Although I have done much research on inequality, I used to have an aversion to using the term. Indeed, the Wall Street Journal ran an article in the mid-1990s that noted that I prefer to use the term ?dispersion.? But the rise in income dispersion ? along so many dimensions ? has gotten to be so high, that I now think that inequality is a more appropriate term.
President Obama summarized the rise of inequality very succinctly in his Osawatomie, Kansas speech, when he said, ?over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.?
These trends are well documented but worth reviewing. My first figure shows the annualized growth rate of real income for families in each fifth of the income distribution over two periods. The figure shows that all quintiles (fifths) of the income distribution grew together from the end of World War II to the late 1970s, but since the 1970s, income has grown more for families at the top of the income distribution than in the middle, and it has shrunk for those at the bottom.
I should point out that the pattern in the post-1970s period is not monolithic. As this next chart shows, the period from 1992 to 2000 was an exception, when strong economic growth and the policies of the Clinton administration led all quintiles to grow together again. Indeed, all income groups experienced their fastest income growth in years.
I could also note that there is no sign in these data that the tax increases in the early 1990s had an adverse effect on income growth.
This next chart shows the level of income earned by the median household each year, after adjusting for inflation. You can see that the median household saw a decline in real income in the 2000s. If in the first decade of the 2000s the income of the median household had grown at the same rate as it did in the 1990s, middle-class households would have an extra $8,900 a year to spend on their mortgages, rent, cars, food and clothing, or to add to their savings.
Support for equality of opportunity should be a nonpartisan issue. It is hard not to bemoan the fact that, because of rising inequality, the happenstance of having been born to poor parents makes it harder to climb the ladder of economic success. There is a cost to the economy and society if children from low-income families do not have anything close to the opportunities to develop and use their talents as the more fortunate kin from better-off families who can attend better schools, receive college prep tutoring and draw on a network of family connections in the job market.
One would think it inexcusable that public policy has exacerbated this trend. But that is exactly what has happened over the last decade. As I mentioned, income tax changes have made the distribution of after-tax income more unequal, not less. Moreover, the drastic cut in the estate tax will reduce economic mobility in the U.S. going forward, as the tremendous resources accrued by the wealthy can now be transferred to their heirs at much lower tax cost.
While the potential drag on aggregate demand from the shifts in the income distribution are hard to document, the following back-of-the envelope calculation makes clear that it could be substantial. The share of income going to the top 1 percent increased by 13.5 percentage points between 1979 and 2007, the equivalent of about $1.1 trillion a year in 2007 income. Research on the saving behavior of families at the top of the income distribution is scarce, but according to research by Karen Dynan and coauthors, the top 1 percent of households saves about half of the increases in their wealth, while the population at large had a general savings rate of about 10%. This implies that if another $1.1 trillion had been earned by the bottom 99% instead of the top 1%, annual consumption would be about $440 billion higher.
To conclude, I want to emphasize that restoring more fairness to the economy would be good for all parts of American society. This is not a zero-sum game. The evidence suggests that a growing middle class is good for the economy, and that is a more fair distribution of income would hasten economic growth. Businesses would benefit from restoring more fairness to the economy by having more middle-class customers, more stable markets, and improved employee morale and productivity.
President Obama said this much better than I ever could: ?This isn?t about class warfare. This is about the nation?s welfare. It?s about making choices that benefit not just the people who?ve done fantastically well over the last few decades, but that benefits the middle class, and those fighting to get to the middle class, and the economy as a whole.?
The following is an excerpt from a speech Alan Krueger, chairman of President Obama?s Council of Economic Advisers, gave at the Center for American Progress
