economic inequality within a country such as the US, not how rich that country is overall, that dictates the quality of life for the majority.

According to research by UC Berkeley, 1928 saw the top 1% of American’s receive 23.9% of all pre-tax income, and the bottom 90% get 50.7%.  By 1944, the impacts of redistributive efforts such as Roosevelt’s New Deal, saw this gap close dramatically; the share of the top 1% fell to 11.3% and the bottom 90% saw their share of income grow to 67.5%.  The gap continued to close until the late 1970’s, with the increasing gap since returning the US to 1928 levels this year.

So what changed?

Primarily, the ascendance of neoliberal economic policies put forward by the likes of US neoliberal economist Milton Friedman and the Chicago School, who considered redistributive policies, and other state interference in markets as a barrier to, not bringer of equality.  Friedman once wrote:

“A society that puts equality—in the sense of equality of outcome—ahead of freedom will end up with neither equality nor freedom.… On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.[1]

Friedman was wrong. Economic inequality matters, because inequality of income translates to inequality of outcome.

The UC Berkeley research supports the view that Friedman’s assertion was incorrect.  This point is underscored by evidence of economic inequality produced by the Organisation for Economic Cooperation and Development (OECD). What is particularly useful about the OECD data, is that it compares countries before and after redistributive policies such as taxes are applied.  

In the case of the US, the gap in absolute income compares favourably with other developed countries – the US being 10th most unequal.  But after accounting for taxes and transfers, the US rose to the second most unequal society.  Conversely, Ireland begins with the largest gap in incomes, yet applies redistributive policies to draw it down to 10th most unequal. 

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As Friedman argued that freedom was synonymous with equality of outcomes, not incomes – his point might still stand, except that inequality of incomes can be shown to equate to inequality of outcomes.

In The Spirit Level, Richard Wilkinson (Professor of Epidemiology at Nottingham University, UK) charts data that proves societies that are more equal are healthier, happier societies. By comparing life expectancies, mortality rates and other health indicators, Wilkinson demonstrated a correlation between inequality of income and inequality of health outcomes.

Wilkinson’s paper, and a replication of his findings by the Joseph Rowntree Foundation, characterised those outcomes as an inequality in life expectancy, rate of death and overall physical and mental health. Additional indicators of quality of life and social mobility, highlighted in both papers, were unequal outcomes in educational attainment, likelihood of conviction and incarceration for crimes, and an array of others, which might point to a causal link between income inequality and inequality of outcomes.

Proving such a causal link is notoriously fraught with complexities and uncertainties, however, several studies have sought to assess the independent impact of inequality on health and social problems. One such study (Lynch et al, 1998) suggested that loss of life as a direct result of the impacts of income inequality in the US during 1990 was equal to the combined loss of life due to lung cancer, diabetes, motor vehicle accidents, HIV-related causes, suicide and homicide.  

Economic inequality is also hereditary; a social inheritance passed from parent to child.  Research by Gregory Clark of the University of California, found data to suggest that in the same time period that neoliberal economic policies expanded the economic inequality gap, the rate of social mobility (increased incomes and outcomes by successive generations) declined for the first time in 1000 years.

For Americans, and citizens across the world, outside the economic elite, rising economic inequality means rising inequality of health and wellbeing; and their inherited disadvantage is proving a barrier to improving not only their circumstances, but those of generations to come.

[1] Milton and Rose D Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1980), 148

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8 thoughts on “US Economic Inequality Rises to Highest Levels Since 1928: Why does it Matter?

  1. Pingback: Britain’s 5 Wealthiest Families Richer Than Poorest 12.6 Million? It’s Time for a People’s Budget | Scriptonite Daily

  2. Pingback: Our Chief Mistakes | Fergus Ray Murray

  3. I don’t claim to be an expert on economics but isn’t economic inequality a necessary consequence of the simple capitalist phenomenon that money breeds money? With time capital is bound to get into the hands of a tiny minority, and the higher the sum one has sitting invested or saved, the higher its returns. Also it is worth noting that the US economy is kept afloat by billions being artificially injected into the economy by the Federal Reserve (source: corbettreport) highlighting all the more that money is a metaphysical datum, pure number, that its reality is based on belief, habit and coercion – in the last case, this is what largely prevents alternative, non centralized, grassroots, currencies to come into their own, as of course it threatens to undermine the plutocratic hierarchy. Money has lost all ties with real economic reality, it has become a deity, Mammon, to which, unfortunately, we are still by and large determined by.

