Political polarization (spelled polarisation in British English) is the divergence of political attitudes away from the center, towards ideological extremes.
Most discussions of polarization in political science consider polarization in the context of political parties and democratic systems of government. In two-party systems, political polarization usually embodies the tension of its binary political ideologies and partisan identities. However, some political scientists assert that contemporary
polarization depends less on policy differences on a left and right
scale but increasingly on other divisions such as religious against
secular, nationalist against globalist, traditional against modern, or
rural against urban. Polarization is associated with the process of politicization.
Scholars distinguish between ideological polarization (differences between the policy positions) and affective polarization (an emotional dislike and distrust of political out-groups).
Definitions and measurements
Political
scientists typically distinguish between two levels of political
polarization: elite and mass. "Elite polarization" focuses on the
polarization of the political elites, like party organizers and elected officials.
"Mass polarization" (or popular polarization) focuses on the
polarization of the masses, most often the electorate or general public.
Elite polarization
Elite polarization refers to polarization between the party-in-government and the party-in-opposition.
Polarized political parties are internally cohesive, unified,
programmatic, and ideologically distinct; they are typically found in a parliamentary system of democratic governance.
In a two-party system, a polarized legislature
has two important characteristics: first, there is little-to-no
ideological overlap between members of the two parties; and second,
almost all conflict over legislation and policies is split across a
broad ideological divide. This leads to a conflation of political
parties and ideologies (i.e., Democrat and Republican become nearly
perfect synonyms for liberal and conservative) and the collapse of an
ideological center.
However, using a cross-national design that covers 25 European
countries, a recent study shows that it is not the number of parties
itself, but the way a party interreacts with another that influences the
magnitude and nature of affective polarization.
The vast majority of studies on elite polarization focus on
legislative and deliberative bodies. For many years, political
scientists measured polarization in the US by examining the ratings of
party members published by interest groups, but now, most analyze roll-call voting patterns to investigate trends in party-line voting and party unity.
Gentzkow, Shapiro, and Taddy used the text of the Congressional Record
to document differences in speech patterns between Republicans and
Democrats as a measure of polarization, finding a dramatic increase in
polarized speech patterns starting in 1994.
Mass polarization
Mass
polarization, or popular polarization, occurs when an electorate's
attitudes towards political issues, policies, celebrated figures, or
other citizens are neatly divided along party lines.
At the extreme, each camp questions the moral legitimacy of the other,
viewing the opposing camp and its policies as an existential threat to
their way of life or the nation as a whole.
There are multiple types or measures of mass polarization. Ideological polarization
refers to the extent to which the electorate has divergent beliefs on
ideological issues (e.g., abortion or affirmative action) or beliefs
that are consistently conservative or liberal across a range of issues
(e.g., having a conservative position on both abortion and affirmative
action even if those positions are not "extreme"). Partisan sorting
refers to the extent to which the electorate "sorts" or identifies with
a party based on their ideological, racial, religious, gender, or other
demographic characteristics. Affective polarization refers to the extent to which the electorate "dislikes" or "distrusts" those from other parties.
Political scientists who study mass polarization generally rely on data from opinion polls
and election surveys. They look for trends in respondents' opinions on a
given issue, their voting history, and their political ideology
(conservative, liberal, moderate, etc.), and they try to relate those
trends to respondents' party identification and other potentially
polarizing factors (like geographic location or income bracket).
Political scientists typically limit their inquiry to issues and
questions that have been constant over time, in order to compare the
present day to what the political climate has historically been.
Some of recent studies also use decision-making games to measure the
extent to which ingroup members discriminate outgroup members relative
to their group members.
Recent academic work shows how intolerance affects polarization.
Having systematically less tolerance at the ideological extremes can
lead to polarization with opinions more polarized than identities. In
contrast, intolerance among moderates helps cohesion.
Some political scientists argue that polarization requires divergence on a broad range of issues,while others argue that only a few issues are required.
Affective polarization
Affective
polarization refers to the phenomenon where individuals' feelings and
emotions towards members of their own political party or group become
more positive, while their feelings towards members of the opposing
party or group become more negative. This can lead to increased
hostility and a lack of willingness to compromise or work together with
people who hold different political views. This phenomenon can be seen
in both online and offline settings, and has been on the rise in several
countries in recent years.
Indeed, using innovative experiments in 25 European countries, a recent
study shows that the magnitude of affective polarization over parties
is much stronger compared to divides over other attributes that
constitute traditional cleavages, such as class, religion, and even
nationality, confirming the primacy of "partyism" and its
generalizability across democratic countries. However, this study shows
that affective polarization in Europe is not primarily driven by
out-group animus while it finds both in-group and out-group bias
statistically significant.
Causes
There are various causes of political polarization and these include political parties, redistricting, the public's political ideology, the mass media, and political context.
Party polarization
Some
scholars argue that diverging parties has been one of the major driving
forces of polarization as policy platforms have become more distant.
This theory is based on recent trends in the United States Congress, where the majority party prioritizes the positions that are most aligned with its party platform and political ideology.
The adoption of more ideologically distinct positions by political
parties can cause polarization among both elites and the electorate. For
example, after the passage of the Voting Rights Act,
the number of conservative Democrats in Congress decreased, while the
number of conservative Republicans increased. Within the electorate
during the 1970s, Southern Democrats shifted toward the Republican Party, showing polarization among both the elites and the electorate of both main parties.
In this sense, political polarization could be a top-down process, in
which elite polarization leads to—or at least precedes—popular
polarization.
However, polarization among elites does not necessarily produce
polarization within the electorate, and polarized electoral choices can
often reflect elite polarization rather than voters' preferences.
Political scientists have shown politicians have an incentive to advance and support polarized positions. These argue that during the early 1990s, the Republican Party used polarizing tactics to become the majority party in the United States House of Representatives—which political scientists Thomas E. Mann and Norman Ornstein refer to as Newt Gingrich's "guerrilla war."
What political scientists have found is that moderates are less likely
to run than are candidates who are in line with party doctrine,
otherwise known as "party fit."
Other theories state politicians who cater to more extreme groups
within their party tend to be more successful, helping them stay in
office while simultaneously pulling their constituency toward a polar
extreme.
A study by Nicholson (2012) found voters are more polarized by
contentious statements from leaders of the opposing party than from the
leaders of their own party. As a result, political leaders may be more
likely to take polarized stances.
With regards to multiparty systems, Giovanni Sartori
(1966, 1976) claims the splitting of ideologies in the public
constituency causes further divides within the political parties of the
countries. He theorizes that the extremism of public ideological
movement is the basis for the creation of highly polarized multiparty
systems. Sartori named this polarizing phenomenon polarized pluralism
and claimed it would lead to further polarization in many opposing
directions (as opposed to in simply two directions, as in a polarized
two-party system) over policy issues. Polarization in multiparty systems can also be defined along two ideological extremes, like in the case of India
in the 1970s. Ideological splits within a number of India's major
parties resulted in two polarized coalitions on the right and left, each
consisting of multiple political parties.
Political fund-raisers and donors can also exert significant
influence and control over legislators. Party leaders are expected to be
productive fund-raisers, in order to support the party's campaigns.
After Citizens United v. Federal Election Commission, special interests in the U.S. were able to greatly impact elections through increased undisclosed spending, notably through Super political action committees. Some, such as Washington Post opinion writer Robert Kaiser,
argued this allowed wealthy people, corporations, unions, and other
groups to push the parties' policy platforms toward ideological
extremes, resulting in a state of greater polarization.
Other scholars, such as Raymond J. La Raja and David L. Wiltse, note
that this does not necessarily hold true for mass donors to political
campaigns. These scholars argue a single donor who is polarized and
contributes large sums to a campaign does not seem to usually drive a
politician toward political extremes.
The public
In democracies and other representative governments,
citizens vote for the political actors who will represent them. Some
scholars argue that political polarization reflects the public's
ideology and voting preferences.
Dixit and Weibull (2007) claim that political polarization is a natural
and regular phenomenon. Party loyalism is a strong element of voters'
thinking. Individuals who have higher political knowledge will not be
influenced by anything a politician says. The polarization is merely a
reflection of the party that the voter belongs to, and whichever
direction it moves in.
They argue that there is a link between public differences in ideology
and the polarization of representatives, but that an increase in
preference differences is usually temporary and ultimately results in
compromise.
Fernbach, Rogers, Fox and Sloman (2013) argue that it is a result of
people having an exaggerated faith in their understanding of complex
issues. Asking people to explain their policy preferences in detail
typically resulted in more moderate views. Simply asking them to list
the reasons for their preferences did not result in any such moderation.
