Our Growing Income Inequality (It's NOT an Accident)

Hendrik Van den Berg

UNL Professor of Economics

Something very disturbing has been happening in the United States, the land of equal opportunity: Income has become much more unequal. The U.S. is now the least equal of all developed countries.

Official statistics from the U.S. Department of Labor paint a very dismal story about the distribution of income in the U.S. Some samples of the statistical data are:

Forty years ago, the minimum wage was about 25 percent higher in terms of real purchasing power than it is today. Specifically, the $1.60 minimum wage in 1968 would buy about $9.00 worth of goods and services today. Today, a person working a 40-hour week at the minimum wage of $7.25 per hour lives below the poverty line.

Since 1980, just about all of the growth in total U.S. national income has been captured by the top 10 percent of income earners. The average real income accruing to the remaining 90 percent of the U.S. population has not changed for 30 years.

In 2009, an average non-supervisory worker earned $18.62 an hour in the U.S. That sounds good, but in 1972 the real purchasing power of the average real non-supervisory wage was the equivalent of $20.20 today! Even more stunning is the fact that productivity of the average worker rose by over 100 percent over those 40 years. So, for producing more than twice as much, the average worker took a pay cut!

The top ten percent of income earners in the U.S. captured almost exactly 50 percent of total U.S. income in 2007—a higher percentage than the top ten percent captured during the unequal “Roaring Twenties.”

The top one percent of U.S. income earners took about one quarter of total income in 2007.

New data suggests that the 2008-2009 recession has hurt high-income earners very little, but low-income earners lost substantial income to high unemployment, underemployment and falling real wages. A U.S. Census Bureau report from September 2010 shows that the number of working people living in poverty rose to the highest level since the “War on Poverty” programs went into effect in the late 1960s, or 14.3 percent of all workers. The number of people without health insurance rose to over 50 million in 2010 from 40 million in 2007. Infant mortality has risen, and life expectancy has actually fallen in over one third of U.S. counties.

The Distribution of Wealth Became Even More Skewed

Wealth is accumulated by saving and investing income, and it is easier to save from a high income than it is to save a portion of a low income. It is, therefore, not surprising that the distribution of accumulated wealth is distributed even less equally than annual income.

In 2007, the top 20 percent of wealth holders in the United States held exactly 85 percent of all wealth.

About 70 percent of the average Americans’ wealth consists of equity in their principal residence. Even so, median household wealth including housing was only $43,600 in 2007. Median wealth (including home equity) for Hispanics or Blacks was an incredibly small $500 and $400, respectively!

Now, if we just look at financial wealth, which includes such things as stocks, bonds and other forms of savings, the top 20 percent holds 93 percent of all financial wealth.

And business equity is even more concentrated: the top ten percent of wealth holders own 93.3 percent of all business equity. It is business equity that really matters for the control of income-producing assets. So we can conservatively say that ten percent of the population owns just about all of the productive capacity of this country.

Worse yet, the top one percent of wealth holders own 63 percent of business equity. That is, one percent of the population owns two-thirds of the private sector economy.

So much for the ‘ownership society.’ The truth is that a small number of people have huge power over most Americans, who have only a bit of home equity to protect them. Their sheer economic clout lets this small elite capitalist class have a dominant say in where Americans work, what they consume, where they live, how much they earn, and what their society looks like. As individuals, the overwhelming majority of Americans really have no input into what happens in our economy.

Something Very Sinister Is Going On

The growing inequality in income and wealth may be a surprise to many Americans, pacified by the ‘greatest democracy in the world’ and ‘land of opportunity’ rhetoric of our political leaders. But the inequality is very real, and it was no accident. The concentration of income and wealth is the predictable and intentional result of changes in government policies that we as citizens stood by and let the wealthy impose on us through our allegedly democratic system. Not surprisingly, the corporations and wealthy capitalists who set the political agenda changed the rules in order to make themselves better off. Their gains came at everyone else’s expense. There has been no ‘trickle-down’ benefit. The ‘trickle down’ theory is a hoax.

