'Bad' inequality on the rise, Stanford scholar says

Rising inequality is primarily driven by market and institutional forces, not tax policy, Stanford sociologist David Grusky says. He suggests that changes in areas like education and labor markets can produce fair and open competition, thus reducing income and wealth inequality.

In the United States, income and wealth inequality is growing – especially "bad" inequality caused by injustice, according to a Stanford expert.

miker/ Shutterstock A Stanford sociologist says better schools and fair labor markets can do more to reduce income and wealth inequality than changes to tax policy.

David Grusky, the director of the Stanford Center on Poverty and Inequality, which produces an annual "poverty report card," said the United States suffers from a type of market failure that greatly hinders those on the bottom rung of the economic ladder from moving up. On Feb. 1, Grusky's center will hold a conference on poverty and inequality and issue its 2016 Poverty and Inequality Report.

Stanford News Service recently interviewed him on the topic of income and wealth inequality.

Have income and wealth inequality worsened?

It is important to distinguish between "good" and "bad" inequality, with good inequality arising from fair and open competition, and bad inequality arising from market failure in the form of corruption and sweetheart deals that benefit those at the top, and various labor market bottlenecks at the bottom that prevent poor children from fairly pursuing opportunities; e.g., low-quality schooling, labor market discrimination, unequal risks of incarceration. There is all manner of smoking-gun evidence to suggest that wages and compensation are increasingly distorted by various types of market failure – and that "bad" inequality is on the rise.





What does the data reveal about income inequality in America today?

U.S. tax returns, as analyzed by UC Berkeley economics Professor Emmanuel Saez, show that the pre-tax income share of the top decile reached a peak of 49 percent in 1928, which is known as the first Gilded Age. It then dropped precipitously during World War II, stabilized at approximately 33 percent over the next 30 years, and then started to take off again in the late 1970s.

By 2014, the top decile's share was as high as 50 percent, a level that just barely tops the highest share of the Roaring '20s. The latter result has prompted many commentators to refer to the contemporary period as the New Gilded Age.

Is income the right measure? What about the wealth gap?

The trend in wealth inequality is not dissimilar. In this study, using income tax data, Saez and Gabriel Zucman [assistant professor of economics at UC Berkeley] apply reported capital income, e.g., dividends, interest, rents, to impute levels of wealth, taking care to correct for forms of wealth that do not yield taxable income. When they plot the share of total household wealth held by the top 0.1 percent, the same U-shaped form appears again, with the extreme concentration of the 1920s followed by a rapid "democratization" of wealth through the late 1940s, a period of relative stability up until the 1970s, a brief second wave of democratization in the 1970s, and then a sharp reconcentration of wealth in the 1980s, 1990s and 2000s. By 2013, 22 percent of total household wealth was held by the top 0.1 percent, a level nearly as high as what prevailed in the first Gilded Age.

Has it become harder for someone born poor to become rich?

We just don't know. The available surveys are simply too small to be sure about trends in mobility, while administrative data can only speak to trends in the relatively recent period. Whatever the long-term trend might be, the contemporary tax-return evidence does make it clear that it matters – a lot – whether the stork drops today's newborn into a low-income or high-income family. The expected income of children raised in families at the 90th percentile is about 200 percent larger than the expected income of children raised in families at the 10th percentile.

What – or should – anything be done to bridge the gap?

The prescription follows from the cause. We need to root out "bad" inequality by realigning our institutions with the rules of fair and open competition that so many Americans embrace.

This means going beyond our usual lip-service commitment to equal opportunity and ensuring that all children, no matter how poor, have the same access to high-quality schooling. It means rooting out labor market discrimination, unequal risks of incarceration and other forms of grossly unequal opportunity and market failure. And it means insisting that the well off and powerful play by the same rules as everyone else.

Is this asking too much? No. There is nothing more distinctively American than the idea that our principles should be taken seriously and that our schools, our neighborhoods and our labor markets should be continually recast and perfected to ensure that they live up to those ideals. Is this the blue-sky thinking of starry-eyed academics? No. The Equal Opportunity Plan, as formulated by Stanford University scholars, will likely be a 2016 California ballot proposition.

If the size of government has grown in the last couple decades, why has income inequality also increased?

It is sometimes assumed that the only way to respond to rising income inequality is to increase tax rates for the well off. This response is founded on the misunderstanding that inequality is increasing mainly because of reduced levies on capital gains, the Bush tax cuts and related changes in U.S. tax policy. If that assumption were correct, then it would make sense to limit ourselves to reversing those policies. But the takeoff in inequality cannot be explained by tax policy alone. There has, to the contrary, been a dramatic rise in pre-tax income inequality.

This increase in market inequality was, of course, exacerbated by changes in after-market taxation. However, because the takeoff in inequality is mainly generated within the market, we should look to market institutions to understand its main causes and – arguably – to pursue corrective policies. As important as tax-based redistribution is, we therefore need to supplement it with policies that address the rise in market inequality.

The institutional critique of inequality is not about the tax system, but about the ways in which U.S. labor and capital markets generate extreme pre-tax inequality. The core idea here is that inequality-generating institutions have come to be codified in law and practice and then represented – through an ingenious sleight of hand – as laissez-faire capitalism.