Studies undertaken in the U.S. (2019) and the UK (2022) have
found that political polarisation is generally less acute among the
public than is portrayed in the media.
Morris P. Fiorina
(2006, 2008) posits the hypothesis that polarization is a phenomenon
which does not hold for the public, and instead is formulated by
commentators to draw further division in government.
Other studies indicate that cultural differences focusing on
ideological movements and geographical polarization within the United
States constituency is correlated with rises in overall political
polarization between 1972 and 2004.
Religious, ethnic, and other cultural divides within the public
have often influenced the emergence of polarization. According to Layman
et al. (2005), the ideological split between U.S. Republicans and
Democrats also crosses into the religious cultural divide. They claim
that Democrats have generally become more moderate
in religious views whereas Republicans have become more traditionalist.
For example, political scientists have shown that in the United States,
voters who identify as Republican are more likely to vote for a
strongly evangelical candidate than Democratic voters. This correlates with the rise in polarization in the United States. Another theory contends that religion does not contribute to full-group polarization, but rather, coalition and party activist polarization causes party shifts toward a political extreme.
In some post-colonial countries, the public may be polarized along ethnic divides that remain from the colonial regime. In South Africa in the late 1980s, members of the conservative, pro-apartheid National Party were no longer supportive of apartheid, and, therefore, no longer ideologically aligned with their party. Dutch Afrikaners, white English, and native Africans split based on racial divisions, causing polarization along ethnic lines.
Economic inequality can also motivate the polarization of the public. For example, in post-World War IGermany, the Communist Workers Party, and the National Socialists, a fascist
party, emerged as the dominant political ideologies and proposed to
address Germany's economic problems in drastically different ways. In Venezuela, in the late 20th century, presidential candidate Hugo Chávez used economic inequality in the country to polarize voters, employing a popular and aggressive tone to gain popularity.
Redistricting
The impact of redistricting—potentially through gerrymandering
or the manipulation of electoral borders to favor a political party—on
political polarization in the United States has been found to be minimal
in research by leading political scientists. The logic for this minimal
effect is twofold: first, gerrymandering is typically accomplished by
packing opposition voters into a minority of congressional districts in a
region, while distributing the preferred party's voters over a majority
of districts by a slimmer majority than otherwise would have existed.
The result of this is that the number of competitive congressional
districts would be expected to increase, and in competitive districts
representatives have to compete with the other party for the median
voter, who tends to be more ideologically moderate. Second, political
polarization has also occurred in the Senate, which does not experience
redistricting because Senators represent fixed geographical units, i.e.
states.
The argument that redistricting, through gerrymandering, would
contribute to political polarization is based on the idea that new
non-competitive districts created would lead to the election of
extremist candidates representing the supermajority party, with no
accountability to the voice of the minority. One difficulty in testing
this hypothesis is to disentangle gerrymandering effects from natural
geographical sorting through individuals moving to congressional
districts with a similar ideological makeup to their own. Carson et al.
(2007), has found that redistricting has contributed to the greater
level of polarization in the House of Representatives than in the
Senate, however that this effect has been "relatively modest".[62]
Politically motivated redistricting has been associated with the rise
in partisanship in the U.S. House of Representatives between 1992 and
1994.
The media
The
mass media has grown as an institution over the past half-century.
Political scientists argue that this has particularly affected the
voting public in the last three decades, as previously less partisan
viewers are given more polarized news media choices. The mass media's
current, fragmented, high-choice environment has induced a movement of
the audience from more even-toned political programming to more
antagonistic and one-sided broadcasts and articles. These programs tend
to appeal to partisan viewers who watch the polarized programming as a
self-confirming source for their ideologies.
Countries with less diversified but emerging media markets, such as China and South Korea, have become more polarized due to the diversification of political media.
In addition, most search engines and social networks (e.g., Google,
Facebook) now utilize computer algorithms as filters, which personalize
web content based on a user's search history, location, and previous
clicking patterns, creating more polarized access to information. This method of personalizing web content results in filter bubbles, a term coined by digital activist Eli Pariser
that refers to the polarized ideological bubbles that are created by
computer algorithms filtering out unrelated information and opposing
views.
A 2011 study found ideological segregation of online news
consumption is lower than the segregation of most offline news
consumption and lower than the segregation of face-to-face interactions.
This suggests that the filter bubbles effects of online media
consumption are exaggerated. Other research also shows that online media
does not contribute to the increased polarization of opinions. Solomon Messing
and Sean J. Westwood state that individuals do not necessarily become
polarized through media because they choose their own exposure, which
tends to already align with their views.
For instance, in an experiment where people could choose the content
they wanted, people did not start to dislike their political opponents
more after selecting between pro or anti immigration content. People did, however, start to counterargue the content.
Academic studies found that providing people with impartial,
objective information has the potential to reduce political
polarization, but the effect of information on polarization is highly
sensitive to contextual factors.
Specifically, polarization over government spending was reduced when
people were provided with a "Taxpayer Receipt," but not when they were
also asked how they wanted the money to be spent. This suggests that
subtle factors like the mood and tone of partisan news sources may have a
large effect on how the same information is interpreted. This is
confirmed by another study that shows that different emotions of
messages can lead to polarization or convergence: joy is prevalent in
emotional polarization, while sadness and fear play significant roles in
emotional convergence.
These findings can help to design more socially responsible algorithms
by starting to focus on the emotional content of algorithmic
recommendations.
Research has primarily focused on the United States, a country with high polarization that has also increased over time. In Sweden, on the other hand, there is a stable ideological polarization over time.
Experiments and surveys from Sweden also give limited support to the
idea of increased ideological or affective polarization due to media
use.
Some
of recent studies emphasize the role of electoral context and the way
parties interact with each other. For example, a recent study shows that
coalition partnership can moderate the extent of affective polarization
over parties.
However, this study does not find evidence that the number of political
parties and district magnitude that captures the proportionality of
electoral systems would influence the extent of affective polarization.
Also, electoral context, such as electoral salience, involvement in
elections, elite polarization, and the strength of Eurosceptic parties,
can intensify the divide.
Consequences
The
implications of political polarization "are not entirely clear and may
include some benefits as well as detrimental consequences."
Polarization can be benign, natural, and democratizing, or it can be
pernicious, having long term malignant effects on society and congesting
essential democratic functions. Where voters see the parties as less divergent, they are less likely to be satisfied with how their democracy works.
While its exact effects are disputed, it clearly alters the political
process and the political composition of the general public.
Pernicious polarization
In political science, pernicious polarization occurs when a single political cleavage
overrides other divides and commonalities to the point it has boiled
into a single divide which becomes entrenched and self-reinforcing. Unlike most types of polarization, pernicious polarization does not need to be ideological. Rather, pernicious polarization operates on a single political cleavage, which can be partisan identity, religious vs secular, globalist vs nationalist, urban vs rural, etc. This political divide creates an explosion of mutual group distrust which hardens between the two political parties (or coalitions) and spreads beyond the political sphere into societal relations. People begin to perceive politics as "us" vs "them."
The office of Ombudsman of Argentina has been vacant since 2009, along
with a companion Public Defender's office, allegedly because of
pernicious polarization.
Causes
According
to Carothers & O'Donohue (2019), pernicious polarization is a
process most often driven by a single political cleavage dominating an
otherwise pluralistic political life, overriding other cleavages.
On the other hand, Slater & Arugay (2019) have argued that it's not
the depth of a single social cleavage, but the political elite's
process for removing a leader which best explains whether or not
polarization truly becomes pernicious.
Lebas & Munemo (2019) have argued pernicious polarization is marked
by both deeper societal penetration and segregation than other forms of
political polarization, making it less amenable to resolution.
It is agreed, however, that pernicious polarization reinforces and
entrenches itself, dragging the country into a downward spiral of anger
and division for which there are no easy remedies.
Effect on governance
Pernicious polarization makes compromise, consensus, interaction, and tolerance increasingly costly and tenuous for individuals and political actors on both sides of the divide. Pernicious polarization routinely weakens respect for democratic norms, corrodes basic legislative processes, undermines the nonpartisan nature of the judiciary and fuels public disaffection with political parties. It exacerbates intolerance and discrimination, diminishes societal trust, and increases violence throughout the society. As well as potentially leading to democratic backsliding.
In country-by-country instances of pernicious polarization, it is
common to see the winner exclude the loser from positions of power or
using means to prevent the loser from becoming a threat in the future.
In these situations, the loser typically questions the legitimacy of the
institutions allowing the winner to create a hegemony, which causes citizens to grow cynical
towards politics. In these countries, politics is often seen as a
self-referential power game that has nothing to do with people.