Fundamentally, there are several fundamental economic changes that economists have identified as the causes of the growing inequality:

Lower taxes for the wealthy

Globalization and offshoring

The decline in unionization

The shrinking of government

Tax rates on high-income earners and business have been reduced substantially. Often justified as necessary for economic growth, the numbers show that what growth did occur accrued only to the high-income earners. At the same time, the U.S. economy did not grow faster with the lower taxes on the rich. To the contrary, the two decades of fastest economic growth were the 1950s and 1960s when the marginal income tax rate was nearly 90 percent, the corporate income tax was a third higher than it is now, and capital gains taxes were nearly double what they are now. Clearly, economic growth does not require low taxes for the wealthy. Nor is there a trickle-down effect to the rest of the population. Despite these facts, the news media only ape the corporate call for even lower taxes.

Globalization, persistently promoted by U.S. business (two thirds of which, remember, is owned by the wealthiest 1 percent of the population), increased the economic and political clout of employers. ‘Accept a lower wage, or we’ll move the factory to China’ became the standard corporate bargaining strategy during labor negotiations. Many jobs did indeed move, and in the jobs that remained, labor was forced to work for less. That is why the median wage is lower today than three decades ago despite a doubling of labor productivity.

Globalization has not only lowered wages, but it destroyed the labor unions that stood as the only remaining protection workers have. In a capitalist economy, individual workers have little power vis-a-vis corporate employers. Workers learned this a century ago, and they responded by organizing. We owe the 8-hour workday, the 40-hour week, the minimum wage, workplace safety regulations, and many labor measures to the union movement. Unions made the labor market more competitive, and there was a persistent improvement in the sharing of national income up to the early 1970s, when unions were strong. Now, few unions remain in the private sector. And the corporate-funded politicians are now going after public sector unions.

The demise of unions, and the decline in union funds for political lobbying, led the Democratic Party to abandon labor in favor of the much wealthier corporate interests. Not surprisingly, tax cuts were embraced by Democrats and Republicans alike, and in the 1990s, Bill Clinton ended “government as we know it.” Obama received more corporate donations in 2008 than John McCain.

And so 90 percent of American workers have not shared at all in the last 30 years of growing national income. Tragically, many people at the wrong end of this growing inequality still support the policies that pushed them towards the bottom. Well-intentioned Americans are reluctant to embrace labor unions, and they continue to vote for candidates who push for ‘Free Trade’ policies and lower taxes on the wealthy. That ‘trickle-down’ mindset runs deep in the American psyche, it seems.

Solution Is Obvious

It is interesting to note that amid all the bad news about the distribution of income, Americans over 65 actually enjoyed a reduction in the incidence of poverty. This shows that Social Security and Medicare have worked. Of course, the U.S. Chamber of Commerce and other business groups are out to undo this success as well. But, think about the lesson here: equality depends on government policies that intentionally tax, redistribute and support minimum living standards. That is, we need to collectively decide as a society—through our democratic government—to fairly distribute the productive bounty of our large and powerful economy. The monopolized market system, dominated by autocratically-run corporate entities with the single purpose of maximizing profit and CEO salaries, does not generate an equitable income distribution. The wealthy who run the system have no intention of sharing any more than they are forced to share with the workers, small businesspeople, professionals, teachers, firefighters and all the other workers that produce our national wealth.

Perhaps Americans are at last waking up to the corporate takeover of our government, economy and society, as evidenced by the 100,000 demonstrators in Madison, Wisconsin, this past February. Alternatively, if we continue to accept the joint Republican/Democratic sellout to the wealthy, we had better—in the words of political analyst Chris Hedges—prepare for an inevitable return to a modern form of feudalism in which most people work for a few privileged owners of society’s resources. In any case, there is little doubt that without a restoration of government’s role in mitigating the inequalities inherent in capitalism, our children are going to be worse off than we are.

This is what the government’s own numbers show is already happening. Is anyone paying attention?