Yes, we already know the facts — income inequality has been increasing since the 1970′s. But it can be easy to lose sight of just how important this has been. This presentation of the data — by Claudia Goldin and my former thesis advisor Larry Katz, really hits home:
Source: U.S. Census Bureau, Historical Income Tables, table F3, updated September 15, 2006.
Note: The figure plots the annual percentage growth rate in mean real family income by quintile and for the top 5 percent of families for 1947 to 1973 and 1973 to 2005. Incomes are converted to constant dollars using the Consumer Price Index Research Series (CPI-U-RS). The income concept used is the official U.S. Census Bureau measure of pre-tax, post-transfer money income.
Economic growth since the mid-1970′s just hasn’t delivered much for many families. Read the full Goldin and Katz posting, over at VoxEU, for a deeper understanding of why. (Hint: It’s education.)
In light of this, perhaps there’s no paradox in the fact that happiness hasn’t grown in the U.S. since the 1970′s. Rather than inferring that growing income doesn’t raise happiness, these data remind us that for most of the distribution there hasn’t been much income growth.
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@ Mark T.
Psychologically it is inequality within a country that matters, not the inequality between them. Do not read that statement advocating global inequality, but rather there are important reasons to consider regional inequality as well. Inequality, regionally and globally, are (in my opinion) important issues in a variety of arenas (e.g. psychology, sociology, economics, political science). Its important not to focus on one at the expense of another.
I personally think an appreciation and acceptance of diversity is important because it lessens the derogation of a variety of low-status and stigmatized groups. To me this is important both from a humanitarian perspective, but from a utilitarian perspective it also makes sense. Acceptance and appreciation of diversity leads to positive economic outcomes that enlarges the pie for everyone. It also helps minority groups feel included, which reduces crime and bolsters educational and economic attainment within these groups.
Economic diversity, however, works against all of the things I find beneficial in social diversity. Furthermore, I’d argue that in the United States, and other countries with high levels of inequality, there is not economic diversity, but rather just the opposite (i.e. there are a lot of underprivileged people). In a truly economically diverse society I would suspect that we would have equal proportions of people at all levels of income, or more likely, a normal curve. We have neither.
But the actual people who were in the lower fifths have often moved up to higher fifths, thereby growing their incomes faster than this chart implies.
Response to Vahid @2:
The American ideal is that everyone should have a reasonable opportunity at a modest, middle-class life.
Poverty is intrinsically self-reinforcing. (The demonstration of that is very long, but the quick summary is that it takes capital–both financial and educational–to improve one’s lot in life, and being poor interferes in that bootstrapping process.)
Putting all the wealth in the hands of the few goes against the American ideal. The American Dream is not to be the richest son of a gun in your town. It’s to be comfortable, where the American definition of “comfortable” is not worrying about how you’ll keep a roof over your head, food on your table, and the lights turned on.
But aside from the emotional appeal of the American standard of living, there is this problem:
If all the money rests in the hands of a few, who buys the goods and services?
Ten thousand rich guys buying ten TVs each don’t create as many jobs as a million middle-class guys buying one TV each. Ditto cars, clothing, computers, etc.
Ten thousand rich guys on massive, over-the-top vacations don’t distribute as many tourist dollars as a million middle-class guys staying in modest hotels and eating modest meals.
Ten thousand rich guys buying six mansions each don’t create as many construction jobs as a million guys buying one modest three-bedroom home each.
If you want to drive an economy, you need lots of people spending modest amounts of money. The greater the divide between rich and poor, the fewer dollars are fed back into the cycle of the economy.
Mark T. – Do not confuse inequality with diversity. As a society we have made a subjective judgment that economic mobility is better than destitution. Objectively, the wealthy are better served and better treated.
It should be fairly obvious why this is a problem. As the lower half finds it more difficult to support themselves, we end up with problems like increasing incidence of bankruptcy, for example. What happens then, is that when some of these have-nots then end up having their economic cost be spread out over the entire society. While it isn’t that big of a deal for the haves, it adds more burden on the have nots who were already struggling, and leading to further economic problems. See the ‘vicious cycle’ here?
Additionally, as taxes shift away from businesses, investements and the super rich, they shift toward the bottom half, as they have been for a while now. This further exasperates the problem.
Why should the rich care if the poor are starving? Why does it make a difference because this is America and not the world? Last I checked, we are all citizens of the USA, with that comes the kinship and protection of being under the same government. Additionally important is that everyone in the US pays roughly the same price for things. There is no point extolling this to the world in general, because that’s not what it was about. Not only because a cup of rice is much cheaper in Cambodia than in the US, but because, as Newt Gingrich put it in trying to deride Obama, “I am not a citizen of the world.”
Additionally, in a society that thrives on the myth of the American dream of social and economic mobility, this is stark evidence that that dream does not exist, and we are moving toward a society of serfdom where the peasants are increasingly at the mercy of the social and economic elite.
But in the end, I just want to point out how ridiculous it is to call income inequality “diversity.”
I have similar concerns to the above commenters. Not even John Rawls pushed equality for equality’s sake. But since those concerns have already been raised, I’ll play devil’s advocate:
One throwaway argument pro-equality might be to cite the decreasing marginal utility of goods. Money, just like butter, isn’t as valuable if we put it all in one person’s mouth.
Mark T-
I agree that inequality isn’t bad per se (a relatively free economy will always have some inequality in it), but it is a problem when the inequality increases without bound because only the top 5% of the population is benefiting from economic growth.
The whole point of growth for the participants of an economy is to raise all ships. If all the societal gains go to a small fraction of the population, then you just have a small group getting fabulously wealthy while the rest of society stalls (which I’m guessing will eventually result in civil unrest). And sure, even with sluggish growth over the last 35 years, the US middle class is still richer than in most other countries, but shouldn’t we striving for higher levels, rather than being satisfied with what we have already attained?
Finally, having the poorer fractions of society share in the economic growth does not appear to harm the richer fractions (as can be seen in the 1947-1973 data), so there seems to be little argument for continuing as we are going.
Recently there was a US president who pushed a program called “No Child Left Behind.” Do you suppose that was an attempt to correct this? What ever happened to that program?
There is also the issue that every quintile’s growth rate is dramatically lower from 1973 on vs. pre-1973. If this were just a matter of money being shifted to the rich we’d see growth rates for the rich over the old mean and for the poor under the old mean: instead we see every quintile doing worse.
The obvious, though not necessarily correct answer is that 1945-1973 is a highly unusual period. In 1945 every economy in the world was in ruins except that of the US and the major industrial countries were literally in ruins, again except for the US.
This gave the US an enormous, and one time only, advantage for growth completely independent of any earned competitive advantages. This meant, for instance, that union workers in Detroit could be paid very high salaries to do mediocre work on poorly designed cars and that Detroit management would be fine with the deal.
My hypothesis is that one of the things we are seeing in the data is the wringing out of overpaid, under-performing parts of the US economy and one of the manifestations of that is this chart.