Effect on public trust
Perniciously polarized societies often witness public controversies over factually provable questions. During this process, facts and moral truths increasingly lose their weight, as more people conform to the messages of their own bloc. Social and political actors such as journalists, academics, and politicians either become engaged in partisan storytelling or else incur growing social, political, and economic costs. Electorates lose confidence in public institutions. Support for norms and democracy decline. It becomes increasingly difficult for people to act in a morally principled fashion by appealing to the truth or acting in line with one's values when it conflicts with one's party interests. Once pernicious polarization takes hold, it takes on a life of its own, regardless of earlier intentions.
Benefits of polarization
Several
political scientists have argued that most types of political
polarization are beneficial to democracy, as well as a natural feature.
The simplifying features of polarization can help democratization. Strategies which depend on opposition and exclusion are present in all forms of observed politics. Political polarization can help transform or disrupt the status quo, sometimes addressing injustices or imbalances in a popular vs. oligarchicstruggle.
Political polarization can serve to unify, invigorate, or mobilize potential allies at the elite and mass levels. It can also help to divide, weaken, or pacify competitors. Even the most celebrated social movements
can be described as a "group of people involved in a conflict with
clearly defined opponents having a conflictual orientation toward an
opponent and a common identity."
Political polarization can also provide voting heuristics to help voters choose among candidates, enabling political parties to mobilize supporters and provide programmatic choices.
Polarizing politics can also help to overcome internal differences and
frame a common identity, based in part on a common opposition to those
resisting reforms.
Still, polarization can be a risky political tool even when intended as
an instrument of democratization, as it risks turning pernicious and
self-propagating.
Outside of the U.S., there are plenty of modern-day examples of
polarization in politics. A bulk of the research into global
polarization comes from Europe. One example includes Pasokification
in Greece. This is the trend from a shift from the center-left to a
more far-left stance. Pasokification was caused by the Greek populous
growing dissatisfied with the country's centrist more left-wing party
and how they handled the Great Recession and the austerity measures the European Union put in place during recovery.
Although the shift further to the left was a massive benefits to the
liberal population in Greece, the results in Greece, as well as other
nations like Germany, Sweden, and Italy, have not been able to sustain
themselves. Parties who have made the shift left have recently shown a
decline in the voting booths, evidence their supporters are uneasy of
the future.
In the 2010s, the shift in Greece to the far left is similar to
the shift in countries like Poland, France, and the UK to more far-right
conservative positions. Much of the polarization in these nations leads
to either a more socialist left-wing party, or more nationalist
right-wing party. These more polarized parties grow from the discontent
of more moderate parties inability to provide progressive changes in
either direction. In Poland, France, and the UK, there is heavy
anti-Islam sentiment and the rise of populist
commentary. The general population of the right in these countries
tends to hold onto these more aggressive stances and pulls the parties
further to the right. These stances include populist messages with
Islamophobic, isolationist, and anti-LGBTQ language.
Regarding the case of Brazil, some authors have questioned the
use of the term. Rafael Poço and Rodrigo de Almeida coined the term
"asymmetric polarization"
to refer to the Brazilian general elections of 2022 that opposed a
far-right candidate against a center-left. In a similar manner, Sergio
Schargel and Guilherme Simões Reis suggests that polarization is not
anti-democratic, but rather democracy in its essence. Furthermore, they
also criticize how the concept has been used to falsely imply that a
country is divided between two extremes: "rhetoric of polarization
offers people the idea that choosing between democracy and
authoritarianism, between a democratic center-left and a Brazilian
version of fascism, is something to ponder — and that it is a difficult
choice."
Income inequality
has fluctuated considerably in the United States since measurements
began around 1915, moving in an arc between peaks in the 1920s and
2000s, with a 30-year period of relatively lower inequality between 1950
and 1980.
The U.S. has the highest level of income inequality among its (post-)industrialized peers.
When measured for all households, U.S. income inequality is comparable
to other developed countries before taxes and transfers, but is among
the highest after taxes and transfers, meaning the U.S. shifts
relatively less income from higher income households to lower income
households. In 2016, average market income was $15,600 for the lowest quintile
and $280,300 for the highest quintile. The degree of inequality
accelerated within the top quintile, with the top 1% at $1.8 million,
approximately 30 times the $59,300 income of the middle quintile.
The economic and political impacts of inequality may include slower GDP growth, reduced income mobility, higher poverty rates, greater usage of household debt leading to increased risk of financial crises, and political polarization. Causes of inequality may include executive compensation increasing relative to the average worker, financialization, greater industry concentration, lower unionization rates, lower effective tax rates on higher incomes, and technology changes that reward higher educational attainment.
Measurement is debated, as inequality measures vary significantly, for example, across datasets or whether the measurement is taken based on cash compensation (market income) or after taxes and transfer payments. The Gini coefficient
is a widely accepted statistic that applies comparisons across
jurisdictions, with a zero indicating perfect equality and 1 indicating
maximum inequality. Further, various public and private data sets
measure those incomes, e.g., from the Congressional Budget Office (CBO), the Internal Revenue Service, and Census. According to the Census Bureau, income inequality reached then record levels in 2018, with a Gini of 0.485, Since then the Census Bureau have given values of 0.488 in 2020 and 0.494 in 2021, per pre-tax money income.
U.S. tax and transfer policies are progressive
and therefore reduce effective income inequality, as rates of tax
generally increase as taxable income increases. As a group, the lowest
earning workers, especially those with dependents, pay no incometaxes
and may actually receive a small subsidy from the federal government
(from child credits and the Earned Income Tax Credit). The 2016 U.S. Gini coefficient was .59 based on market income, but was reduced to .42 after taxes and transfers, according to Congressional Budget Office
(CBO) figures. The top 1% share of market income rose from 9.6% in 1979
to a peak of 20.7% in 2007, before falling to 17.5% by 2016. After
taxes and transfers, these figures were 7.4%, 16.6%, and 12.5%,
respectively.
Definitions
Relative
income growth, organized by percentile classes, normalized to 1970
levels. Graph accounts for both income growth, and the hidden decline in
the progressivity of the tax code at the top, the wealthiest earners
having seen their effective tax rates steadily fall.
Same data as adjacent chart, but plotted on logarithmic scale to show absolute dollar amounts
Income distribution can be assessed using a variety of income
definitions. Adjustments are applied for various reasons, particularly
to better reflect the actual economic resources available to a given
individual/household.
Market income—Labor income; business income; capital income
(including capital gains); income received in retirement for past
services; and other non-governmental sources of income
Gini coefficient—Summarizes
income distribution. It uses a scale from 0 to 1. Zero represents
perfect equality (everyone having the same income), while 1 represents
perfect inequality (one person receiving all the income). (Index scores
are commonly multiplied by 100.)
The CBO explains the Gini as "A standard composite measure of income
inequality is the Gini coefficient, which summarizes an entire
distribution in a single number that ranges from zero to one. A value of
zero indicates complete equality (for example, if each household
received the same amount of income), and a value of one indicates
complete inequality (for example, if a single household received all the
income). Thus, a Gini coefficient that increases over time indicates
rising income inequality."
"The Gini coefficient can also be interpreted as a measure of
one-half of the average difference in income between every pair of
households in the population, divided by the average income of the total
population. For example, the Gini coefficient of 0.513 for 2016
indicates that the average difference in income between pairs of
households in that year was equal to 102.6 percent (twice 0.513) of
average household income in 2016, or about $70,700 (adjusted to account
for differences in household size). Similarly, the Gini coefficient of
0.521 projected for 2021 indicates that the average difference in income
between pairs of households would equal 104.2 percent (twice 0.521) of
average household income in 2021, or about $77,800 (in 2016 dollars)."
Income
inequality has fluctuated considerably since measurements began around
1915, declining between peaks in the 1920s and 2007 (CBO data) or 2012 (Piketty, Saez, Zucman data). Inequality steadily increased from around 1979 to 2007, with a small reduction through 2016, followed by an increase from 2016 to 2018.
Before 20th century
In
the late 18th century, “incomes were more equally distributed in
colonial America than in any other place that can be measured,”
according to Peter Lindert and Jeffrey Williamson. The richest 1 percent
of households held only 8.5% of total income in the late 18th century.
Some reasons for this include the ease that the average American had in
buying frontier
land, which was abundant at the time, and an overall scarcity of labor
in non-slaveholding areas, which forced landowners to pay higher wages.
There were also relatively few poor people in America at the time, since
only those with at least some money could afford to come to America.
