Graph of the Day: Putting the Squeeze on Labor
The White House’s new Economic Report of the President—broadly, an annual overview of how the president and his Council of Economic Advisors (CEA) view the state of the economy—is generally optimistic for 2012, noting better-than-expected job growth and economic expansion for ten straight quarters. It also underscores just how severe the financial crisis was that the president faced, with revised estimates showing that the economy contracted at an 8.9 percent annualized rate in the last quarter of 2008, not the 3.8 percent initially claimed.
The outlook on wages, productivity, and prices is less rosy. The CEA notes ominously that for the first time since World War II, the historical link between wages and prices has broken. For the last ten years, inflation has been driven by rising price markup, while unit labor costs have fallen behind productivity gains. In other words, prices are increasing and corporate profits are soaring—but workers are being left behind, with labor share of output (the inverse of price markup over labor unit costs) at its lowest level in seventy years.
On the one hand, that means there is now considerable slack in the labor market, so the CEA can predict that the economy has plenty of room to expand without creating inflationary pressures. But it also indicates a tectonic shift, since the Reagan Revolution, in the relationship between unskilled labor and capital. If this new trend holds, then we are looking at an economic environment that is unlike anything we have experienced in the post-war era. Karl Smith is more blunt: “At its heart the issue is that Industrialization Really Was Different, and there is no reason to think it will come again. The reality of this new world is that you cannot simply work hard and make a good living.”
In a way, he’s right. The post-war era really was a unique time in American and economic history, with wage compensation tied to productivity growth—a rising tide that lifted all boats mostly equally. The past several decades have seen that relationship erode, as manufacturing and union jobs disappeared overseas, and corporations sought massive gains in competitiveness and profit at the expense of labor. Globalization and technology share much of the blame, but it is also instructive to look at the experience of other industrialized countries, many of which have been able to mitigate soaring income inequality with education and industrial policies designed to equalize opportunity and share the benefits of economic growth. Once, around the turn of the twentieth century, enterprising young progressives headed to Europe to study policy, returning to America with the seeds of what would become the New Deal, and later, the Great Society. Perhaps it is time, once again, to look abroad for answers.
Graph of the Day: The Growing Education Gap Between Rich and Poor (Continued)
New research on the state of U.S. education shows that income inequality has surpassed racial inequality as the single most significant predictor of education outcomes. According to the Russell Sage Foundation, the achievement gap between rich and poor students is now larger than the gap between white and black students—perhaps a watershed moment in the changing discourse on inequality.
Century Foundation Senior Fellow Rick Kahlenberg weighs in on the debate, describing a few of the myriad strategies that TCF and other organizations have proposed to close the socioeconomic achievement gap in education. But I wanted to highlight a few of Rick’s own graphs, from Rewarding Strivers: Helping Low-Income Students Succeed in College, which illustrate a few of the ways in which income inequality critically disadvantages students at the bottom of the income distribution.
Much of the funding for public schools typically comes from local property taxes, leaving poorer districts with significantly lower-quality staff and facilities than wealthier districts. The table above shows how teacher quality drops at high-poverty schools, while the number of students who will grow up to live in poverty skyrockets from 4 percent to one in seven—even when controlling for individual ability and family home environment.
But the disadvantages don’t stop there. Rick’s research for The Century Foundation also indicates that students from the bottom income quartile received zero or negative advantage in the college admissions process, while recruited athletes, minority groups, and legacies enjoyed a significant boost. Leaving aside the issue of athlete and legacy preference, which Rick has argued against forcefully in the past, it is disturbing, in light of this new research, why few schools have adopted programs to encourage economic diversity.
Graph of the Day: For High-Scoring Students, Socioeconomic Status Still Matters
My colleague Greg Anrig continues live-blogging his critique of Charles Murray’s Coming Apart: The State of White America 1960-2010, with a deconstruction of Murray’s claim that top-tier universities perpetuate a genetically superior elite, whose privilege further isolates them from working-class Americans. As Anrig points out, class privilege in higher education is a problem The Century Foundation takes seriously (our own research shows that 74 percent of the students at highly selective colleges come from the richest socioeconomic quartile, while just 3 percent come from the bottom fourth); but Murray’s obsession with genetic explanations (as in his debunked theories about racial intelligence in The Bell Curve) and his conservative ideology blind him to essential facts about the way that class privilege operates in the real world.
