INCOME AND WEALTH INEQUALITY



According to the Federal Reserve, in 1990 the richest 1 percent of America owned 40 percent of its wealth -- the greatest level of inequality among all rich nations, and the worst in U.S. history since the Roaring Twenties. Furthermore, the richest 20 percent owned 80 percent of America -- meaning, of course, that the bottom four-fifths of all Americans owned only one fifth of its wealth.



Another revealing way of expressing this statistic is that the top 1 percent owned more than the bottom 90 percent combined.



What caused this growing inequality? The most underlying reason may be that it takes money to make money. This is why many call for a progressive tax system: to redistribute at least a percentage of the wealth back to the middle class, thereby avoiding modern serfdom. We will explore the tax cuts for the rich in detail in the next section. But tax cuts are not the only way to polarize wealth. There are several others, and they can all be lobbied through Congress. A complete list follows in More.



Tax progressivity was highest in the decades after World War II, when the rich were taxed a stratospheric 88 percent for nearly two decades. This was also an era in which the U.S. economy was a juggernaut, and the American Dream was indisputably alive and well. Because of this, most economists do not believe that high tax rates on the rich are bad for the economy.

Personal income tax rate for top bracket 1 Years Percent 1945 91% 1946-63 88 1964-81 70 1981-86 50 1988 28 1991 31

The following chart shows the effectiveness of a progressive tax system. When the top rates were truly high from 1950 to 1978, American income at all levels grew at about the same pace. But when progressivity was lost in the 80s, the income of the poor began falling, while that of the rich continued growing.



Income Growth by Quintile 2

Quintile 1950-1978 1979-1993 Lowest 20% 138% -15% 2nd 20% 98 -7 3rd 20% 106 -3 4th 20% 111 5 Highest 20% 99 18

Economists have a standard measure of income inequality, called the Gini Index. In this index, the higher the number, the greater the income disparity between the rich and the poor. (0 = perfect equality, 1 = only one person in the economy has all the income.)

Gini Index of Income Inequality 3

Before After Taxes Taxes 1979 0.403 0.352 1980 0.401 0.347 1981 0.404 0.350 1982 0.409 0.359 1983 0.412 0.368 1984 0.413 0.372 1985 0.418 0.381 1986 0.423 0.404 1987 0.424 0.380 1988 0.425 0.384 1989 0.429 0.387 1990 0.426 0.381 1991 0.425 0.379 1992 0.430 0.381

As mentioned earlier, the U.S. economy slowed in 1973 for reasons still not completely understood. The average weekly earnings of nonsupervisory workers -- about four-fifths of the civilian workforce -- peaked in 1973, and have been falling ever since:



Average weekly earnings of nonsupervisory workers, total private industry, 1982 dollars 4

1965 $290 1970 297 1973 315 (Peak) 1975 292 1976 297 1977 299 1978 301 1979 291 1980 274 1981 271 1982 267 1983 272 1984 274 1985 271 1986 271 1987 269 1988 266 1989 263 1990 259 1991 255 1992 255 (Nadir)

The above chart is especially useful in rebutting supply-siders who use other measures to argue that everyone's incomes rose during the 80s. For detailed refutations of these other measures, see More.

Average hourly earnings also fell over the 80s:

Average hourly earnings, total private industry (1982 dollars) 4 1973 $8.55 1980 7.78 1985 7.77 1990 7.52 1993 7.39

Presidents Reagan and Bush froze the minimum wage for 9 years, essentially giving those workers a pay cut each year as inflation bit into their paychecks. In 1992 dollars, the 1963 minimum was $5.74 -- or 35 percent more than it is today.



Raises in the Federal Minimum Wage 5

Percent of average Year New rate production earnings 1950* $0.75 54% 1981 3.35 43 1990 3.80 35 1991 4.25 38 1994 -- 35

*For brevity's sake, this chart omits the 15 minimum wage increases between 1950 and 1981. No newly introduced minimum wage has ever been lower than 35 percent of the average wage, although old minimum wages have certainly gone below this. For a fuller chart, see More.



Economists previously believed that raising the minimum wage would cost jobs, especially among teenagers. However, recent research suggests that the truth might be a bit more complicated than this, and that when the minimum wage falls too low (due to inflation), it can be raised safely. For more on the controversy stemming from the Card/Krueger study, see More.



On the other hand, the salaries of executives skyrocketed during the 80s:



Salaries and benefits of corporate CEOs as a multiple of the average factory worker's 6

1980 30 times 1991 130-140 times

And these super-salaries did not come primarily from greater profits, but from a larger slice of the profits: (More)



Executive Compensation as a Share of Corporate Profits 7

1953 22% 1987 61

The following chart shows the growth in the number of millionaires and billionaires during the 80s. Notice that their numbers skyrocketed in the years 1985-87.



Approximate number of millionaires and billionaires in the U.S., 1978-1988 8

Year Millionaires Decamillionaires Centamillionaires Billionaires 1978 450,000 1 1979 519,000 1980 574,000 ? 1981 638,000 ? 1982 38,885 400 13 1983 500 15 1984 600 12 1985 832,000 700 13 1986 900 26 1987 1,239,000 81,816 1,200 49 1988 1,500,000 100,000 1,200 51

Percent Increase of Combined Salaries by Income Bracket, unadjusted for inflation (1980s) 9

Income Bracket Percent Increase $20,000 - 50,000 44% 200,000 - 1 million 697 Over $1 million 2,184

Viewing the above chart more broadly, the total wages of all people who earned less than $50,000 a year -- about 85 percent of all Americans -- increased an average of 2 percent a year from 1980 to 1989, which did not even keep pace with inflation. By contrast, the total wages of all millionaires shot up 243 percent a year.