In 1860, the top 1 percent collected almost one-third of property incomes,
as compared to 13.7% in 1774. There was a great deal of competition for
land in the cities and non-frontier areas during this time period, with
those who had already acquired land becoming richer than everyone else.
The newly burgeoning financial sector also greatly rewarded the already-wealthy, as they were the only ones financially sound enough to invest.
1913–1941
An early governmental measure that slightly reduced inequality was the enactment of the first income tax in 1913. The 1918 household Gini coefficient (excluding capital gains) was 40.8. A brief but sharp depression in 1920-1921
reduced incomes. Income inequality rose from 1913 to peaks in 1926
(1928 Gini 48.9, 1936 Gini 45.5) and 1941 (Gini 43.1), after which
war-time measures of the Roosevelt administration began to equalize the income distribution. Social Security was enacted in 1935. At several points in this pre-World War II era, in which the Rockefellers and Carnegies dominated American industry, the richest 1% of Americans earned over 20% of the income share.
The Great Compression, 1937–1967
From about 1937 to 1947, a period dubbed as the "Great Compression", income inequality fell dramatically. The GINI fell into the high 30s. ProgressiveNew Deal taxation, stronger unions, strong post-war economic growth and regulation by the National War Labor Board broadly raised market incomes and lowered the after-tax incomes of top earners. In the 1950s, marginal tax rates reached 91%, although the top 1% paid only about 16% in income taxes. Tax cuts in 1964 lowered marginal rates and closed loopholes. Medicare and Medicaid were enacted in 1965. The Earned Income Tax Credit was enacted in 1975.
The income change was the product of relatively high wages for trade union
workers, lack of foreign manufacturing competition and political
support for redistributive government policies. By 1947 more than a
third of non-farm workers were union members.
Unions both raised average wages for their membership, and indirectly,
and to a lesser extent, raised wages for non-union workers in similar
occupations. Economist Paul Krugman
claimed that political support for equalizing government policies was
provided by high voter turnout from union voting drives, Southern
support for the New Deal, and prestige that the massive mobilization and
victory of World War II had given the government.
A 2022 study in the Economic Journal challenged that World
War II was a great leveler in income inequality. The study points
instead to a gradual decline in income inequality during the Great
Depression which extended into the war years.
1979–2007 increase
Americans have the highest income
inequality in the rich world and over the past 20–30 years Americans
have also experienced the greatest increase in income inequality among
rich nations. The more detailed the data we can use to observe this
change, the more skewed the change appears to be ... the majority of
large gains are indeed at the top of the distribution.
— Timothy Smeeding
The return to high inequality began in the 1980s. The Gini first rose above 40 in 1983. Inequality rose almost continuously, with inconsequential dips during the economic recessions in 1990–91 (Gini 42.0), 2001 (Gini 44.6) and 2007.
The lowest top 1% pre-tax income share measured between 1913 and 2016
was 10.9%, achieved in 1975, 1976 and 1980. By 1989, this figure was
14.4%, by 1999 it was 17.5% and by 2007 it was 19.6%.
CBO reported that for the 1979–2007 period, after-tax income
(adjusted for inflation) of households in the top 1 percent of earners
grew by 275%, compared to 65% for the next 19%, just under 40% for the
next 60% and 18% for the bottom fifth.The share of after-tax income
received by the top 1% more than doubled from about 8% in 1979 to over
17% in 2007. The share received by the other 19 percent of households in
the highest quintile edged up from 35% to 36%.
The major cause was an increase in investment income. Capital gains
accounted for 80% of the increase in market income for the households in
the top 20% (2000–2007). Over the 1991–2000 period capital gains
accounted for 45% of market income for the top 20%.
CBO reported that less progressive tax and transfer policies
contributed to an increase in after tax/transfer inequality between 1979
and 2007.
Higher incomes due to a college education were a key reason
middle income households gained income share relative to those in the
lower part of the distribution between 1973 and 2005. This was due in
part to technology changes. However, education had less impact
thereafter. Further, education did not explain why the top 1% gained
disproportionately starting around 1980. Causes included executive pay trends and the financialization of the economy.
For example, CEO pay expanded from around 30 times the typical worker
pay in 1980 to nearly 350 times by 2007. From 1978 to 2018, CEO
compensation grew 940% adjusted for inflation, versus 12% for the
typical worker.
A 2012 study reported that the main occupational shift for the top 1%
was towards finance, while in 2009 "the richest 25 hedge-fund investors
earned more than $25 billion, roughly six times as much as all the chief
executives of companies in the S&P 500 stock index combined."
The share of income held by the top 1 percent was as large in 2005 as in 1928. That year household Gini reached 45.
2007–2016 reduction
CBO
The household income Gini index for the United States was 45.6 in 2009, and 45.4 in 2015, indicating a reduction in inequality during that time.
CBO reported that the share of after-tax income received by the top 1%
peaked in 2007 at 16.6%. It fell to 11.3% in 2009 due in part to the
impact on investment income from the Great Recession,
then increased thereafter, to 14.9% by 2012 as the economy recovered.
It then fell somewhat, reaching 12.5% by 2016, reflecting Obama policies
including the expiration of the Bush tax cuts for top incomes, and both tax increases on top incomes and redistribution to lower income groups under the Affordable Care Act.
CBO reported that for the 1979-2016 period, after-tax income
(adjusted for inflation) of households in the top 1 percent of earners
grew by 226%, compared to 65% for the 81st to 90th percentile, 47% for
the 20th to 80th percentile, and 85% for the bottom fifth. The income
growth for the top 1% was less than the 1979-2007 increase, while the
bottom fifth was much higher, indicating a reduction in inequality from
2007 to 2016. The bottom quintile benefited from Medicaid expansion and
refundable tax credits.
Saez, et al.
The top 1% earned 12% of market income in 1979, 20% in 2007 and 19%
in 2016. For the bottom 50%, these figures were 20%, 14% and 13%,
respectively. For the middle 40% group, a proxy for the middle class,
these figures were 45%, 41% and 41%, respectively. Measured by the share captured by the top 1%, by 2012, post-Great Recession market income inequality was as high as it was during the Roaring Twenties, at just over 20%.
The Great Recession took place from December 2007 to June 2009. From 2007 to 2010 total income going to the bottom 99 percent of Americans declined by 11.6%, while the top 1% fell by 36.3%.
In 2014 Saez and Gabriel Zucman
reported that more than half of those in the top 1 percent had not
experienced relative gains in wealth between 1960 and 2012. In fact,
those between the top 1% and top .5% had lost relative wealth. Only
those in the top .1% and above had made relative wealth gains during
that time.
Saez reported in 2013 that, from 2009 to 2012, the incomes of the top
1% grew by 31.4%, while the incomes of the bottom 99% grew by 0.4%.
In May 2017, they reported that income shares for those in the
bottom half stagnated and declined from 1980 to 2014. Their share
declined from 20% in 1980 to 12% in 2014, while the top 1% share grew
from 12% in 1980 to 20%. The top 1% then made on average 81 times more
than the bottom 50%, while in 1981 they made 27 times more. They
attributed Inequality growth during the 1970s to the 1990s to wage
growth among top earners, and that the widening gap had been due to
investment income.
Events
The Great Recession
lasted from 2008 to 2009, multiplying unemployment and crashing the
stock market. Obama administration policies addressed inequality in
three main ways, contributing to a reduction in the share of income
going to the top 1% measured between 2007 and 2016, both pre-tax and
after-tax:
Tax increases on top incomes. The Bush tax cuts
were extended only for the bottom 98-99% incomes in 2013. CBO reported
that the average federal tax rate on the top 1% increased from 28.6% in
2012 to 33.6% in 2013–2014, and remained at 33.3% in 2015–2016.
The Affordable Care Act.
CBO estimated the ACA shifted approximately $21,000 in after-tax income
from the average top 1% household via the investment income tax and the
Medicare tax, to provide $600 in health insurance subsidies to the
average bottom 40% household via insurance subsidies and expanded
Medicaid. The Medicaid and CHIPs expansions amounted to 80% of the increase in means-tested transfers between 1979 and 2016.
In 2018, and for the first time in U.S. history, U.S.
billionaires paid a lower effective tax rate than the working class. A
study found that the average effective tax rate paid by the richest 400
families in the country was 23 percent, a full percentage point lower
than the 24.2 percent rate paid by the bottom half of American
households.
In September 2019, the Census Bureau reported that income
inequality in the United States had reached its highest level in 50
years, with the GINI index increasing from 48.2 in 2017 to 48.5 in 2018.