The fact is that among high school students who score in the top 25th percentile on standardized tests, socioeconomic background remains the most significant predictor of whether they will go on to earn a college degree. According to a 2010 Century Foundation report, high-scoring students from a poor socioeconomic background were more than 80% less likely to attend a four-year college than their wealthy peers, and five times more likely to attend no college at all. And with the cost of a four-year college education skyrocketing, is it really any wonder that affordability has become a major obstacle for equally intelligent and deserving students? But Murray takes no time to consider whether income inequality–rather than an inevitable, genetic aristocracy of talent–is to blame for this concentration of class privilege. The data below, from the U.S. Department of Education, tell the true story.
Graph of the Day: Why Does the U.S. Have Lower-Wage Jobs than Europe?
The folks at the Center for Economic and Policy Research have a new report out this week that provides an interesting perspective on the now hot-button issue of income inequality. According to John Schmitt, the report’s author, nearly a quarter of American workers were in low-wage jobs in 2009, a higher percentage than in any other rich, developed country. What’s more, the number of low-wage workers—defined as those earning less than two-thirds the national median hourly wage—has been rising in the United States for “at least three decades,” from around 20 percent in 1979 to nearly 30 percent in 2010.
Of course, a high incidence of low-wage jobs does not by itself indicate income inequality. If, as Schmitt points out, “low wage jobs act as a stepping stone to higher-paying work, then even a relatively high share of low-wage work may not be a serious social problem.” But that is no longer the case, at least in the United States. Even Republican lawmakers are acknowledging that social mobility in the U.S. has fallen behind much of the rest of the developed world, with low-wage work “a persistent and recurring state for many workers.”
But, you may ask, doesn’t the United States have a higher standard of living? Aren’t our low-wage earners still better off than their counterparts in Europe? Well, not really. Low-wage workers in the United States have no legal right to paid vacation, sick days or parental leave, not to mention the lowest incidence of employer-sponsored health insurance—54 percent of workers in the bottom wage quintile have no insurance at all. And though the U.S. does enjoy a high GDP per capita, the OECD data shows no association with a reduction in the share of low-wage workers. Comparing median household income yields the same result:
Stronger labor market institutions, like those in Europe, could certainly help reduce our high proportion of low-wage jobs. Collective bargaining, a higher minimum wage, employment protection legislation, and more rigorous enforcement of national labor laws would all raise wages for the quarter of Americans struggling with low wages and ever-lower social mobility.
It’s almost hard to believe how tone-deaf this candidate really is. And then he says this:
“You know, I think it’s fine to talk about those things in quiet rooms,” but the President ought not to be taking such a “divisive,” “envy-oriented” approach.
Because you never apologize for America, right Mitt? Congratulations, GOP. You get the candidate you deserve.
Via Andrew Sullivan, Dan Amira expects this message to flop:
This is not a gaffe, really, just a particularly stark reflection of Romney’s true beliefs as he’s repeatedly expressed them. Still, it’s a ballsy way to handle issues of income–power inequality, particularly when he’s already being portrayed as an unfeeling, opulently wealthy corporate monster by Democrats and Republicans alike. And Romney might soon find that the 77 percent of Americans (including 80 percent of independents) who believe there is “too much power in the hands of a few rich people and large corporations” and the 61 percent (including 61 percent of independents) who say that “the economic system in this country unfairly favors the wealthy” don’t find his ideology very relatable.
