The Rich Get (Much) Richer
By Steven Rattner
Hooray for The New York Times and The Wall Street Journal for returning the problems of class in America to the front page. Shame on the rest of us, passive witnesses to the emergence of a second Gilded Age, another Roaring Twenties, in which the fruits of economic success have gone not to the broad populace but to a slim sliver at the top. For this handful, life is a sweet mélange of megafortunes, grand houses, and massive yachts. Meanwhile, the bottom 80% endures economic stagnation, including real wages that haven't risen in 14 months, according to the Bureau of Labor Statistics.
Much of the recent commentary has focused on class mobility, the opportunity for individuals to move up the ladder. But trumpeting mobility as a reason for ignoring growing income inequality is a chimera. Even if mobility is high -- a questionable assertion -- it is hardly a consolation for those who remain at the bottom, gazing across a growing distance at the more successful.
We can debate a lot of economic data but not income inequality. Every serious study shows that the U.S. income gap has become a chasm. Over the past 30 years, the share of income going to the highest-earning Americans has risen steadily to levels not seen since shortly before the Great Depression.
JUST HOW DRAMATIC A SHIFT over the past three decades? Economists Thomas Piketty and Emmanuel Saez calculated (using data from the Internal Revenue Service, hardly a hotbed of partisanship) that the share of income going to the top 1% of households nearly doubled, to 14.7% in 2002, up from a low of 7.7% in the early 1970s. By comparison, the income share for the top 1% peaked at 19.6% in 1928 before beginning its long slide. What is particularly alarming is that at every step up the ladder, the disparity has progressively widened. Over the past 30 years, the share of income garnered by the top 10% of Americans has grown by about a third; the share of the top 0.01% -- the 13,000 or so households with an average income of $10.8 million in 2002 -- has multiplied nearly four times.
What's to blame for this sorry situation? Certainly globalization has taken its toll. Cheaper labor in emerging markets means relentless wage pressure on U.S. workers. Meanwhile, the fruits of American success in fast-growing services and technology remain available only to the slice of our workforce with the necessary skills. Other factors, such as an increasingly regressive tax code, have also played a role.
Growing inequality helps explain why so many Americans feel so vulnerable even as the overall economy continues to expand. Moods understandably darken when many have to take second jobs and go into debt to improve their living standards. These pressures are exacerbated by another evident trend: greater income insecurity, a result of the decreasing percentage of Americans who have certainty of pension and health-care benefits to cushion them against a loss of wages.
The renewed attention to the glacial progress of all but a few has drawn fire from an eclectic mix of those who say it isn't true, those who say it is true but it doesn't matter, and those who say we don't know enough to know whether it's true, so let's not worry about it. But a common thread among these naysayers is the fear that fretting about income disparities could lead to the redistributionist and suffocating slow-growth policies of Old Europe.
We can follow their advice and do nothing and hope that America's rising tide eventually will lift all boats proportionately -- something that has not occurred in 30 years. Or we can believe in growth capitalism while also worrying that most Americans are being left behind. As Brad DeLong, an economist at University of California at Berkeley recently wrote, historical data suggest that growth and less income inequality are not mutually exclusive objectives.
Sadly, there is no magic bullet. We need to provide more education and training to fix our problem of too many low-skilled workers. We don't need to become tax-code Robin Hoods, but we can be vigilant about tax plans -- like virtually all of President George W. Bush's -- that widen the gulf between haves and have-nots. Finally, we can provide more protection for those at risk, such as better wage insurance to cushion the effects of globalization.
If we don't pursue policies to fix inequality, social pressures may force unwise, even extremist moves, like protectionism. Income inequality is now wider in America than anywhere else in the industrialized world and on a par with that of a Third World country. Is this the American Dream?
Steven Rattner is managing principal of private investment firm Quadrangle Group and former deputy chairman of Lazard.