Unequal Denial

That economic inequality is great and growing in the United States is now hard to deny. An earlier post reviewed how average Americans see and understand economic inequality. But one of the side stories is the expert debate about this inequality. Having followed the public and academic arguments about inequality for a few decades, I have a sense of how the terms of the debate have shifted and how defenders of post-1960s policies have responded. It’s an interesting dance of denial.

After a brief recap of the basic evidence, I’ll turn to that dance.

Another Look

The two graphs below remind us of recent history. The top graph displays, for several countries, how much more the rich (those at the 90th percentile of income) make than average people (at the 50th percentile) do. The countries I have included are those for which data were available in the source for both in the 1970s and the 2000s. The blue bars are for 1970s data, the red for mid-2000s data.

Two points are striking: One, in the 2000s, only in the U.K. and the U.S. did the affluent make more than twice as much as average citizens did. Two, only in the U.K. and the U.S. was there a substantial increase in that gap, in the 90:50 ratio, between the 1970s and the mid-2000s – not surprising since both countries shared rich-friendly policies during those years (Thatcher/Reagan/Murdoch policies). Closer looks at the data show that it is really the top one percentile that has reaped the huge gains (see here). And all these numbers precede the post-2008 “Great Recession” which further widened inequality.

The next graph draws from the same source but compares the average household, at the 50th percentile, to the poor one, the 10th percentile.  Here the U.S. stand out, with ratios of higher than 2.5 to 1 both in the 1970s and the 2000s – and that ratio grew substantially over the years. If you combine the two graphs and ask about the ratio of the rich to the poor, i.e., the gap between the 90th percentile and the 10th percentile, the U.S. is far ahead of the other nations.

Clearly, then, the U.S. has long had a highly unequal income distribution and that inequality has grown over the last generation. Moreover, neither fact is the result of some natural forces in the world economy. Other western, developed countries have sustained much lower levels of inequality. What’s going on?

The Debate Devolves

For much of the 20th century, economic inequality narrowed; the poor and the middle class started catching up with the rich. Then, when observers started to note widening inequality starting in the 1970s, the initial response of those who defended the policies of the Nixon and then the Reagan administrations was to deny that widening was real. They offered all sorts of reasons for thinking that the signs of a growing gap were a statistical mirage or a temporary aberration.

Eventually, it became clear that economic inequality really was widening. The next line of defense was to argue that the widening inequality was OK, because everyone was doing better. Did it matter if the rich moved up faster than other Americans so long that everyone’s vessel – yacht to rowboat – was being lifted? But then it became clear that the tide was not raising everyone. The poor were falling behind and middle class folks were stagnating, treading water faster, mainly by having wives work more hours.

The defense now involved challenging the data again, to say that if you counted things differently – say, add in health benefits, count food stamps, throw in the value of expected social security payments, and such – then the non-rich were doing OK.

One major exercise here was a Republican-appointed commission to reconsider the consumer price index. It argued that the rate of inflation was being over-estimated and such overestimates made it appear that average wages were falling behind. Commission members were mesmerized by electronics and pointed to how much more tech stuff a dollar could get you now than it could before – a much faster computer, a bigger TV, and such. But the costs of the key, big-ticket elements of the American middle-class lifestyle — housing, health care, and college – were rising even faster than the overall cost of living. American families would have gladly settled for smaller TVs to get better homes or easier college payments.

There was another part of the inflation-is-not-that-bad argument used to deny that the middle class was falling behind: The usual inflation calculations do not take into account “substitution.” If beef prices go up faster than wages, people buy more chicken; if children’s shoe prices go up faster, parents buy them flip-flops; if gasoline prices go up faster, people … well, never mind. The re-calculations assumed the substitutes were just as good. By the way, using a cost of living index adjusted downward for substitutions is one way some experts imagine slowing down the rising expense of Social Security. (For a more detailed dismissal of these bobs and weaves, see John Quiggen.)

These arguments continue to be heard, but in the last decade the basic contention of the leave-it-as-it-is crowd seems to be this: OK, inequality is widening, and OK, middle-class and working-class families are struggling, but you cannot change things. The economic forces are either too strong or meddling with them — say, getting more revenues out of corporations — will wreck havoc on our economy. Yet, if one looks to the graphs above and to much other data, one can see that other countries — countries where average people live at least as well as average Americans do —  have managed to sustain much lower levels of inequality for the last 40 years. It can be done.

The question is whether we want it to be done. (This 1996 book by several colleagues and myself pursues that question.)

(This column was cross-posted on The Public Intellectual on October 6, 2011.)