  4. I think it is safe to say in the early days of the communist and socialist movements they already knew that inequality in wealth meant inequality in all other aspects of the human experience. Whereas we now have a large volume of data which we can analyse and use to prove our theories, they simply looked around and saw the inequality staring back at them. However, whilst they struggled to improve the world, the top 1% also knew this, since they had created the inequality and so they lived in fear of joining the 99%.

    The problem is not that there isn’t enough to go around, to redistribute wealth more evenly. The problem is that the top 1% wants to keep what they see as a position of power over the masses. They see it as their right, acquired either through privilege of birth or corruption, or both. Communism failed, for the most part, because as Orwell said those in power became more equal than those they presided over. Once the greed level rose too high within the state their only choice was to open the doors to the money hungry neo-liberals. Where it still exists today it operates as a communist dictatorship and unsurprisingly we do not seem to have the same data from their societies as we do for the rest of the world. Socialism failed because the state and the people increased their wealth becoming comfortable, which left them vulnerable to the con of the neo-liberals making them greedy. So now we must reap what we sew or wake up and change things, and not make the same mistakes again.

    All this demonstrates is the most successful system within the political arena is neo-liberalism, but its success comes with a huge inequality of the human experience. So what is the answer, the solution that will create a more equal world where all can experience a safe, happy and healthy life? I’ll be honest it will take far greater minds than mine to find a solution. Although Richard Wilkinson’s data analysis presentation for TED would suggest we look closely at the Scandinavian countries for some best practice tips. What I do know, however, is that the key will be balance…balance in all things. Without balance there can be no equality. Balance has kept the planet ticking over for millennia and unless we find a global balance, among all aspects of life on earth, we will bring about our own downfall. And ironically that also means the downfall of the top 1% by their own devices of greed which will render uninhabitable the thing they need most to survive…the planet.

    • “..Depressions occur after investment bubbles burst. In free-market capitalism, capital generates income for the owners of the capital which in turn is used to create additional capital. This is very good. Sometimes, it can be actually too good. As capital continues to accumulate, its owners find it more and more difficult to deploy it efficiently. The business sector generally must interact with the household sector by selling goods and services or lending to them. When capital accumulates too rapidly, the productive capacity of the business sector can outpace the ability of the household sector to absorb the increasing production.

      The capitalists, or if you prefer, job creators use their increasing wealth and income to reinvest, thus increasing the productive capacity of the business they own. They also lend their accumulated wealth to other business as well as other entities after they have exhausted opportunities within business they own. As they seek to deploy ever more capital, excess factories, housing and shopping centers are built and more and more dubious loans are made. This is overinvestment. As one banker described the events leading up to 2008 – First the banks lent all they could to those who could pay them back and then they started to lend to those could not pay them back. As cash poured into banks in ever increasing amounts, caution was thrown to the wind. For a while consumers can use credit to buy more goods and services than their incomes can sustain. Ultimately, the overinvestment results in a financial crisis that causes unemployment, reductions in factory utilization and bankruptcies all of which reduce the value of investments.

      If the economy was suffering from accumulated chronic underinvestment, shifting income from the non-rich to the rich would make sense. Underinvestment would mean there was a shortage of shopping centers, hotels, housing and factories were operating at 100% of capacity but still not able to produce as many cars and other goods as people needed. It might not seem fair, but the quickest way to build up capital is to take income away from the middle class who have a high propensity to consume and give to the rich who have a propensity to save (and invest). Except for periods in the 1950s and 1960s and possibly the 1990’s when tax rates on the rich just happened to be high enough to prevent overinvestment, the economy has generally suffered from periodic overinvestment cycles.

      It is not just a coincidence that tax cuts for the rich have preceded both the 1929 and 2007 depressions. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increases in savings and investment. However, overinvestment (by 1929 there were over 600 automobile manufacturing companies in the USA) caused the depression that made the rich, and most everyone else, ultimately much poorer.

      Since 1969 there has been a tremendous shift in the tax burdens away from the rich on onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and are now less than 1%. During that same period, payroll tax rates as percent of GDP have increased dramatically. The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers; higher payroll taxes reduces the purchasing power of middle-class consumers…”
      http://seekingalpha.com/article/1543642

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