Sep 1 2007

Cheerleading for Inequality

Rich getting richer is all for the better, pundits say

At this point, it is no longer possible to contest the fact that there has been an enormous upward redistribution of income since 1980. Dozens of economists have reached the same conclusion, using different methodologies and different data sets (e.g., The State of Working America, 2006-07, Lawrence Mishel et al.; “Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income,” Ian Dew-Becker and Robert Gordon, 2005; “The Evolution of Top Incomes: A Historical and International Perspective,” Thomas Piketty and Emmanuel Saez, National Bureau of Economic Research, 1/06). Income has risen far more rapidly for the top 5 percent than the bottom 95 percent, and more rapidly for the top 1 percent than for the next 4 percent, and more rapidly for the top 0.1 percent than for the next 0.9 percent.

While this might look like bad news, since most people have been on the losing side of this upward redistribution, the pundits have been anxious to tell the public otherwise. In the last few months, columnists in many of the nation’s leading publications have told readers that the upward redistribution over this period is essentially all right, because income has risen for everyone (e.g., “The Inequality Conundrum,” by Roger Lowenstein, New York Times Magazine, 6/10/07; “The Quagmire of Inequality,” by Robert Samuelson, Newsweek, 6/11/07; and “The Democrats’ Trade Troubles,” by Fareed Zakaria, Newsweek, 5/21/07). According to this line, everyone has benefited from the fact that we have allowed some people to get rich and a relatively small number of people to get very rich.

These articles point out that median family income has risen by 12.9 percent between 1979 and 2005, the last year for which Census Bureau data is available.* Some articles isolate particular family groups, such as two-parent families, to show even larger gains. Since most people are earning more today than in 1979, this is supposed to mean that they have gained from the pattern of economic growth that led to this rise in inequality, and therefore should not be upset that those at the top have benefited the most.

Such comparisons of family income through time are complicated by the fact that there has been a substantial increase in the number of workers per family, primarily due to the increasing number of women in the workforce. While this raises family income, it also leads to higher work-related expenses, such as childcare and transportation.

Newsweek’s Samuelson carries this game to the extreme when he points out that income for the poorest fifth of families with children rose by 35 percent between 1991 and 2005. This comparison both suffers from cherry-picking (the gains would be about 3 percent less if he began from the business cycle peak of 1989, the normal practice) and also ignores the fact that there was an enormous increase in hours of work from this group of families. This is exactly the set of families most affected by welfare reform. One could argue that the increase in hours worked from these families is a good thing, but it is ridiculous to compare income levels without taking work-related expenses into account. The cost of childcare alone could easily absorb the $4,400 income gain reported for low-income families over this period.

The most straightforward method of comparison is examining wage data, since the vast majority of families, despite media’s “Wall Street is Main Street” refrain (Extra!, 7-8/02), get the vast majority of their income from wages. The picture here is not very good. The average real wage for the median worker (a worker who earns more than half the workforce and less than half the workforce) has risen by 8.8 percent from 1979 to 2005, a rate of 0.3 percent a year. The wage for a worker at the 30th percentile (a worker who earns more than 30 percent of all workers) rose by just 3.5 percent over this period, an increase of just 0.1 percent annually. Wages for workers at the 10th percentile of the wage distribution fell by 2.3 percent.

While the situation looks better as we move up the income distribution, even workers at the 90th percentile only saw their wages rise by 26.7 percent, a rate of 0.9 percent annually (Economic Policy Institute, 8/5/07). In short, most workers don’t have much to show from a quarter century of economic growth.

The pundits’ underlying argument is that because people are better off today than they were in 1979, the public really has nothing to complain about, implicitly assuming that if people make any economic gains at all, then the economy is performing well. In fact, modern economies generally grow unless they are very badly mismanaged or hit by war or natural disaster. The real question is the rate of growth and how evenly the gains of growth are shared.

In fact, it is best to look at the rate of growth of productivity—the amount of output per hour of work—which is generally the fundamental way that an economy grows. As a society becomes more productive and hence can meet basic needs with less labor, it’s likely that many people will choose to enjoy more leisure, which means that the GDP may grow somewhat less rapidly than the rate of growth of productivity.

In the years from 1947 to 1973, usable productivity grew at an annual rate of 3.1 percent. (“Usable productivity” is a measure of productivity that is adjusted so that it is directly comparable to wage growth; see “The Productivity to Paycheck Gap: What the Data Show,” Center for Economic and Policy Research, 4/07.) Since much of this increased productivity was shared with workers in the form of higher wages, the wage of the typical worker increased at an annual rate of 2.2 percent. This means that for a typical worker, the cumulative wage gains over the last 26 years were equal to just four years of wage growth during the 1947-73 period.

The limited gains that most workers have seen from the last 26 years are attributable primarily to slower productivity growth, but upward redistribution was also an important factor. Usable productivity grew at an annual rate of 1.3 percent in the years since 1979. This is far below the growth rate of the 1947-73 period, but it still would have allowed for much more rapid wage growth had it not been for the upward redistribution of income over the last quarter century. If the gains of productivity growth had been distributed evenly, wage growth would have been almost three times as fast for the typical worker.

In short, the upward redistribution over this period gives the public much to complain about, since the vast majority of income gains went to the richest 10 percent of the population. And there is not much case that such an upward redistribution was necessary to spur growth, since economic growth was very weak over this period. Pundits show either their ignorance or dishonesty when they try to portray the last quarter century as a period of prosperity for most of the country.

* Newsweek columnist Fareed Zakaria (5/21/07) carries things a step further by telling readers that per capita income “has roughly doubled” over the last two decades. Apparently, Mr. Zakaria did not adjust his data for inflation. By the Zakaria method, Zimbabwe’s economy is enjoying the most rapid growth on the planet, because its hyperinflation is causing per capita GDP to soar, measured in currency not adjusted for the impact of inflation.

Dean Baker is co-director of the Center of Economic and Policy Research and author of the blog Beat the Press.