If the United States had the same income distribution it had in 1979,
the bottom 80 percent of the population would have $1 trillion – or
$11,000 per family – more. The top 1 percent would have $1 trillion – or
$750,000 – less.
In December 2019, CBO forecast that inequality would increase between
2016 and 2021. Their report had several conclusions: (Adjusted for
inflation)
Before taxes and transfers, all income groups will see income
growth, with the largest increases being for the highest and lowest
quintiles. After taxes and transfers, that income growth is more skewed
toward the higher income households.
The ratio of means tested transfers (aid for the poor) to income
(BTT) will decrease, mainly because of income growth at the bottom of
the distribution, which makes those households ineligible for transfers.
Lower federal taxes for all income groups, with the greatest
decrease for the highest income households, predominately because of the
Trump tax cuts.
Income inequality is projected to increase, both before taxes and
transfers, and after taxes and transfers, from Ginis of .513 to .521 and
.423 to .437, respectively.
According to a December 2020 analysis of W-2 earnings data from the Economic Policy Institute
U.S. income inequality is worsening, as the earnings of the top 1%
nearly doubled from 7.3% in 1979 to 13.2% in 2019 while over the same
time period the average annual wages for the bottom 90% have stayed
within the $30,000 range, increasing from $30,880 to $38,923,
representing 69.8% of total earnings in 1979 and 60.9% in 2019
respectively. The earnings of the top 0.1% surged from $648,725 in 1979
to nearly $2.9 million in 2019, an increase of 345%.
According to CBO (and others), the precise reasons for the [recent] rapid growth in income at the top are not well understood", but involved multiple, possibly conflicting, factors.
Causes include:
decline of labor unions
– Unions weakened in part due to globalization and automation may
account for one-third to more than one-half of the rise of inequality
among men. Pressure on employers to increase wages and on lawmakers to
enact worker-friendly measures declined. Rewards from productivity gains
went to executives, investors and creditors.
A study by Kristal and Cohen reported that rising wage inequality was
driven more by declining unions and the fall in the real value of the
minimum wage, with twice as much impact as technology. An alternative theory states that passthrough income's contribution is incorrectly attributed to capital rather than labor.
globalization – Low skilled American workers lost ground in
the face of competition from low-wage workers in Asia and other
"emerging" economies.
skill-biased technological change – Rapid progress in information technology increased the demand for skilled and educated workers.
superstars – Modern communication technologies often turn competition into a "winner take most" tournament in which the winner is richly rewarded, while the runners-up get far less.
financialization – In the 1990s stock market capitalization rose from 55% to 155% of Gross Domestic Product (GDP). Corporations began to shift executive compensation toward stock options,
increasing incentives for managers to make decisions to increase share
prices. Average annual CEO options increased from $500,000 to over $3
million. Stock comprised almost 50% of CEO compensation.
Managers were incentivized to increase shareholder wealth rather than
to improve long-term contracts with workers; between 2000 and 2007,
nearly 75% of increased stock growth came at the cost of labor wages and
salaries.
immigration of less-educated workers – Relatively high levels of immigration of low skilled workers since 1965 may have reduced wages for American-born high school dropouts;
college premium - Workers with college degrees traditionally earned more and faced a lower unemployment rate than others.
Wealthy families are also more likely to send their children to schools
which have large endowments, resulting in more grants and lower student
debt. The cycle is completed when wealthier alums donate more and
disproportionately increase the size of elite endowments. Elite colleges
also have better access to financial expertise.
automation - The Bureau of Labor Statistics
(BLS) found that increased automation had led to "an overall drop in
the need for labor input. This would cause capital share to increase,
relative to labor share, as machines replace some workers."
We haven't achieved the minimalist state that libertarians advocate.
What we've achieved is a state too constrained to provide the public
goods – investments in infrastructure, technology, and education – that
would make for a vibrant economy and too weak to engage in the
redistribution that is needed to create a fair society. But we have a
state that is still large enough and distorted enough that it can
provide a bounty of gifts to the wealthy.
policy – Krugman asserted that movement conservatives
increased their influence over the Republican Party beginning in the
1970s. In the same era, it increased its political power. The result was
less progressive tax
laws, anti-labor policies, and slower expansion of the welfare state
relative to other developed nations (e.g., the unique absence of
universal healthcare).
Further, variation in income inequality across developed countries
indicate that policy has a significant influence on inequality; Japan, Sweden and France have income inequality around 1960 levels. The US was an early adopter of neoliberalism, which shifted the distribution of income from labor to capital, and whose focus on growth over equality spread to other countries over time.] Nevertheless, the United States remains, according to Jonathan Hopkin,
"the most extreme case of the subjection of society to the brute force
of the market." As such, he argues this made the United States an
outlier with economic inequality hitting "unprecedented levels for the
rich democracies."
corporatism and corpocracy– Excessive attention to the interests of corporations reduced scrutiny over compensation shifts.
female labor force participation – High earning households are more likely to be dual earner households.
stock ownership is tilted towards households at higher income and education levels, resulting in disparate investment income.
Higher income households are disproportionately likely to prosper
when economic times are good, and to suffer losses during downturns.
More of their income comes from relatively volatile capital income. For
example, in 2011 the top 1% of income earners derived 37% of their
income from labor, versus 62% for the middle quintile. The top 1%
derived 58% of their income from capital as opposed to 4% for the middle
quintile. Government transfers represented only 1% of the income of the
top 1% but 25% for the middle quintile; the dollar amounts of these
transfers tend to rise in recessions.
According to a 2018 report by the Organization of Economic Cooperation and Development
(OECD), the US has higher income inequality and a larger percentage of
low income workers than almost any other advanced nation because
unemployed and at-risk workers get less support from the government and a
weak collective bargaining system.
Effects
Economic
Income inequality may contribute to slower economic growth, reduced income mobility, higher levels of household debt, and greater risk of financial crises and deflation.
Krueger
wrote in 2012: "The rise in inequality in the United States over the
last three decades has reached the point that inequality in incomes is
causing an unhealthy division in opportunities, and is a threat to our
economic growth. Restoring a greater degree of fairness to the U.S. job
market would be good for businesses, good for the economy, and good for
the country." Since the wealthy tend to save nearly 50% of their
marginal income while the remainder of the population saves roughly 10%,
other things equal this would reduce annual consumption (the largest
component of GDP) by as much as 5%, but would increase investment, at
least some of which would likely take place in the US. Krueger wrote
that borrowing likely helped many households make up for this shift.
Inequality in land and income ownership is negatively correlated with subsequent economic growth. Increasing inequality harms growth in countries with high levels of urbanization.
High unemployment rates have a significant negative effect
when interacting with increases in inequality. High unemployment also
has a negative effect on long-run economic growth. Unemployment may
seriously harm growth because resources sit idle, because it generates
redistributive pressures and distortions, because it idles human capital
and deters its accumulation, because it drives people to poverty,
because it results in liquidity constraints that limit labor mobility,
and because it erodes individual self-esteem and promotes social
dislocation, unrest and conflict. Policies to control unemployment and
reduce its inequality-associated effects can strengthen long-run growth.
Economists such as David Moss, Krugman and Raghuram Rajan believe the "Great Divergence" may be connected to the 2008 financial crisis.
Even conservatives must acknowledge
that return on capital investment, and the liquid stocks and bonds that
mimic it, are ultimately dependent on returns to labor in the form of
jobs and real wage gains. If Main Street is unemployed and
undercompensated, capital can only travel so far down Prosperity
Road....
Investors/policymakers of the world wake up – you're killing the
proletariat goose that lays your golden eggs."
The majority of the Associated Press
survey respondents agreed that widening income disparity was harming
the US economy. They argue that wealthy Americans are receiving higher
pay, but they spend less per dollar earned than middle class consumers,
whose incomes have largely stagnated.
The S&P report concluded that diverging income inequality had
slowed the recovery and could contribute to future boom-and-bust cycles
given increasing personal debt levels. Higher levels of income
inequality increase political pressures, discouraging trade, investment,
hiring, and social mobility.
Alperovitz and Reich argued that concentration of wealth does not
leave sufficient purchasing power for the economy to function
effectively.
Stiglitz argued that wealth and income concentration leads the
economic elite to protect themselves from redistributive policies by
weakening the state, which lessens public investments – roads,
technology, education, etc. – that are essential for economic growth.
Milanovic stated that while traditionally economists thought
inequality was good for growth, "When physical capital mattered most,
savings and investments were key. Then it was important to have a large
contingent of rich people who could save a greater proportion of their
income than the poor and invest it in physical capital. But now that
human capital is scarcer than machines, widespread education has become
the secret to growth" and that while "broadly accessible education" is
difficult to achieve under inequality, education tends to reduce income
gaps.
