The wealth gap: An embarrassment of riches | Jonathan Weiler | Indy Week
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Although Americans are aware that inequality in the U.S. is substantial, they profoundly underestimate its extent.

The wealth gap: An embarrassment of riches 

Most Americans realize that the United States has become more unequal over the past three decades or so. But it's unlikely that most Americans fully grasp the magnitude of the change in the distribution of wealth since the end of the 1970s, or how that change has negatively affected ordinary Americans.

A lot of the data points to what political scientists Jacob Hacker and Paul Pierson, in their important new book, Winner-Take-All Politics, call "trickle up" economics. For example, from 1979–2007, the post-tax incomes of the bottom fifth of earners increased 13 percent. But the incomes of the top 1 percent of earners nearly quadrupled.


More for them, less for you: 1979–2007

  • The lowest 20 percent of income households in America saw their post-tax wages increase from $15,500 to $17,500 (in constant, inflation-adjusted dollars).
  • Incomes for the middle 60 percent rose from $44,000 to $57,000.
  • Incomes for the top 1 percent exploded from $350,000 to $1.3 million.
  • The increases for the top one-tenth of 1 percent and top-hundredth of 1 percent were greater still.

Sources: Jacob Hacker and Paul Pierson, Congressional Budget Office


Many think inequality is irrelevant as long as a rising tide lifts all boats. But while the wealthiest Americans live ever more opulent lifestyles, ordinary Americans, especially at the 60th percentile and below, are running in place, if not falling further behind.

The typical household works longer hours now than in 1979, placing additional strains on many American families. Furthermore, in the past three years the general picture of distribution has worsened, with record levels of long-term unemployment, as well as draconian cuts to basic services like health care and education at the state and local level, which have disproportionately affected people lower on the income ladder.

So the relatively weak gains for the majority of Americans in the past 30 years have been precarious, subject to a swift and unnerving reversal of fortune, while those at the top continue to enjoy record incomes and wealth.

The growing concentration of wealth at the top is arguably directly related to growing precariousness for most of the rest of us. Had the pattern of wealth distribution that existed in the 1970s held steady over the subsequent decades, Hacker and Pierson estimate that in 2006, the lowest 60 percent of households would have enjoyed incomes $6,000–$12,000 higher than they actually did. That would have been a cushion in an economic downturn.

Defenders of the status quo might argue that growing inequality and the conditions that support it are a product of the very policies that fueled robust growth, which benefits everyone. But in fact, growth in the past three decades has not been better than it was in the previous 30 years, when income and wealth were more evenly distributed in America. This profound new skew in wealth has meant a significant transfer of wealth up the income ladder.

As former Clinton treasury secretary and Obama economic adviser Larry Summers—no populist firebrand—put it in 2007: "By definition what one group gains from changes in the distribution of income another group must lose ... If middle-income families had shared fully in the economy's income growth over the past generation their incomes would have risen twice as rapidly."

Is this what Americans want? Dan Ariely of Duke University and Michael Norton of Harvard University recently conducted a fascinating survey of more than 5,000 randomly sampled Americans to explore their preferences for an ideal distribution of wealth and to see how accurately they assessed wealth concentration in the U.S. Respondents were shown three unlabeled charts, each divided into fifths and each representing a different distribution of wealth for some unnamed country (wealth was defined as income, property, stocks, bonds and other assets).


2.9_news_chart_update.jpg

The above chart shows the actual United States wealth distribution compared with that of Sweden and a hypothetically equal society. Only 10 percent of Americans surveyed preferred the actual U.S. distribution. The original charts were unlabeled.

Source: Survey of 5,000 Americans, randomly sampled, conducted by Dan Ariely of Duke University and Michael Norton of Harvard University


The results were striking. Ninety percent of Americans, virtually regardless of gender, income level or partisan affiliation, preferred either the second chart or the third chart; only 10 percent of respondents preferred the first.

The first chart, the one almost no one deemed preferable, represents the actual distribution of wealth in the United States. And that third chart was not a bunch of random numbers—it's the distribution of wealth in Sweden. When given a direct choice between Sweden's distribution and that of the U.S. (both unlabeled), 92 percent preferred Sweden's to the United States'.

Respondents were also asked to estimate the distribution of wealth in the U.S. On average, they thought that the wealthiest fifth of Americans owned 59 percent of the wealth, indicating that although Americans are aware that inequality in the U.S. is substantial, they profoundly underestimate its extent.

What explains this dramatic change in the structure of American wealth? It seems very unlikely that this is what Americans want (our willingness to tolerate it is a separate question). Many economists have argued that changes in technology and globalization have provided increased benefits to the highly educated. But Hacker and Pierson reject these explanations or deem them greatly overstated. Europe has experienced very similar technological and globalization-driven changes but has not witnessed the degree of wealth concentration that America has, or the erosion of health and other services that are affecting a growing number of Americans.

Education- and skills-based explanations also cannot tell us why the top 1 percent has pulled away from the top 10 percent, or the top one-tenth of 1 percent from the top 1 percent and so on.

Hacker and Pierson note that the causes are complex but believe that a key explanation is politics. They contend organized business interests and their ideological allies have waged an extraordinarily successful battle to enact policies—changes in tax rates and tax law enforcement, labor law, financial deregulation and curtailing public assistance—that benefit the wealthiest Americans.

The GOP's push in this direction since 1980 has been undeniable. But the Democratic Party has also played a significant, if more ambivalent, role, particularly its growing cultivation of Wall Street donors, frequent advocacy for Wall Street's deregulatory agenda and its equivocal policy response to the decline of organized labor.

Hacker and Pierson contend that winner-take-all interests have successfully rigged our political institutions regardless of which party holds the reins of power. However, they acknowledge that the health care reform act of 2010, assuming it achieves full implementation, represents a meaningful move in the opposite direction. But the extent of wealth concentration in America—and the degree to which politics seems to play a crucial role in that process—raise depressing doubts about the capacity of our presumably representative institutions to produce policy outcomes that benefit ordinary Americans.

  • Although Americans are aware that inequality in the U.S. is substantial, they profoundly underestimate its extent.

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