Graph of the Day: Capital Gains Drive Income Inequality
As the mainstream Republican establishment begins to coalesce around Mitt Romney following his caucus victory in Iowa, the former Massachusetts governor should also come under increased scrutiny for his hardline conservative positions on tax policy, which many Americans rightly perceive as out of touch with both fiscal reality and growing economic inequality. Romney’s stated opposition to any new income taxes, his promise to lower capital gains tax rates and eliminate the estate tax look particularly out of touch in light of a new report from the Congressional Research Service, which concludes that capital gains—the primary source of income for Mitt Romney and others in the top 1 percent—are now the single greatest driver of income inequality today.
According to the report, GDP grew a healthy 38 percent in the decade between 1996 and 2006 (the last year before the boom-bust cycle of 2007-2008), with average inflation-adjusted after-tax income increasing about 25 percent. But that average conceals an astounding divergence in outcomes between the nation’s richest and poorest citizens: while income of the wealtheist 1 percent nearly doubled, the bottom 20 percent actually saw their income decrease by 6 percent. And because the CRS analysis only used data from active tax filers, those numbers may even underestimate the true width of the income gap.
The CRS data confirms earlier reports from the likes of the Congressional Budget Office that suggest that the tax code has become less progressive over time, decreasing inequality by less than 4 percent in 2006. Still, the inequality encouraged by the Bush tax cuts—which provided enormous savings at the top of the income distribution—pales in comparison to the incredible shift from labor income to capital income among the wealthiest 5 percent, which, Jared Bernstein muses, “seems endemic of a society that devalues work while providing outsized rewards for speculation and asset accumulation.”
The graph below, culled from the CRS data, illustrates the growing rift between the top 1 percent—who now take the majority of their income from cheaply taxed capital gains and dividends—and the bottom 99 percent, who continue to derive nearly all of their income from wages. It is a troubling paradigm shift in the way our society values labor and rewards risk-taking, but perhaps a natural evolution for the “you’re on your own” culture of today’s Republican party.
For more, check out Greg Anrig’s 10 Reasons to Eliminate the Tax Break for Capital Gains.
Graph of the Day: How Rising Income Inequality Threatens Representative Democracy
By Benjamin Landy
Disillusionment is nothing new in political life. You might even call it the regular condition of the American voter. We continually set our hopes on the next ‘outsider’ candidate—the one who will finally change Washington—and then try not to flinch as the dream implodes. Of course, there is a good reason lawmakers rarely live up to their rhetoric: compromise in the face of political reality is a feature, not a bug, of the democratic process.
Still, it’s hard not to feel that this time has been different. The collapse of the credit market in 2008 precipitated an economic crisis that Congress has appeared unable (Democrats) or unwilling (Republicans) to solve. Income inequality has soared and millions remain out of work, but Washington remains gridlocked. With nowhere to turn, thousands have taken to the streets to express their frustration with a political system that no longer seems to represent their interests.
Sadly, Americans aren’t wrong to feel that way. According to a landmark study by economist Larry Bartels, wealthier and better-educated citizens are significantly more likely than the poor and less-educated to have their interests represented in Congress. For “incidental reasons of data availability,” Bartels examined Senatorial representation in the late 1980s and early 1990s, to test his presumption that an increasingly unequal distribution of wealth was having an adverse effect on the political representation of specific income groups. What his analysis revealed was shocking, though expected: the interests of constituents in the upper third of the income distribution were weighted 50 percent more than those in the middle third, while the views of constituents in the bottom third received no weight at all in the voting decisions of their representatives.
The situation is almost certainly worse today. The wage gap between the richest 10 percent and the poorest 10 percent has grown by about a third since the time of Bartels’ original study, while the structural and institutional barriers to equal political representation have only intensified. Corporations and unions can now join together with individuals and other groups as “super PACs” to raise unlimited sums of money for candidates—now virtually a requirement for political campaigns that are more cost-prohibitive than ever—while a glut of new “voter ID” laws in conservative states discriminate against poor and minority voters that frequently vote Democrat. Campaign finance reforms like the McCain-Feingold Act are “dead,” as Senator McCain noted in the aftermath of the recent Supreme Court decision on the Citizens United case, which lifted the restriction on corporate funding of political campaigns.
