Something massive and important has happened in the United States over the past 50 years: Economic wealth has become increasingly concentrated among a small group of ultra-wealthy Americans.
You can read lengthy books on this subject, like economist Thomas Piketty’s recent best-seller, Capital in the Twenty-First Century (the book runs 696 pages and weighs in at 2.5 pounds). You can see references to this in the campaigns of major political candidates this cycle, who talk repeatedly about how something has gone very wrong in America.
Donald Trump’s motto is to make America great again, while Bernie Sanders’s campaign focused on reducing income inequality. And there’s a reason this message is resonating with voters:
It’s grounded in 50 years of reality.
You can see lots of discussion and debate and political fighting over who has wealth in America, and whether that should change. Or, you can look at the the cartoon below to understand how the distribution of wealth has changed in America, and why.
Let’s say the 100 figures below represent every household in America
The poorest 20 percent are wearing red shirts. The second 20 percent are wearing orange, and so on:
And let’s say the dollar bills below represent all the income in America:
In 1967, this is how that $100 was split up:
Things stayed about the same for the next decade and a half.
Then in 1981, before Ronald Reagan became president, the wealthy began to get wealthier while the poor got poorer.
By the time Reagan left office in 1989, this is how that $100 was split up
Notice how everyone but the richest has a smaller portion of the money.
And that trend continued
Here’s what it looked like in 2014, six years into President Barack Obama’s term:
In short, we’ve seen quite an increase in income inequality since the late-1970s.
There are many reasons economists believe wealth inequality is a bad thing
One reasons is it means everyone doesn’t share America’s economic growth. Another reason is that it prohibits social mobility — and it turns out social mobility in the US might be worse than once thought.
One metaphor often used is that when the rungs of a ladder get further apart, it’s harder to climb.
But perhaps the best argument against income inequality, though, is that it’s a threat to democracy. If a few people control most of the money, then they can control political outcomes.
But how did this happen?
We need to go back in time, starting with the 1930s, to really understand.
So here we are in the 1930s. This is when we start seeing a strengthening of labor unions, a federal minimum wage, the establishment of Social Security and unemployment insurance, and increased taxes on the wealthy and corporations. Economist Paul Krugman calls this phenomenon “The Great Compression” because these policies created a lot more parity — and held inequality at bay for about 40 years.
You can see that in this graph. It shows that, from the 1940s through the mid-1980s, the richest one person got a much smaller portion of the whole:
That lasted until the late-1970s — and you saw what happened from then on. It’s what economists call “The Great Divergence,” or a great increase in wealth inequality.
So, what caused this?
Wealthy people began making more of their money from investments and business income
Everyone else continued to make money on salaries and wages. Even from 1996 to 2006 , things changed drastically:
But since the 1970s, we’ve significantly reduced how much we tax investment income
The most we’ve taxed investment income is about 40 percent. That was in the late-1970s. Since then, rates have been much lower. In fact, until 2013, the most investment income could be taxed was 15 percent. It’s now about 25 percent.
Keep in mind that, if you’re filing as a single person, your salary and wages starting at $38,000 are taxed at 25 percent — and from there the rates only go up.
Since it’s the rich who made more and more money on investments, taxing investments less helped them a lot.
American tax and transfer policies are among the worst in reducing inequality, compared to other developed countries
The below chart shows how effective tax rates have changed. Even though we have a relatively progressive tax system, we now have some of the lowest tax rates in decades. Low tax rates mean the US collects less revenue — and can transfer fewer resources back to taxpayers.
Here’s the same chart, but showing who controlled Congress when these effective tax rates changed:
This isn’t just a story about tax policy. Salary growth has also been higher at the very top of the economic ladder. CEO, athletes, managers, and financial professionals have seen a huge increase in wages.
So the past half century has been quite prosperous for a small number of people.
Meanwhile, the policies that help everyone else have suffered.
The federal minimum wage has been going down.
Adjusted for inflation, minimum wage has gone down by about $3 an hour.
And labor unions have shrunk dramatically
The percentage of workers who are part of labor unions has plummeted to all-time lows. Studies show unions help workers earn more.
Meanwhile, some argue that technological advances and the decline of manufacturing jobs has made education an even bigger determinant for future income.
That means access to education is more important than ever before — and lower degrees become less valuable
The chart below shows that those with bachelor’s degrees or less have seen stagnant or falling wages, while those with master’s and doctorate degrees have generally seen rising wages.
But despite all this, some people think there’s no problem
Some say income inequality is a myth. Other say the poor haven’t gotten any poorer, though the rich did get richer, so everything is fine. Another argument is that inflation over time exaggerates the differences.
Some people agree it’s happening, but argue that the government should get out of the way so everyone can equally pursue the “American Dream,” as defined by them. Others say the government should merely provide equal protection and otherwise do nothing — even if inequality is a terrible thing.
Not all politicians talk directly about income inequality — or not as directly as someone like Bernie Sanders. Rather, they talk about restoring the middle class, education reform, social safety nets, and tax policy.
But if it’s been happening since the ’70s, we can put it on the back burner for a little longer, right? Not really.
It’s urgent, because some analysts believe that if nothing is done soon, the next generation will have 25 percent less upward mobility than right now.
In other words, the rungs of the ladder will grow further apart.