Defenders of the Reagan era claim that income mobility in the U.S. is great enough to overcome income inequality. That is, if people move up and down the income scale to a significant degree, then, over a lifetime, your average income is going to match my average income. However, there are a few flaws with this argument. First, income mobility in the U.S. is not even close to making this a reality. (More.) Second, one could hardly justify slavery on the basis that, for 1 percent of your life, you, too, will be the master.

So who gets ahead, and who gets left behind? The single most decisive factor is education:



Education, Experience and Wages 10

Percent change in earnings New Workers (1-5 years experience) from 1979 to 1987 Less than 12 years of school -15.8% High school degree -19.8 16 or more years of school +10.8 Old Workers (26-35 years of experience) Less than 12 years of school -1.9 High school degree -2.8 16 or more years of school +1.8

Some people claim that if the poor want to get ahead, they should just return to college. However, the job market can bear only a limited percentage of educated professionals, and there is already a glut of college grads in most fields. This makes competition the hallmark of today's meritocracy, which critics call destructive in its extreme form. (More)



Although the following chart is one of the largest, it is also one of the most important. This chart shows how the incomes of most American families stagnated or fell during the 80s, with gains posted only by the top 20 percent. It also reveals how supply-siders lie with statistics, but more on this in a moment. For those unfamiliar with the term "decile," the 1st decile is the poorest 10 percent of the population, the 2nd decile the 2nd poorest, and so on.



Average Income Level and Effective Federal Tax Rates in Each Family Decile by Year, in 1988 dollars (Corporate income tax allocated to capital income) 11

Percent change: 1977- 1980- 1985- Decile 1977 1980 1985 1990 90 90 90 1st $4,277 3,852 3,568 3,805 -11.0% -1.2 6.7 2nd 8,663 7,982 7,717 8,251 -4.8 3.4 6.9 3rd 13,510 12,530 12,230 13,110 -3.7 4.6 7.2 4th 18,980 17,240 17,010 18,200 -4.1 5.6 7.0 5th 24,520 22,380 22,070 23,580 -3.8 5.4 6.9 6th 30,430 28,100 27,620 29,490 -3.1 5.0 6.8 7th 36,880 34,370 34,620 36,890 0.0 7.3 6.5 8th 44,820 42,050 43,370 46,280 3.3 10.1 6.7 9th 56,360 53,660 56,190 59,860 6.2 11.6 6.5 10th 111,100 107,900 123,200 133,200 19.9 23.4 8.2 top 5% 149,500 146,000 172,100 187,400 25.4 28.3 8.9 top 1% 319,100 321,400 415,700 463,800 45.4 44.3 11.6 All 34,830 32,850 34,480 37,050 6.4 12.8 7.4

As you can see, the majority of American families were worse off in 1990 than they were in 1977, at the beginning of Carter's presidency!



When supply-siders talk about family income in the 80s, they are always careful to use 1980 as a benchmark for their comparisons, and never 1977. This is because the recession of 1980-82 was the worst since World War II -- perfect for comparing the later Reagan years in their best light. But comparing the Reagan recovery to the non-recession year of 1977 puts everything in perspective: most Americans lost ground, even at the end of the recovery.



Which leads to the question: are presidents responsible for creating recessions and recoveries? If yes, then Reagan deserves credit for rescuing the economy from Carter's mismanagement. But if not -- which is what almost all mainstream economists believe -- then the supply-sider's praise of the 80s rings hollow. In that case, it is natural for recessions to be followed by recoveries, and supply-siders might as well take credit for the incoming of the tide. In reality, the Chairman of the Federal Reserve Board is far more responsible for influencing recessions and recoveries. (More)



Supply-siders have a partial rebuttal to the above chart. They point out that family size decreased during the 70s and 80s, which means that less family income would cover fewer people, and therefore not lower their standard of living. The following chart shows the long-term decline in average family size:



Average Family Size 12

1970 3.58 persons 1975 3.42 1980 3.29 1985 3.23 1990 3.17

But this counter-argument runs into a few others. First, falling individual income is responsible for declining family size, so to say that families are maintaining their standard of living despite everything is missing the point. (More) Second, the rather small decline in family size does not explain or justify the massive income gains seen by the top 1 percent, while 80 percent of all families are treading water.



The following chart shows how large a slice of the economic pie everyone is getting. More specifically, it shows how much of the total national income that each 20 percent of American families are making. As you can see, everyone's slice of the pie grew smaller in the 80s except the top 20 percent, which grew. And the top 1 percent was responsible for most of that quintile's growth, as the last chart reveals.



Percent of National Aggregate Income Received by Each Quintile (by Family, in 1992 dollars) 13

Quintile 1980 1992 Lowest 20% 5.2% 4.4 2nd 20% 11.5 10.5 3rd 20% 17.5 16.5 4th 20% 24.3 24.0 Top 20% 41.5 44.6 Top 5% 15.3 17.6

Shares of Pretax Adjusted Family Income 14

Quintile 1977 1980 1985 1988 1989 Lowest 20% 4.7% 4.3 3.7 3.5 3.5 2nd 20% 10.8 10.5 9.5 9.1 9.2 3rd 20% 16.3 16.0 15.1 14.6 14.7 4th 20% 22.9 22.9 22.2 21.7 21.7 Top 20% 45.6 46.7 50.1 51.4 51.4* Top 1% 8.3 9.2 11.6 13.4 13.0