Starting at the Economic Policy Institute in the early 1990s, I and others, like Larry Mishel, have been writing about growing inequality, trying to amplify and elevate the issue.
It now appears to be elevated. The CBO did an authoritative study of the US case, the OECD just followed up with an international version, and the newspapers and blogosphere resound with analysis and commentary.
Why now? Lots of good reasons.
Occupy Wall St: No one knows where this movement is headed or what kind of staying power it has. But like I said, I’ve been trying to elevate this discussion for decades and they’ve managed to do so in months. If you use (the very cool) Google trends, you can see a clear uptick in reporting on the issue coinciding with the rise of OWS.
Source: Google trends (HT: MB)
I hope the movement lasts and morphs into a progressive political force—a countervailing force of the type I discuss here. But if not, they already can take credit for starting a national conversation about the increasingly inequitable distribution of growth that stands as a profound economic problem in our country.
Piketty and Saez: By rigorously creating and, equally importantly, sharing with the world, a long time series of income shares going back the early 1900s, these researchers have provided extremely compelling evidence of how skewed the distribution of income has become in the other advanced economies. See here for recent CBPP work featuring P&S’s analysis (and here’s Saez’s website).
Here’s a picture from their work showing the share of income accruing to the top 1% since 1913. We’ve recently equaled highs in the inequality measure we haven’t seen since the late 1920s, and need I remind you, that didn’t end well.
[BTW, note the dip at the end of the series—2008 (these data are only available with a lag). That’s a cyclical dip, a function of realized capital losses from when the bubble burst, just like what happened in the last downturn. And as you can see, once the economy picked up again, inequality regained its momentum. I predict the same pattern in this expansion—see figure on the bottom of this post.]
Um…Inequality Itself and the Middle Class Squeeze: Look at that sharp trend in income share in the 2000s and consider that this trend occurred as middle class families were losing ground in terms of the their real income in those years, even while the economy expanded. They then got badly whacked in the Great Recession and are far from back on their feet. Meanwhile, though we don’t yet have the inequality data for recent years, we do know that corporate profits have more than recovered their prior peak while compensation as a share of GDP is at a fifty year low and real paychecks are falling.
For years now the economy has been growing yet most families are simply finding it a lot harder to get ahead than they thought, hoped, or remembered from earlier generations. Many of these folks are not prone to reading CBO and OECD studies, but when they hear about this stuff in this economic context, it resonates with them.
Perhaps if the growth of inequality were of a different nature—if families were generally all getting ahead but those at the top were getting ahead faster, as has been the case in some European countries, the issue wouldn’t be as resonant as it has been. But that’s not how it’s played out here.
Weaker Levees: Both the CBO and OECD studies find that the system of taxes and transfers has become less effective over time at pushing back on the rising tide of pretax income inequality.
From the OECD:
Tax and benefit systems play a major role in reducing market-driven inequality, but have become less effective at redistributing income since the mid-1990s. The main reason lies on the benefits side: benefits levels fell in nearly all OECD countries, eligibility rules were tightened to contain spending on social protection, and transfers to the poorest failed to keep pace with earnings growth.
As a result, the benefit system in most countries has become less effective in reducing inequalities over the past 15 years. Another factor has been a cut in top tax rates for high-earners.
Remember, and this is important as we move from diagnosis to prescription, the increase in inequality is very much a pretax phenomenon, and it’s neither realistic nor good policy to try to redistribute your way out of it. But you surely don’t want your tax and transfer systems to do less against that tide, to become less progressive, to exacerbate the market inequalities. Yet that’s the trend, and thankfully, that has caught people’s attention too. Just look at the polling numbers on the President’s call for measures like the expiration of the highend Bush tax cuts.
Of course, when I say people here, I don’t mean Congressional R’s along with the R candidates, who are busy agitating for bigger tax cuts for the rich and fighting tooth and nail against a 1.9% temporary surcharge on households above $1 million (0.2% of taxpayers; avg income $3 million).
I’ve got more for this list but I’d better go to work and see what we can do in the near term, most pressingly to get this payroll tax cut extension over the hump (and we’ve still got to work on UI too!).