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Figure 1. Changes in before-tax household incomes, 1949–1979. Source: www.census.gov/hhes/income/histinc/f03.html.
That pattern began to change at some point during the 1970s. Some people date the change even earlier than that. In any event, if we look at the period from 1979 to 2003, we can see how dramatically different the later income growth pattern is from the earlier one. In the more recent period, shown in figure 2, people at the bottom of the income distribution gained only just over 3 percent in real purchasing power terms, and gains throughout the middle were also very small. For example, median family earnings were only 12.6 percent higher at the end of that twenty-four-year period than at the beginning. Income gains for families in the top quintile were substantially larger, and larger still for those in the top 5 percent. Yet even for these groups, income growth was not as great as during the earlier period. The later period was thus a time not only of slower growth but also, and more important, of much more uneven growth.
Figure 2. Changes in before-tax incomes, 1979–2003. Source: www.census.gov/hhes/income/histinc/h03ar.html.
Income inequality has also increased in two important ways not portrayed in figures 1 and 2. One is that changes in the income-tax structure during the presidency of Ronald Reagan significantly shifted real after-tax purchasing power in favor of those atop the socioeconomic ladder. Tax rates on top earners were increased slightly in the final year of the George H. W. Bush administration and further still during the administration of Bill Clinton, which also increased the earned income tax credit for working families with low incomes. But those interim adjustments were far outweighed by the large additional tax cuts targeted toward high-income families by George W. Bush. A second change not reflected in figures 1 and 2 is the magnitude of the earnings gains recorded by those at the very top.
Figure 3. Change in after-tax household income, 1979–2000. Source: Greenstein and Shapiro 2003.
Figure 3 portrays some of the results of these two additional effects. Note that the middle 20 percent of earners (net of both tax and transfer payments) gained slightly more ground than in figure 2, which showed pretax incomes (net of transfer payments). Note also that the gains accruing to the top 1 percent in figure 3 are almost three times as large as the corresponding pretax gains experienced by the top 5 percent in figure 2.
Even more spectacular income growth has occurred within the top 1 percent of earners. Only fragmentary data exist for people that high up in the income distribution, but there are snapshots here and there that show us what has been happening. One valuable source is the salaries of CEOs, which Business Week has been tracking for more than twenty years. In 1980, the CEOs of Fortune 200 companies earned about forty-two times as much as the average worker. That ratio had grown to more than five hundred times as much by 2000. And there is evidence that the gains have been even more pronounced for those who stand even higher than CEOs on the income ladder.
Figure 4. Changes in net worth, 1989–1999. Sources: Wolff 1998; www.inequality.org.
A similar picture emerges when we look at how the distribution of wealth has changed over time. In recent years, it has been widely reported that roughly half of all Americans own stocks, the apparent implication being that there was a fairly broad sharing of the huge run-up in asset prices that peaked in March 2000. In fact, however, asset ownership has become even more heavily concentrated during recent years. As figure 4 shows, for example, the net worth of the median household remained virtually unchanged between 1989 and 1999, a period during which the total net worth of American households nearly doubled.
Figure 5. Changes in average household net worth, 1983–1998. Sources: Wolff 1998; www.inequality.org.
People in the middle simply don’t own much stock. Because their pensions were, for the most part, defined-benefit plans rather than defined-contribution plans, they did not benefit significantly from the stock market boom of the 1990s.
As with income, the real growth in wealth came predominantly at the top. As shown in figure 5, for example, the bottom 40 percent of households actually experienced a significant decline in net worth between 1983 and 1998, a period during which the top 1 percent saw its wealth grow by more than 40 percent.
But it was within the top 1 percent that the most spectacular changes in net worth occurred. For the past several decades, Forbes has published a list of the estimated net worth of the four hundred richest Americans. In 1982 there were only thirteen billionaires on this list, five of them children of the Texas oil baron H. L. Hunt. By 1996 there were 179 billionaires on the Forbes list, and by 2005 there were 374. Together the Forbes four hundred are now worth more than a trillion dollars, nearly one-eighth the national income of China, a country with one billion people.
There were some 7.5 million American households with a net worth of at least a million dollars in 2004, more than 20 percent more than there had been just the year before.1 If a net worth of a million dollars has become almost commonplace, a net worth of five million dollars still counts as real money. There were 740,000 such families in 2004, 37 percent more than there had been a year earlier.2 Wealth at that level was once rare. Twenty-five years ago, if people worth more than five million dollars happened to find themselves in Ithaca on business, there would almost certainly have been an article about them in the Ithaca Journal. But now that almost three of every thousand people have a net worth that high, such events have become altogether unremarkable.
My point is not that the creation of these big fortunes is by itself a bad thing; I cite these figures merely to present a rough picture of how the distributions of income and wealth were evolving in the United States at the end of the twentieth century. In contrast to the robber barons of the nineteenth century, most of the people who have amassed today’s big fortunes did so without having to crush labor unions with armies of hired thugs. And although there are obvious exceptions, most of today’s wealthy did not become rich by stealing money from others who had a rightful claim to it. Rather, they invented valuable new products and services and sold them to the public.
But whatever processes may have been involved, the result has been that the distributions of income and wealth have become much more concentrated during the last several decades. Those in the middle of the income and wealth distributions have lost ground relative to those at the top, despite the absolute increases in their income and wealth. For them, to return to my first thought experiment, the United States has become much more like World A and much less like World B.
CHAPTER THREE
Inequality, Happiness, and Health
With evidence on recent trends in income and wealth inequality in hand, we are now in a position to attempt to answer the question before us: Does rising inequality harm the middle class? One way to approach it is to try to answer a closely related question: Does growing inequality make the middle class less happy? Although few economists would pose such a question, I am persuaded that much can be learned from an attempt to answer it. As a first step, we require