Gordon wrote that such issues as 'rising inequality; factor price
equalization stemming from the interplay between globalization and the
Internet; the twin educational problems of cost inflation in higher
education and poor secondary student performance; the consequences of
environmental regulations and taxes ..." make economic growth harder to
achieve.
In response to the Occupy movement, legal scholar Richard Epstein
defended inequality in a free market society, maintaining that "taxing
the top one percent even more means less wealth and fewer jobs for the
rest of us." According to Epstein, "the inequalities in wealth ... pay
for themselves by the vast increases in wealth", while "forced transfers
of wealth through taxation ... will destroy the pools of wealth that
are needed to generate new ventures".
According to a 2020 study by the RAND Corporation, the typical worker, defined in the study as a "Full-Year, Full-Time, Prime-Aged Worker",
makes $42,000 less than he/she would have if income inequality had not
increased over the last four decades. The study also shows that white
working class males and rural workers who work full time have been the
hardest hit, while the higher income earners captured the vast majority
of economic growth over the same time period.
The total wealth difference would have exceeded $50 trillion by early
2020, an amount that would have led to a more prosperous economy and a
healthier, more financially secure population. The report concludes that
the American economy's radical inequality is hindering economic growth,
as the benefits are mainly enjoyed by those at the top, while the
majority, responsible for the bulk of consumer spending which constitutes 67% of GDP, are left behind.
Financial crises
Income inequality was cited as one of the causes of the Great Depression by Supreme Court Justice Louis D. Brandeis in 1933. In his dissent in the Louis K. Liggett Co. v. Lee
(288 U.S. 517) case, he wrote: "Other writers have shown that,
coincident with the growth of these giant corporations, there has
occurred a marked concentration of individual wealth; and that the
resulting disparity in incomes is a major cause of the existing
depression."
Rajan argued that "systematic economic inequalities, within the
United States and around the world, have created deep financial 'fault
lines' that have made [financial] crises more likely to happen than in
the past".
Monopoly, labor, consolidation, and competition
Greater income inequality can lead to monopolization, resulting in fewer employers requiring fewer workers. Remaining employers can consolidate and take advantage of the relative lack of competition.
Aggregate demand
Income inequality is claimed to lower aggregate demand, leading to large segments of formerly middle class consumers unable to afford as many goods and services. This pushes production and overall employment down.
The ability to move from one income group into another (income mobility)
is a measure of economic opportunity. A higher probability of upward
income mobility theoretically would help mitigate higher income
inequality, as each generation has a better chance of achieving higher
income.
Several studies indicated that higher income inequality is
associated with lower income mobility. In other words, income brackets
tend to be increasingly "sticky" as income inequality increases. This is
described by the Great Gatsby curve. Noah summarized this as "you can't really experience ever-growing income inequality without experiencing a decline in Horatio Alger-style
upward mobility because (to use a frequently-employed metaphor) it's
harder to climb a ladder when the rungs are farther apart."
Over lifetimes
A 2013 Brookings Institution study claimed that income inequality was increasing and becoming permanent, sharply reducing social mobility.
A 2007 study found the top population in the United States "very
stable" and that income mobility had not "mitigated the dramatic
increase in annual earnings concentration since the 1970s."
Krugman argued that while in any given year, some people with low
incomes will be "workers on temporary layoff, small businessmen taking
writeoffs, farmers hit by bad weather" – the rise in their income in
succeeding years is not the same 'mobility' as poor people rising to
middle class or middle income rising to high income. It's the mobility
of "the guy who works in the college bookstore and has a real job by his
early thirties."
Studies by the Urban Institute and the US Treasury
have both found that about half of the families who start in either the
top or the bottom quintile of the income distribution are still there
after a decade, and that only 3 to 6% rise from bottom to top or fall
from top to bottom.
On
the issue of whether most Americans stay in the same income bracket
over time, the 2011 CBO distribution of income study reported:
Household
income measured over a multi-year period is more equally distributed
than income measured over one year, although only modestly so. Given the
fairly substantial movement of households across income groups over
time, it might seem that income measured over a number of years should
be significantly more equally distributed than income measured over one
year. However, much of the movement of households involves changes in
income that are large enough to push households into different income
groups but not large enough to greatly affect the overall distribution
of income. Multi-year income measures also show the same pattern of
increasing inequality over time as is observed in annual measures.
In other words,
many
people who have incomes greater than $1 million one year fall out of
the category the next year – but that's typically because their income
fell from, say, $1.05 million to .95 million, not because they went back
to being middle class.
Disagreements about the
correct procedure for measuring income inequality continues to be a
topic of debate among economists, including a panel discussion at the
2019 American Economic Association annual meeting.
Between generations
Several studies found the ability of children from poor or
middle-class families to rise to upper income – known as "upward
relative intergenerational mobility" – is lower in the US than in other
developed countries. Krueger and Corak found lower mobility to be linked to income inequality.
In their Great Gatsby curve, Labor economist Miles Corak found a negative correlation
between inequality and social mobility. The curve plotted
intergenerational income mobility, the likelihood that someone will
match their parents' relative income level – and inequality for various
countries.
The connection between income inequality and low mobility can be
explained by the lack of access and preparation for schools that is
crucial to high-paying jobs; lack of health care may lead to obesity and
diabetes and limit education and employment.
Krueger estimated that "the persistence in the advantages and
disadvantages of income passed from parents to the children" will "rise
by about a quarter for the next generation as a result of the rise in
inequality that the U.S. has seen in the last 25 years."
Greater income inequality can increase the market income poverty
rate, as income shifts from lower income brackets to upper brackets.
Jared Bernstein wrote, "If less of the economy's market-generated growth
– i.e., before taxes and transfers kick in – ends up in the lower
reaches of the income scale, either there will be more poverty for any
given level of GDP growth, or there will have to be a lot more transfers
to offset inequality's poverty-inducing impact." The Economic Policy Institute
(EPI) estimated that greater income inequality added 5.5% to the
poverty rate between 1979 and 2007, other factors equal. Income
inequality was the largest driver of the change in the poverty rate,
with economic growth, family structure, education and race other
important factors. An estimated 11.8% of Americans lived in poverty in 2018, versus 16% in 2012 and 26% in 1967. The poverty threshold in the United States was at $12,880 for a single-person household and $26,246 for a family of four in 2021. As of 2023, 2.75% of the U.S. population earn less than $10 per day. 0.25% of the U.S. population lived below the international poverty line of $2.15 per day in 2020.
A rise in income disparities weakens skills development among
people with a poor educational background in terms of the quantity and
quality of education attained.
Debt
Income inequality may be the driving factor in growing household debt,
as high earners bid up the price of real estate and middle income
earners go deeper into debt trying to maintain a middle class lifestyle.
Between 1983 and 2007, the top 5 percent saw their debt fall from 80
cents for every dollar of income to 65 cents, while the bottom 95
percent saw their debt rise from 60 cents for every dollar of income to
$1.40. Krugman found a strong correlation between inequality and household debt during the twentieth and early twenty-first centuries.
Twenty-first century college costs have risen much faster than income, resulting in an increase in student loan debt from $260 billion in 2004 to $1.6 trillion in 2019Q2.
From 1995 to 2013, outstanding education debt grew from 26% of average
yearly income to 58%, for households with net worth below the 50th
percentile.
Bernstein and Krugman assessed the concentration of income as variously "unsustainable" and "incompatible" with democracy. Political scientists Jacob S. Hacker and Paul Pierson quoted a warning by Greek-Roman historian Plutarch: "An imbalance between rich and poor is the oldest and most fatal ailment of all republics." Some academic researchers alleged that the US political system risks drifting towards oligarchy, through the influence of corporations, the wealthy and other special interest groups.
Political polarization
Rising income inequality has been linked to political polarization.
Krugman wrote in 2014, "The basic story of political polarization over
the past few decades is that, as a wealthy minority has pulled away
economically from the rest of the country, it has pulled one major party
along with it ... Any policy that benefits lower- and middle-income
Americans at the expense of the elite – like health reform, which
guarantees insurance to all and pays for that guarantee in part with
taxes on higher incomes – will face bitter Republican opposition." He used environmental protection as another example, which became a partisan issue only after the 1990s.
Evidence suggests the impact of national income inequality on regional
economic divergence as one potential reason for the link between
inequality and political polarization.
As income inequality increased, the degree of House of Representatives
polarization measured by voting record followed. Inequality increased
influence by the rich on the regulatory, legislative and electoral
processes.