And, as Bartels observed in 2005, wealthier citizens remain significantly more likely to turn out to vote, contribute money to campaigns and to have direct contact with their public officials. Quoting political scientist Robert Dahl, he asks, “In a political system where nearly every adult may vote but where knowledge, wealth, social position, access to officials, and other resources are unequally distributed, who actually governs?”
Commentators on both the right and left have taken to blaming this apparent disconnection on “crony capitalism” (a potent bit of political messaging that Democrats, for once, are hesitant to yield), although it means completely separate things to the different parties. For Republicans, crony capitalism is a story about bureaucratic villainy: government employees colluding with constituents to pad their pockets at the expense of the hardworking, independent taxpayer. Crony capitalism means entitlements, hand-outs and welfare queens, for which the only prescription is fiscal discipline and smaller government. The wealthy are not part of this story, except as its untold heroes, the “job creators.”
Liberals deploy the same term to refer to the corruption of government by corporations and lobbyists, and the wealthy who stand to benefit from both. Unfortunately this story—about how income inequality begets inequality of political representation—is all too real.
New OECD Study Rejects “Trickle-Down” Economics
Income inequality has been in the news a lot recently, and for good reason: the Great Recession and the collapse of the credit market have highlighted gross discrepancies in wealth that—disguised by a series of asset bubbles—had been growing precipitously since the early 1980s. Now, a new report from the Organization for Economic Cooperation and Development warns that rising income inequality is increasingly an international trend, even in historically egalitarian nations like Finland and Sweden. “The benefits of economic growth do not trickle down automatically,” concluded OECD Secretary-General Angel Gurría at a press conference yesterday. “This study dispels this assumption. Greater inequality does not foster social mobility. Without a comprehensive strategy for inclusive growth, inequality will continue to rise.”
According to the report, income growth for the poorest 10 percent of Americans was just 0.5 percent annually from 1985 to 2008, far less than social-democratic France (1.6 percent) and Spain (3.9 percent). And the United States remains one of the most unequal societies overall, with the average income for the top 10 percent nearly fifteen times that of the bottom 10 percent. That widening gulf is not helped by the top federal income tax rate, the report claims, which has fallen from 70 percent in 1981 to just 35 percent today.
The report’s authors suggest several reasons why inequality is increasing throughout the developed world, though they focus on the wage growth of highly educated and skilled workers, who have benefited more from recent technological changes. That wage premium has generally come at the expense of less-skilled, lower-paid workers, who have lost many of the protections that once made their jobs secure. Many such workers have had their hours cut during the global recession, pushing them into part-time status.
Unfortunately, public policy has done little to slow the tide. Regulatory and tax policy are essential tools for reducing market-driven inequalities, but they have become less progressive and less effective since the mid-1990s. Social transfers and benefits that once sustained a vibrant middle class have become constrained by budget cutbacks, failing to keep pace with the income growth of the OECD’s most affluent.
“A sustained period of strong economic growth has allowed emerging economies to lift millions of people out of absolute poverty,” said Secretary-General Angel Gurría at the report release. “But the benefits of strong economic growth have not been evenly distributed and high levels of income inequality have risen further.”
Sustained inequality inhibits growth and social cohesion. It is a real “live” economic issue as we could observe at the beginning of the crisis when the housing bubble burst, and the most vulnerable couldn’t afford to pay for their mortgages anymore. The framework and the incentives which made this happen had its roots in deep-rooted social imbalances.
Furthermore the economic crisis has added urgency to the need to address inequality. The social compact is starting to unravel in many countries. Uncertainty and fears of social decline and exclusion have reached the middle classes in many societies. People feel they are bearing the brunt of a crisis for which they have no responsibility, while those on high incomes appear to have been spared. Addressing the question of “fairness” is a condition-sine-qua-non for the necessary restoring of confidence today.
According to the Center on Budget and Policy Priorities, more than 25 percent of Americans would have been poor last year if not for the social safety net.
The safety net was responding to the downturn even without the Recovery Act initiatives. Between 2007 and 2010, the share of Americans that the safety net kept out of poverty rose from 9.5 percent to 10.8 percent. This increase mostly reflects the growth of programs like unemployment benefits and SNAP, which expand automatically to help people hit by the recession and then shrink as the economy recovers.
