“The belief that income inequality has risen sharply in the US may be wrong.”
For decades, the share of national income held by the top 1% of the United States has soared. Income inequality, which former US President Barack Obama called “the defining challenge of our time,” has become a major issue in American politics. Republicans and Democrats proposing higher taxes on the wealthy.
The idea, propagated by nationalists and progressives, that the economic system is rigged against ordinary workers and households has also fanned the flames of populism. Some even argue that economic inequality threatens democracy.
And yet the belief that income inequality has increased sharply may be wrong. New research by Gerald Auten of the U.S. Treasury Department and David Splinter of Congress’ Joint Committee on Taxation shows that the after-tax income share of the top 1% has changed little since 1962. This is in stark contrast to the work of Thomas Piketty, Emmanuel Saez and Gabriel Zucman, who have shaped policy and political debate in recent years: the trio conclude that the top 1%’s income share has increased by around 55% over the same period increased.
Rather than answering the question of who is right (although I believe Auten and Splinter are closer to the truth), it is more useful to consider whether the top 1% should be our focus. From a broader perspective, the income equality debate does little to benefit those who need the help most.
The discussion focused mainly on how much of the economic pie each group gets. But the size of the pie is not fixed. Since 1962, real economic output in the US has increased increased by 499%, leading to significant improvements in living standards and human well-being. The percentage of Americans living in poverty has declined substantially, new medications and therapies have significantly improved people’s quality of life, and more women have entered the workforce.
This significant improvement in American well-being is more striking than the share of income accruing to the nation’s highest earners. Compare a middle-income American household with a household in the top 1%. Everyone has access to quality medical care and pharmaceutical products, everyone can take a nice vacation, everyone can eat in the same restaurants, read the same books and watch the same television programs, and everyone has warm clothes and a comfortable home.
Sure, there are differences: the wealthier family has better health care, flies first class on vacation to the Caribbean, occasionally eats at Michelin-starred restaurants and has a larger house. But this does not alter the fact that inequality in quality of life has decreased dramatically in recent decades. The gap in quality of life between a middle-income household and a household in the top 1% was much wider a century ago, and even a century before that.
Moreover, the economic and philosophical underpinnings of this obsession with the top 1% are far from sound. In a market economy, income is earned and not distributed. In a democracy, inequality is acceptable if it is caused by productivity differences – and the best evidence shows a strong link between pay and productivity in the US.
“How much ‘should’ top earners ‘receive’ from society?”
Ultimately, the debate about income inequality is normative: how much “should” top earners “receive” from society? It would be better to assume that the richest have earned their income and ask how much of this income should be retained by the government. According to the nonpartisan Congressional Budget Office (CBO), the top 1% earned 17.6% of all market revenues and paid 24.7% of all federal taxes in 2019, indicating they have been in trouble for some time.
Ironically, concerns about the income gap exploded at a time when, as I show in my book, there was a crisis The American Dream Isn’t Dead (But Populism Can Kill It), the measured inequality stagnated or decreased. Using data from the CBO, I found that income inequality among all households—after accounting for taxes and government transfers and estimated with a Gini coefficient—increased by 29% between 1979 and 2007, but then increased by 29% between 2007 and 2019. more than 5% has fallen. .
To understand this trend, one must focus on the bottom 99%. Although inequality increased in the 1990s, average wages also increased; Americans didn’t worry about whether some groups were growing faster than others. But after the 2008 financial crisis, average wages plummeted. In fact, for the bottom half of workers, they fell so sharply that it took until 2014 for average real wages to return to 2007 levels. This prolonged period of wage stagnation fueled the anger and sense of injustice of a ‘rigged’ economic game, giving rise to populism.
The lesson is clear: people care about how they are doing, not about a group of people they rarely interact with. People are not as oozing with jealousy as the debate about inequality might suggest.
Anyone concerned about the health of American democracy should be more concerned about wage growth for the bottom half of workers than about the income gap. If upward mobility is the goal, we need to stop treating economic success as if it were a success problem rather than something worth celebrating. Policymakers should focus on providing economic opportunities to the poor and working class.
The 1% don’t deserve nearly as much attention as they receive. It would be better to focus on raising the wages and incomes of those at the bottom, who need help most.
Michael R. Strain, director of economic policy studies at the American Enterprise Institute, is most recently the author of The American Dream Is Not Dead (But Populism Could Kill It) (Templeton Press, 2020).
This commentary is published with permission from Project Syndicate — The Myth of the 1%
More: This family just declared Walmart’s Waltons the richest in the world
Also read: The growing risk of global disorder