McCarty, Pool and Rosenthal wrote in 2007 that Republicans had then
moved away from redistributive policies that would reduce income
inequality, whereas earlier, they had supported redistributive policies
such as the EITC. Polarization thus completed a feedback loop,
increasing inequality.
The IMF warned in 2017 that rising income inequality within
Western nations, in particular the United States, could result in
further political polarization.
Political inequality
Several economists and political scientists argued that income
inequality translates into political inequality, as when politicians
have financial incentives to accommodate special interest groups.
Researchers such as Larry Bartels
found that politicians are significantly more responsive to the
political opinions of the wealthy, even when controlling for a range of
variables including educational attainment and political knowledge.
Class system
A class system
is a society organized around the division of the population into
groups having a permanent status that determines their relation to other
groups.
Such groups may be defined by income, religion and/or other
characteristics. Class warfare is thus conflict between/among such
classes.
Investor Warren Buffett
said in 2006, "There's class warfare, all right, but it's my class, the
rich class, that's making war, and we're winning." He advocated much
higher taxes on the wealthiest Americans.
George Packer wrote, "Inequality hardens society into a class system
... Inequality divides us from one another in schools, in
neighborhoods, at work, on airplanes, in hospitals, in what we eat, in
the condition of our bodies, in what we think, in our children's
futures, in how we die. Inequality makes it harder to imagine the lives
of others."
In recent US history, the class conflict has taken the form of the "1% versus the 99%" issue, particularly as reflected in the Occupy movement and struggles over tax policy and redistribution. The movement spread to 600 communities in 2011. Its main political slogan – "We are the 99%" – referenced its dissatisfaction with the era's income inequality.
Political change
Increasing inequality is both a cause and effect of political change, according to journalist Hedrick Smith.
The result was a political landscape dominated in the 1990s and 2000s
by business groups, specifically "political insiders" – former members
of Congress and government officials with an inside track – working for
"Wall Street banks, the oil, defense, and pharmaceutical industries; and
business trade associations." In the decade or so prior to the Great
Divergence, middle-class-dominated reformist grassroots efforts – such
as the civil rights movement, environmental movement, consumer movement, labor movement – had considerable political impact.
World trade significantly expanded in the 1990s and thereafter, with the creation of the World Trade Organization and the negotiation of the North American Free Trade Agreement. These agreements and related policies were widely supported by business groups and economists such as Krugman. and Stiglitz One outcome was greatly expanded foreign outsourcing, which has been argued to have hollowed out the middle class.
Stiglitz later argued that inequality may explain political
questions – such as why America's infrastructure (and other public
investments) are deteriorating, or the country's recent relative lack of reluctance to engage in military conflicts such as the 2003 Iraq war.
Top-earning families have the money to buy their own education, medical
care, personal security, and parks. They showed little interest in
helping pay for such things for the rest of society, and have the
political influence to make sure they don't have to. The relatively few
children of the wealthy who joined the military may have reduced their
concern about going to war.
Milanovic argued that globalization and immigration caused US middle-class wages to stagnate, fueling the rise of populist political candidates. Piketty attributed the victory of Donald Trump in the 2016 presidential election,
to "the explosion in economic and geographic inequality in the United
States over several decades and the inability of successive governments
to deal with this."
Health
After rising for a century, average life expectancy in the U.S. is
now declining. And for those in the bottom 90% of the income
distribution, real (inflation-adjusted) wages have stagnated: the income
of a typical male worker today is around where it was 40 years ago.
Using statistics from 23 developed countries and the 50 states of the US, British researchers Richard G. Wilkinson and Kate Pickett found a correlation that remains after accounting for ethnicity, national culture and occupational classes or education levels.
Their findings place the United States as the most unequal and ranks
poorly on social and health problems among developed countries. The authors argue inequality creates psychosocial stress and status anxiety that lead to social ills.
A 2009 study attributed one in three deaths in the United States to high levels of inequality. According to The Earth Institute, life satisfaction
in the US has been declining over several decades, which they
attributed to increasing inequality, lack of social trust and loss of
faith in government.
A 2015 study by Angus Deaton and Anne Case
found that income inequality could be a driving factor in a marked
increase in deaths among white males between the ages of 45 to 54 in the
period 1999 to 2013.So-called "deaths of despair", including suicide
and drug/alcohol related deaths, which have been pushing down life
expectancy since 2014, reached record levels in 2017. Some researchers
assert that income inequality, a shrinking middle class, the weakening
labor union influence and stagnant wages have been significant factors
in this development. In their 2020 book Deaths of Despair and the Future of Capitalism, Case and Deaton put forth the argument that in the United States, globalization
and technological advancement dramatically shifted political power away
from labor and towards capital by empowering corporations and weakening
labor unions
much more so than in peer countries such as those of Western Europe. As
such, other rich countries, while facing their own challenges
associated with globalization and technological change, did not
experience a "long-term stagnation of wages, nor an epidemic of deaths
of despair."
According to the Health Inequality Project, the wealthiest
American men live 15 years longer than the poorest. For American women
the life expectancy gap is 10 years.
Political extremism and violence
A 2020 paper published in Science Advances
posits that there is a correlation between economic inequality, poor
economic conditions and increased rates of political violence and right-wing extremism. A 2019 study of mass shootings published in BMC Public Health found that communities with rising levels of income inequality are at an increased risk of mass shootings.
Financing of social programs
Krugman argues that the long-term funding problems of Social Security and Medicare
can be blamed in part on the growth in inequality as well as changes
such as longer life expectancy. The source of funding for these programs
is payroll taxes,
which are traditionally levied as a percent of salary up to a cap.
Payroll taxes do not capture income from capital or income above the
cap. Higher inequality thereby reduces the taxable pool.
Had inequality remained stable, increased payments would have covered about 43% of the projected Social Security shortfall over the next 75 years.
Justice
Classical liberal economists such as Friedrich Hayek
maintained that because individuals are diverse and different, state
intervention to redistribute income is inevitably arbitrary and
incompatible with the rule of law, and that "what is called 'social' or
distributive' justice is indeed meaningless within a spontaneous order".
Those who would use the state to redistribute, "take freedom for
granted and ignore the preconditions necessary for its survival".
Public attitudes
Americans are not generally aware of the extent of inequality or recent trends.
In 1998 a Gallup poll found 52% of Americans agreeing that the gap
between rich and the poor was a problem that needed to be fixed, while
45% regarded it as "an acceptable part of the economic system".
A December 2011 Gallup poll found a decline in the number of
Americans who rated reducing the gap in income and wealth between the
rich and the poor as extremely or very important (21 percent of
Republicans, 43 percent of independents, and 72 percent of Democrats).
Only 45% see the gap as in need of fixing, while 52% do not. However,
there was a large difference between Democrats and Republicans, with 71%
of Democrats calling for a fix.
In 2012, surveys found the issue ranked below issues such as
growth and equality of opportunity, and ranked relatively low in
affecting voters "personally".
A January 2014 poll found 61% of Republicans, 68% of Democrats
and 67% of independents accept that income inequality in the US had
grown over the last decade.
The poll indicated that 69% of Americans supported the government doing
"a lot" or "some" to address income inequality and that 73% of
Americans supported raising the minimum wage from $7.25 to $10.10 per
hour.
Surveys found that Americans matched citizens of other nations
about what equality was acceptable, but more accepting of what they
thought the level was. Dan Ariely and Michael Norton found in a 2011 study that US citizens significantly underestimated wealth inequality.
States and cities
The US household income Gini of 46.8 in 2009 varied significantly between states: after-tax income inequality in 2009 was greatest in Texas and lowest in Maine. Income inequality grew from 2005 to 2012 in more than 2 out of 3 metropolitan areas.
After-tax, the Federal Reserve estimated that 34 states in the US have a Gini index between 30 and 35, with Maine the lowest.
At the county and municipality levels, the 2010 market income
Gini index ranged from 21 to 65, according to Census Bureau estimates.
International comparisons
The United States has the highest level of income inequality in the Western world, according to a 2018 study by the United Nations Special Rapporteur
on extreme poverty and human rights. The United States has forty
million people living in poverty, and more than half of these people
live in "extreme" or "absolute" poverty. Income inequality has increased
in recent decades, and large tax cuts that disproportionately favor the
very wealthy are predicted to further increase U.S. income inequality.
Actual income inequality and public views about the need to
address the issue are directly related in most developed countries, but
not in the US, where income inequality is larger but the concern is
lower.
Excluding retirees, US market income inequality is comparatively high
(rather than moderate) and the level of redistribution is moderate (not
low). These comparisons indicate Americans shift from reliance on market
income to reliance on income transfers later in life, although less
fully than in other developed countries.