But these automatic increases wouldn’t have been enough by themselves to prevent a large increase in poverty in the recession. Without the temporary Recovery Act initiatives, the poverty rate would have jumped from 14.9 percent to 17.8 percent between 2007 and 2010, and 6.9 million more people would have become poor than actually did.
What Happened to the American Dream?
By Benjamin Landy
“I don’t try and define who’s rich and who’s not rich; I want everybody in America to be rich,” GOP frontrunner Mitt Romney explained in a recent presidential debate. “I want people in America to recognize that the future will be brighter for their kids than it was for them.”
The line received enthusiastic applause from the audience even as there was a collective eye-rolling on the Left. Romney had not answered the question of what constitutes being rich—but his dodge on income inequality was more noteworthy for the change in tact that it anticipated. As populist anger has focused on the inequities of the one percent, Republicans have adapted their messaging to emphasize that anyone can become rich, a strategy they believe places the party on surer footing. “[We want to] promote income mobility and not excoriate some who have been successful,” Representative Eric Cantor recently told Fox News host Chris Wallace. “We want success for everybody.”
Unfortunately, the latest research on social mobility suggests that few middle class Americans or their children can expect to be as successful as Mr. Romney or Mr. Cantor. According to a new report by the Federal Reserve Bank of Boston, “the evidence indicates that over the 1969-to-2006 time span, family income mobility across the distribution decreased, families’ later-year incomes increasingly depended on their starting place, and the distribution of families’ lifetime incomes became less equal.”
That is significant.The “American dream” is predicated on the possibility of economic mobility, and we rely on such mobility to offset longer-term inequalies. Less mobility actually amplifies the problem of income inequality, invalidating Romney and Cantor’s argument that inequality is irrelevant so long as anyone can become rich. And economic mobility is indeed slowing, as the latest evidence shows.
In fact, according to the Center for American Progress, children from low-income families in the United States now have only a 1 percent chance of reaching the top 5 percent of the income distribution, while the children of the rich have about a 22 percent chance. Children born into families in the middle quintile of the income distribution (the 40th-60th percentile) actually have a higher chance of ending up in a lower income bracket (39.5 percent) than a higher one (36.5 percent), while their chance of reaching the top fifth percentile remains under 2 percent. Such class rigidity both accelerates and deepens existing inequalities, reinforcing a positive feedback loop of unequal opportunity for the middle and lower class.
As Economist Jared Bernstein observes,
This notion that where you start is an increasing determinant of where you end up poses a fundamental challenge to a basic American value. Most of us don’t seek policies to ensure equal outcomes, but we do seek equal opportunities. The combination of increased inequality and decreased mobility suggests the violation of both: less equal outcomes and diminished opportunities.
If you want to find the American dream today, you might be better off looking in Denmark or Australia, where the average child’s future income is far less dependent on that of his or her parents. Internationally, the United States ranks among the least socially mobile countries in the OECD, and has the highest income inequality of them all. To argue that our unique national character allows us to ignore such inequality, as Mr. Romney and Mr. Cantor suggest, is not borne out by the evidence.
David Brooks’ Red and Blue Inequality
By Benjamin Landy
While it is heartening that income inequality is receiving increased attention in the press, conservative commentators are once again trying to reframe the debate as a referendum on the social habits of the poor. Earlier this week, Paul Krugman tore into fellow New York Times columnist David Brooks for his contention that income inequality is really two distinct phenomena: “Red Inequality,” which is the wage gap between those with and without college degrees among the bottom 99 percent of wage earners in the Heartland; and “Blue Inequality,” the result of a coastal coalition of ‘old boys club’ types, wielding outsized political influence and enjoying unjustly low tax rates. According to Brooks, it is a mistake to focus only on Blue Inequality when the “disorganized social fabric of the bottom 50 percent” (Brooks identifies lack of education, divorce, having children out of wedlock, smoking and obesity) is the real reason for enduring inequality. “Liberal arts majors like to express their disdain for the shallow business and finance majors who make all the money,” Brooks opines. “It is easier to talk about the inequality of stock options than it is to talk about inequalities of family structure, child rearing patterns and educational attainment.”
