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Inequality isn't important? That's just wrong

America’s rich have become geniuses at creating wealth for themselves without creating wealth for other people. Don't let anyone tell you it doesn't matter.
Bankers from Bank of India watch from a window as Occupy Wall Street protesters march 47th Street in New York Sept. 17, 2013
Bankers from Bank of India watch from a window as Occupy Wall Street protesters march 47th Street in New York Sept. 17, 2013

President Obama observed, in a December 4 speech, that “a dangerous and growing inequality and lack of upward mobility” are “the defining challenge of our time.” This seemingly self-evident statement prompted many people—not all of them conservative—to argue that all this talk about income inequality is overblown. They happen to be wrong, but the inequality backlash has gathered sufficient strength that it’s worth reviewing their arguments.

Inequality isn’t growing as much as people say. Yes, proponents of this view concede, the trend looks pretty dire when you look just at wages and investment income. But when you add in employer benefits like health insurance and government redistribution through taxes and transfer payments, income inequality is shown to have increased less.

That’s true. Health insurance, even before the advent of Obamacare, blunted somewhat the growth in income inequality, because lower-income people who had insurance tended to be in poorer health than higher-income people, and also because the price of health care was, until recently, rising very, very fast. And government redistribution does indeed slow the growth of market-based income inequality, which of course is what it’s supposed to do.

But neither variable comes close to eliminating inequality’s growth. When you include employer benefits and government redistribution, income for the middle 60% of the population has grown 40% since 1979, while for the top 1%, it’s grown 201%.  By contrast, for almost half a century before 1979, income inequality decreased or at worst remained stable. During much of that time (1949-1979) median income grew at about the same rate as it has since 1979 for just the 1%.

Ironically, the people who insist on counting government redistribution when calculating income inequality (that is, conservatives) also tend to favor decreasing it through cuts to programs like food stamps. To some extent they’ve been getting their wish; since 1979, the extent to which government redistributes incomes has been reduced by about one-quarter.

Inequality is important, but the “defining challenge of our time” is unemployment, not inequality. This argument muddies the distinction between the short term and the long term. If “our time” means “since 2008,” then unemployment is indeed the more urgent problem. If “our time” means “since 1979,” then inequality is the more urgent problem. Even if your time frame begins in 2008, though, the economy’s unequal growth has to be a matter of serious concern. Since the current recovery began, (market) incomes for the top 1% increased by 31.4%, while (market) incomes for the bottom 99% grew 0.4%. Surely that disconnect helps explain why unemployment still stands at 7%.  America’s rich have lately become geniuses at creating wealth for themselves without going through the bother of creating wealth for anyone else.

Inequality doesn’t matter. According to this argument, the growing concentration of wealth among the 1% (really the 0.1%) has nothing to do with stagnation at the (market) median. It’s true that these are two separate problems with two different sets of causes. But there is one common link: the shift of dollars from labor to capital. Josh Bivens of the nonprofit Economic Policy Institute calculates that over the past dozen years or so labor’s share of corporate income has dropped from 80% to 75%. Michael Cembalest, chief investment officer of JP Morgan Chase, calculated in 2011 that labor compensation was at a 50-year low relative to company sales and GDP. These statistics are entirely unsurprising when you remember that private-sector labor unions have been in free fall since 1979. When labor is weak, workers get less money. Duh.

American society is highly mobile. This argument usually invokes a Treasury department study from 2007 that showed half the people from the bottom 20% in 1996 had moved up from that group by 2005. But they didn’t travel particularly far; most never make it to the middle 20%. And anyway, such calculations are muddied by the tendency of income to reflect the stage of life you happen to inhabit. The more accepted way to measure mobility is to compare two successive generations over comparable periods in their lives. And international studies have found relative income to be more “heritable” in the U.S. than in Germany, France, Spain, Canada, and Australia, among other nations. Mobility has slowed in the U.S. since the 1950s, and possibly since the 1970s, while it’s accelerated in other countries.

Inequality and mobility aren’t linked. The scholarship here is, it’s true, well short of definitive. But a rough correlation has been found between high inequality and low mobility, and it seems intuitive that (in the formulation of Brookings scholar Isabel Sawhill) the ladder will get harder to climb as the rungs grow farther apart.

President Obama’s insistence on talking about inequality is not only apt; it is, given the especially dire turn this trend has taken during his presidency, pretty brave. The problem was one-third of a century in the making and won’t be halted overnight. But isn’t it time to start trying?