Income Inequality - the Second Gilded Age

Brad DeLong at SFGate:

A third of a century ago, all of us economists confidently predicted that America would remain and even become more of a middle-class society. The wealth inequality of the 1870-1929 Gilded Age, we would have said, was a peculiar result of the first age of industrialization. Transformations in technology, public investments in education, a progressive tax system, a safety net and the continued decline in discrimination on the basis of race and sex had made late-20th century America a much more equal place than early-20th century America and would make early-21st century America even more equal - even more of a middle-class society - still.

We were wrong.

America is at least as unequal as, and might be more unequal than, it was back at the beginning of the 20th century when Republicans, such as President Theodore Roosevelt of New York condemned the power wielded by "malefactors of great wealth," and Democrats such as perennial losing presidential candidate William Jennings Bryan of Nebraska denounced shadowy conspiracies that had somehow manipulated the financial system to rob the typical family of its proper share in America's prosperity.

Four major factors have driven rising inequality over the past 35 years:
Waning progressivity of our tax system: We no longer tax the rich a significantly greater share of their income than we tax the middle class. The idea behind the cut in relative tax rates on the rich was that it would release blocked entrepreneurial energy and trigger a burst of more rapid economic growth.

It did not: Economic growth overall has been slower since President Ronald Reagan began waves of tax cuts for the rich.

Decline in our willingness to invest in education: A generation ago, we were the best-educated country among the rich nations of the North Atlantic; today we rank 14th. Add in the relative decline in the minimum wage and globalization, and the upshot is that the U.S. Bureau of Labor Statistics tells us that the typical white American male with just a high school diploma earns less today than his predecessor of the late-1970s, even though the country as a whole is 70 percent richer per capita. Of the four, two factors have widened inequality between the top fifth of America and the 1 percent.

Transformation to a winner-take-all society: The information revolution now allows the most-skilled and luckiest to leverage their skills and luck across immense customer bases. In earlier centuries, Charles Dickens and Enrico Caruso were superstars but not super-wealthy. Today Stephen King and Placido Domingo and Oprah Winfrey are super-wealthy indeed. We saw this a century ago whenever luck and economies of scale in production and a continent-wide market all came together: Andrew Carnegie and John D. Rockefeller became super-rich. But our Bill Gates is, and Sam Walton was, super-richer.

Economic shift to industrial sectors that subtract value: Three percent of the American economy today is excessive private health care administrative costs, which produces nothing useful but transfers money away from insurance customers and doctors. Some 4 percent of the American economy today is excessive financial services: less-informed savers and borrowers who should not be buying or selling sophisticated financial products they do not understand are losing their money to those better able to judge risks and values. We can see the impact of these last two factors in the Romney family dynasty:
 Former American Motors President and Michigan Gov. George Romney typically made $300,000 a year in the early 1960s, roughly 40 times the typical income of Americans of his day. Bain Capital President and Massachusetts Gov. W. Mitt Romney typically makes $20 million a year today, roughly 400 times the typical income of Americans now - and relative to those he regards as his Wall Street peers, W. Mitt Romney is a poor man.

A more equal economy would be a happier economy. The time and energy and work devoted to making, toasting and serving a $40 bagel at the Four Seasons Hotel on 57th Street in Manhattan would, in a more equal America, buy a full dinner for four at Sizzler Steakhouse for a family to whom going to Sizzler is a once-a-month treat - and thereby produce more human happiness.

A more equal America would be one in which claims that America has equality or is approaching equality of opportunity would be less of a sick joke.

A more equal America would be one in which economic catastrophes like the 2007-whenever Great Recession that robs 1 in 12 usually working Americans of his or her job would be less likely and less destructive. Those who see themselves as falling behind their peers are inevitably prone to take extra risks as they gamble for resurrection. This is a very human drive: It applies to those who go double-or-nothing repeatedly and lose $5 billion for the investment bank they work for as well as those who commit 50 percent of their income to mortgage payments in the hope of grabbing some equity for themselves in a housing boom. This drive also produces an economy in which there is too-much-too-risky debt around. The borrowers then cut their spending because they must pay it down. But the creditors don't dare increase their spending because they fear they will never be paid. An economy in which nearly everybody is trying to spend less than they earn is one prone to depression.

What can be done to make America a land of more real equality of opportunity?

We don't want to restrict globalization. America is still a rich country in a poor world, and we have a moral obligation not to use our economic weight to close off others' roads to prosperity.

We do want an America with higher taxes on the rich: When market income is more unequal, taxes on the rich should be higher to equalize prosperity and voice in a political system where money talks.

We can't do anything about changing technologies that have produced the winner-take-all economy.

We can tax and regulate our health care and financial systems to shift the resources of the 7 percent of the American economy that is subtracting from our national prosperity into something useful.

The road to a better tax system now looks like it will take at least a generation and, after the Citizens United ruling, require substantial turnover of the Supreme Court before it can even begin.

And we could strive to once again make America - and not Germany or South Korea or someplace else - the country where education and thus roads to upward mobility are the most comprehensive, best and cheapest.

But - and I hope this is just the growing pessimism of the middle-aged - I don't think that we will.