Krugman counters by pointing out that even the income share of the highest quintile—composed overwhelmingly of college graduates—has barely budged in thirty years, if you discount the bulk of that growth which comes from the top 1 percent. Everyone else, even families in the second highest quintile, have seen their share of income drop.
It is true, as Mr. Brooks claims, that the economic benefits of a college education have risen steadily over the past several decades. But that gap is dwarfed by the outsized gains at the very top of the income spectrum. While overall productivity has soared, average real after-tax income grew by just 18 percent for the bottom 20 percent of households since 1979. The top 1 percent saw their income grow by 275 percent. According to The Century Foundation’s Greg Anrig, those gains help explain the growing divide between more and less educated workers:
Both the gaps between the wealthiest Americans and everyone else, and between those with and without college educations, are national phenomena that are not dictated by geography as Brooks claims. More importantly, both aspects of rising inequality matter because they are inter-related. It’s because almost all of the income gains have been accruing to the top 1 percent that everyone else has experienced stagnant or declining compensation. In the past, when the highest earners weren’t running away from everyone else, there was enough income to share across the income spectrum that mitigated gaps among workers with differing educational levels.
Will Wilkinson is naive to ask what point there is to Krugman’s concern that the United States is becoming an oligarchy (“How does this help? To what question is this the answer?”). The issue is not whether “Blue” or “Red” inequality is more important, or whether that kind of delineation is even useful. The American people are currently being presented with two distinct visions for the future of the country: one in which the tax burden shifts from the rich to the poor, leading to less funding for social programs; and one in which taxes are raised on the rich to fund those programs that help lift the poor out of poverty and increase social mobility. The first solves neither Blue nor Red inequality; the second tackles both, by redistributing resources to stimulate the broadest social and economic benefits. The relationship between unprecedented growth at the top of the income spectrum and stagnation at the bottom requires a progressive, not regressive, solution.
Graph of the Day: US Wage Growth Falls Behind
By Benjamin Landy
Thanks to the Occupy protests, income inequality is finally getting some long-overdue attention in the media. Still, there’s a fair amount of navel-gazing in America, and those conversations rarely move beyond our own borders to contemplate how the struggles of our middle class measure up with the rest of the post-industrial world. Since the early 1970s, most US households have seen little income growth, with wages down 14 percent as a share of the economy overall and wage inequality up 40 percent. But is our growing income gap the exception or the rule?
According to a new study, it’s a little of both. The Resolution Foundation, a British think tank, found that “the phenomenon of growth without gain in advanced economies is a universal one,” with median wages growing less quickly than economic output over the last ten years in each of the ten rich countries studied. But there were still significant variations in the relationships between workers’ wages and GDP among the nations, allowing the study’s authors to differentiate three distinct groups:
The US, Australia and Canada were categorized as having consistently weak wages relative to GDP; France, the UK and Germany did slightly better but likewise experienced an acute deterioration in the relationship between growth and pay; and Japan, Finland, Sweden and Denmark were cited for a stronger relationship between wages and GDP over the last decade, though they too faced a “recent and mild” decrease in wage equality.
In the chart above, a higher ratio corresponds to faster wage growth relative to GDP. The United States, while clearly not the worst among its peers (that unfortunate honor must go to Canada, which experienced exactly zero wage growth between 2000 and 2007), was still clearly on the lower end of the spectrum.
But crises always double as moments of opportunity. The study concludes that the varying experiences of the three groups suggest that there remains considerable opportunity to reverse the trend of increasing wage inequality. Policies like indexing the minimum wage to consumer price indexes, for instance, have allowed France to maintain wage growth, although at the expense of higher unemployment. The industrial policies of Germany and the Nordic countries may likewise provide policymakers with strategies to reconnect wage growth to productivity gains.
