The Lagging Income of the Middle Class
The Economic Policy Institute and the Center on Budget and Policy Priorities
issued a joint study today called "Pulling Apart" that shows, on a state-by-state and national
basis, that income inequality in the United States has continued to worsen in
the past decade, building on a trend that began in the late 1970s. Although the
report focuses attention on the huge gap between the top fifth of
income-earning families and the bottom fifth, a gap worthy of Brazil, the more
striking numbers delineate the widening gap between the top fifth of income
earners (and, within that group, the top 5 percent in particular) and everyone
else.
Between the late 1970s and the late 1990s, for example, the top fifth saw
its average real income rise by about 35 percent, while the fourth fifth
(closest to the top) saw real income rise 13 percent, and the middle fifth saw
real income rise just 7 percent. As a result, the top fifth now averages about
twice as much as the second fifth, and three times as much as the middle
fifth.
Now, you might say to this, so what? In the first place, these groups are
not static. Not everyone in the top fifth in 1998 (the last year of the study)
was there in 1988, nor will everyone there in 1998 be there in 2008. (Though a
much higher percentage will be than won't.) In addition, inequality itself is a
tricky problem. If remedying inequality comes at the expense of overall growth,
then it's possible that the poor and middle class will end up worse in absolute
terms even if their relative position improves.
In general, after all, the best remedy for poverty, and the best way to lift
people into the middle class, is not income redistribution but rather economic
growth. Although many critiques of globalization and free trade depend, at
least implicitly, on Marx's immiseration thesis, which held that growth in a
capitalist economy inevitably impoverished most while enriching a few, the
experience of most capitalist economies, and especially those in the Third
World, has demonstrated exactly the opposite. A 1996 World Bank study of more
than 30 fast-growing economies showed that in nearly all of them, growth did
not meaningfully change income distribution, and that even the poorest fifth of
income-earners reaped absolute benefits from economic growth. (The study did
show that in countries that adopted land reform growth was more equitable.)
Unfortunately, the United States does not fit well into that study. On the
contrary, the remarkable thing is how narrow the benefits, even in absolute
terms, of the boom of the last 15 years have been. Remember, the middle fifth
of income-earning families saw its real income rise just 7 percent in 20 years,
and just 2 percent in the last decade. The second fifth saw its real income
actually drop since the late 1980s, while the poorest fifth saw its
income stay relatively steady.
These statistics are, of course, subject to question. If the Consumer Price
Index really overstates inflation, then those real income numbers should be
higher. After-tax numbers, because the federal income tax is progressive, would
not be as striking. And the past couple of years have seen real--although still
small--wage increases for most workers, increases they did not enjoy for most
of the 1990s.
Still, the economic inequality we now have in the United States is of a
magnitude we have not witnessed since before the New Deal. And what's
remarkable is that it's happening at a time when unemployment is at historic
lows and when economic growth is much faster than most economists thought
possible. Stephen Moore of the Cato Institute, pooh-poohing the new study, said
that the best solution to the problems it raises--assuming they are
problems--would be to cut the capital-gains tax, spurring greater investment.
But it seems implausible that putting more money in the stock market or in
venture capital funds will affect income inequality at all. More to the point,
if the economy grows any faster than it is now, Fed Chairman Alan Greenspan
will just slam on the brakes. In terms of growth and employment, this is
probably as good as it gets. And as good as it gets is actually making income
gaps wider, rather than narrowing them.
Whether economic inequality of the magnitude the United States now has
should matter to a society is, of course, a matter of principle, and not logic.
(Paul Krugman made a good case for its
importance.) And we should not let concern over inequality obscure the
lessons of the last 20 years: the virtues of deregulation, competition,
entrepreneurship, and, above all, the allocation of capital by markets, not
planners. But as Congress heads into its latest round of budget planning, and
as Dubya tries to offer up his latest "middle-class" tax cut, it's probably
worth remembering who's actually in the middle class, and whether those who are
a long way out of it really need yet another break.
