Examining income inequality

Before 1930, an affluent elite controlled much of America’s wealth; think F. Scott Fitzgerald’s The Great Gatsby, which vividly depicts this Gilded Age. After WWII and the New Deal, America fundamentally changed; wealth was spread more evenly as we became a middle class society. However, starting in the late 1970’s, income inequality began a drastic upward spiral that has yet to slow down.

Paul Krugman, a foremost American economist, accurately declared our current era a new Gilded Age. Census data from the late 1970’s onward depict a growing share of income going to the top 20 percent of families, within that top 20 percent to the top 5 percent, and within the top 5 percent to the top 1 percent. Additionally, the non-partisan CBO reports that, from 1979-1997, the median American family’s after-tax income increased by only 10 percent, while the top 1 percent of families’ income rose 157 percent. Moreover, Krugman argues that most of the modest increase in middle-class incomes seems “due to wives working longer hours, with little or no gain in real wages.”

Why the sudden and enduring reconcentration of wealth? Krugman, who believes that traditional economic explanations are lacking, offers an innovative hypothesis that emphasizes the function of social norms in establishing limits to inequality. He argues that the New Deal imposed norms espousing relative equity in earnings that created the middle-class society that persisted from the 1950’s to the 1970’s. These norms began to crumble in the late 70’s and caused tangible changes in the American distribution of income.

This unraveling of norms is illustrated by the changing philosophy of corporate leadership. The post-WWII consensus on effective and responsible corporate leadership is accurately encapsulated by economist Kenneth Gailbraith: “Management does not go out ruthlessly to reward itself – [it] is expected to exercise restraint… [without restraint] the corporation would be a chaos of competitive avarice… [an] effective code bans such behavior.’’ Gailbraith’s depiction stands in stark contrast to the insider trading, dishonest accounting practices, and other repugnant corporate actions recently unearthed; actions that constituted widespread corporate malfeasance during the booming 1990’s, which caused millions of Americans to lose a huge chunk of their savings and retirement funds.

There have been other marked changes America’s corporate norms. In the post-WWII era, many workers felt they had considerable job security; most companies wouldn’t fire workers except in extreme circumstances. Many workers had guaranteed health insurance even if laid off. Also, workers had pension plans that weren’t subject to the whims of the stock market. In our new Gilded Age, mass firings from respected companies are common, and losing your job means losing your insurance. Moreover, a 401-K plan that oscillates with the market is no guarantee of a comfortable retirement

Still, America is the richest major nation, so why be concerned about income inequality? Despite our preeminent wealth, we have more poverty and a lower life expectancy than any other major advanced nation. America’s average life expectancy falls right above Portugal’s and below Greece’s; male life expectancy is lower than Costa Rica’s. In Sweden, life expectancy is three years higher than that of the U.S., infant mortality is half the U.S. level, and functional illiteracy is much less common.

How is this possible? It’s simple: our rich are much richer than those of any other highly advanced nation and this drives up our per capita GDP. When you compare middle classes, the picture radically changes: the median Swedish family’s standard of living is comparable to that of its U.S. equivalent. Wages are slightly higher in Sweden, and a higher tax burden is offset by public health care. The lower class provides even a starker contrast: the poorest 10 percent of Swedish families have incomes that are 60 percent higher than their U.S. counterparts.

But isn’t income inequality the price we pay for our impressive economic growth? Maybe. It’s true that most Western European countries have higher rates of unemployment and lower rates of economic growth than America. Yet, the history of American economic growth runs counter to this claim: our highest economic growth occurred during the same era when we achieved our highest level of income equality: you guessed it, post-WWII.

Even if it’s true that our high level of income inequality is necessary for maximal economic growth, is it a fair bargain? Though we are richer, per capita, than Western Europe, most of that extra wealth accrues in the upper class. Is that extra wealth for the wealthy worth having the lowest life expectancy and worst poverty of any major advanced nation? Is it more important than a higher standard of living for our lower and middle classes?

No, it’s not. It seems a clear-cut value judgment to me. Luckily, if Krugman’s thesis about social norms is accurate, we can do more than simply make a value judgment. We can change societal norms to achieve the goals that we value. One day, some of our classmates will sit on executive boards. Maybe they’ll fight for a retirement plan that provides for true security; maybe graduates entering government service will promote programs for the training and education of unemployed workers. That’s the beauty of Krugman’s theory: if it holds true, we, as a country, starting with you as an individual, decide what kind of society we want live in.