Today, we are living in a computer age.
If an economy is to function well, people need incentives to work hard and innovate. The pertinent question is not whether income and wealth inequality is good or bad. It is at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy.
We are near or have already reached that tipping point. The dysfunctions of our economy and politics are not self-correcting when it comes to inequality. But a return to the Gilded Age is not inevitable.
It is incumbent on us to dedicate ourselves to reversing this diabolical trend. But in order to reform the system, we need a political movement for shared prosperity. Herewith a short summary of what has happened, how it threatens the foundations of our society, why it has happened, and what we must do to reverse it.
What has Happened The data on widening inequality are remarkably and disturbingly clear. The Congressional Budget Office has found that between andthe onset of the Great Recession, the gap in income—after federal taxes and transfer payments—more than tripled between the top 1 percent of the population and everyone else.
The after-tax, after-transfer income of the top 1 percent increased by percent, while it increased less than 40 percent for the middle three quintiles of the population and only 18 percent for the bottom quintile.
The gap has continued to widen in the recovery. According to the Census Bureau, median family and median household incomes have been falling, adjusted for inflation; while according to the data gathered by my colleague Emmanuel Saez, the income of the wealthiest 1 percent has soared by 31 percent.
In fact, Saez has calculated that 95 percent of all economic gains since the recovery began have gone to the top 1 percent.
Wealth has become even more concentrated than income.
In the United States, consumer spending accounts for approximately 70 percent of economic activity. If the middle class is forced to borrow in order to maintain its standard of living, that dampening may come suddenly—when debt bubbles burst.
Consider that the two peak years of inequality over the past century—when the top 1 percent garnered more than 23 percent of total income—were and Each of these periods was preceded by substantial increases in borrowing, which ended notoriously in the Great Crash of and the near-meltdown of The anemic recovery we are now experiencing is directly related to the decline in median household incomes aftercoupled with the inability or unwillingness of consumers to take on additional debt and of banks to finance that debt—wisely, given the damage wrought by the bursting debt bubble.
We cannot have a growing economy without a growing and buoyant middle class. We cannot have a growing middle class if almost all of the economic gains go to the top 1 percent.
High inequality correlates with low upward mobility. Studies are not conclusive because the speed of upward mobility is difficult to measure.
But even under the unrealistic assumption that its velocity is no different today than it was thirty years ago—that someone born into a poor or lower-middle-class family today can move upward at the same rate as three decades ago—widening inequality still hampers upward mobility.
The distance between its bottom and top rungs, and between every rung along the way, is far greater. Anyone ascending it at the same speed as before will necessarily make less progress upward. In addition, when the middle class is in decline and median household incomes are dropping, there are fewer possibilities for upward mobility.
A stressed middle class is also less willing to share the ladder of opportunity with those below it. For this reason, the issue of widening inequality cannot be separated from the problems of poverty and diminishing opportunities for those near the bottom.
They are one and the same. The connection between widening inequality and the undermining of democracy has long been understood. With all that money, no legislative bulwark can be high enough or strong enough to protect the democratic process.
The threat to our democracy also comes from the polarization that accompanies high levels of inequality. Partisanship—measured by some political scientists as the distance between median Republican and Democratic roll-call votes on key economic issues—almost directly tracks with the level of inequality.
It reached high levels in the first decades of the twentieth century when inequality soared, and has reached similar levels in recent years. When large numbers of Americans are working harder than ever but getting nowhere, and see most of the economic gains going to a small group at the top, they suspect the game is rigged.
Some of these people can be persuaded that the culprit is big government; others, that the blame falls on the wealthy and big corporations. The result is fierce partisanship, fueled by anti-establishment populism on both the right and the left of the political spectrum.Abstract.
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