International comparisons vary. In 2019 the CIA ranked the US 39th-worst among 157 countries measured by Gini. While inequality increased after 1981 in two-thirds of OECD countries, most are in the more equal end of the spectrum. The European Union measured 30.8.
The US Gini rating (after taxes and transfers)
puts it among those of less developed countries. The US is more unequal
or on par with countries such as Mozambique, Peru, Cameroon, Guyana and
Thailand.
Across Europe the ratio of post-tax income of the top 10% to that
of the bottom 50% changed only slightly between the mid-1990s and 2019.
Comparative data are available from databases such as the Luxembourg Income Study
(LIS) or the OECD Income Distribution database (OECD IDD), or, when
including developing countries, from the World Bank's Povcalnet
database, or the World Income Inequality Database (WIID), maintained by the United Nations University World Institute for Development Economics Research (UNU-WIDER), or the World Inequality Database (WID).
Reasons for relative performance
One 2013 study indicated that US market income inequality was
comparable to other developed countries, but was the highest among 22
developed countries after taxes and transfers. This implies that public
policy choices, rather than market factors, drive U.S. income inequality
disparities relative to other developed nations.
Inequality may be higher than official statistics indicate in
some countries because of unreported income. Europeans hold higher
amounts of wealth offshore than Americans.
Leonhardt and Quealy in 2014 described three key reasons for
other industrialized countries improving real median income relative to
the US over the 2000-2010 period. In the US:
educational attainment has risen more slowly;
companies pay relatively lower wages to the middle class and poor, with top executives making relatively more;
government redistributes less from rich to poor.
As of 2012 the U.S. had the weakest social safety net among developed nations.
2014
In 2014
Canadian middle class incomes moved higher than those in the US and in
some European nations citizens received higher raises than their
American counterparts. As of that year only the wealthy had seen pay increases since the Great Recession, while average American workers had not.
Policy responses
Debate
continues over whether a public policy response is appropriate to
income inequality. For example, Federal Reserve Economist Thomas Garrett
wrote in 2010: "It is important to understand that income inequality is
a byproduct of a well-functioning capitalist economy. Individuals'
earnings are directly related to their productivity ... A wary eye
should be cast on policies that aim to shrink the income distribution by
redistributing income from the more productive to the less productive
simply for the sake of 'fairness.'" Alternatively, bipartisan political majorities have supported redistributive policies such as the EITC.
Economists have proposed various approaches to reducing income inequality. For example, then Federal Reserve Chair Janet Yellen
described four "building blocks" in a 2014 speech. These included
expanding resources available to children, affordable higher education,
business ownership and inheritance. That year, the Center for American Progress recommended tax reform, further subsidizing healthcare and higher education and strengthening unions as appropriate responses.
Improved infrastructure
could address both the causes and the effects of inequality. E.g.,
workers with limited mobility could use improved mass transit to reach
higher-paying jobs further from home and to access beneficial services
at lower cost.
Proposals that address the causes of inequality include education reform and limiting/taxing rent-seeking. Other reforms include raising the minimum wage, tax reform, and increased stock ownership at lower income levels via a deferred investment program.
Education
Children from higher-income families often attend higher-quality private schools or are home-schooled.
Better teachers raise the educational attainment and future earnings of
students, but they tend to prefer school districts that educate higher
income children.
Parenting assistance
Economist Richard V. Reeves and other researchers point out the "parenting gap"
between high-income and low-income families. High-income families tend
to have resources to pay for assistance like child care and tutors, and
having had economically successful ancestors have culturally inherited
the skills needed to raise economically successful children. Based on
studies of economic outcomes, Reeves recommends, and many governments
fund, home visiting
programs which assist parents in raising healthy children who succeed
in school and are later able to obtain better-paying jobs.
Increasing public funding for services such as healthcare can reduce after-tax inequality. The Affordable Care Act reduced income inequality for calendar year 2014:
"households in the lowest and second quintiles [the bottom 40%]
received an average of an additional $690 and $560 respectively, because
of the ACA ..."
"Most of the burden of the ACA fell on households in the top 1% of
the income distribution, and relatively little fell on the remainder of
households in that quintile. Households in the top 1% paid an additional
$21,000, primarily because of the net investment income tax and the
additional Medicare tax."
Public welfare and infrastructure spending
OECD asserted that public spending is vital in reducing the wealth gap. Lane Kenworthy advocates incremental reforms in the direction of the Nordic social democratic model, claiming that this would increase economic security and opportunity.
Eliminating social safety nets can discourage entrepreneurs by exacerbating the consequences of business failure from a temporary setback to financial ruin.
Income taxes provide one mechanism for addressing after-tax
inequality. Increasing the effective progressivity of income taxes
reduces the gap between higher and lower incomes. However, taxes paid
may not reflect statutory rates because (legal) tax avoidance strategies
can offset higher rates.
PIketty called for a 90% wealth tax to address the situation.
Tax expenditures
Tax expenditures (i.e., exclusions, deductions, preferential tax
rates, and tax credits) affect the after-tax income distribution. The
benefits from tax expenditures, such as income exclusions for
employer-based healthcare insurance premiums and deductions for mortgage
interest, are distributed unevenly across the income spectrum.
As of 2019, the US Treasury listed 165 federal income tax
expenditures. The largest as employer health insurance deductions,
followed by net imputed rental income, capital gains (except
agriculture, timber, iron ore, and coal) and defined contribution
employer pension plans.
Understanding how each tax expenditure is distributed across the income spectrum can inform policy choices.
A 2019 study by the economists Saez and Zucman found the
effective total tax rate (including state and local taxes, and
government fees) for the bottom 50% of U.S. households was 24.2% in
2018, whereas for the wealthiest 400 households it was 23%.
Corporate taxes
Economist Dean Baker
argued that corporate income tax policies have multiple effects.
Increased corporate profits increase inequality by distributing
dividends (mostly to higher income people). Taxing profits reduces this
effect, but it also may reduce investment reducing employment. It also
encourages payers to (often successfully) lobby for increased tax
expenditures, which offsets the inequality reduction and also pushes
corporations to adjust their behavior to exploit them. Professional
lobbying and accounting firms that generally pay well get more business,
at the expense of other workers.
The Economist states that as inequality rises, political will
to help low-paid workers increases, and minimum wages may not be as bad
as some believe.
In a blog post on the Economic Policy Institute's site, they say that raising the federal minimum wage to $15 an hour would decrease income inequality.
A public basic income
provides each individual with a fixed sum from the government, without
consideration of factors such as age, employment, wealth, education,
etc. People who support basic income as a way to reduce income
inequality include the Green Party.
Economic democracy is a socioeconomic philosophy that proposes to shift decision-making power from corporations to a larger group of public stakeholders that includes workers, customers, suppliers, neighbours and the broader public.
Economists Richard D. Wolff and Gar Alperovitz claim that such policies would improve equality.
Monetary policy is responsible for balancing inflation and unemployment.
It can be used to stimulate the economy (e.g., by lowering interest
rates, which encourages borrowing and spending, additional job creation,
and inflationary pressure); or tighten it, with the opposite effects.
Former Fed Chair Ben Bernanke
wrote in 2015 that monetary policy affects income and wealth inequality
in multiple ways, but that responsibility lies primarily in other
areas:
Stimulus reduces inequality by creating or preserving jobs,
which mainly helps the middle and lower classes who derive more of their
income from labor than the wealthy.
Stimulus inflates the prices of financial assets (owned mainly by
the wealthy), but also employment, housing and the value of small
businesses (owned more widely).
Stimulus increases inflation and/or lowers interest rates, which
helps debtors (mainly the middle and lower classes) while hurting
creditors (mainly the wealthy), because they are paid back with cheaper
dollars or reduced interest.
Measurement
Various methods measure income inequality. Different sources prefer Gini coefficients or ratio of percentiles, etc. Census Bureau studies on household and individual income show lower levels than some other sources, but do not break out the highest-income households (99%+) where most change has occurred.
One review describes six possible techniques for estimating
American real median income growth. Estimates for the 1979-2014 period
ranged from a decline of 8% (Piketty and Saez 2003) to an increase of
51% (CBO).
Two commonly cited estimates are the CBO and Emmanuel Saez.
These differ in their sources and methods. Using IRS data for 2011 Saez
claimed that the share of "market income less transfers" received by
the top 1% was about 19.5%. The CBO uses both IRS data and Census data in its computations and reported a lower "pre-tax" figure for the top 1% of 14.6%.
Census Bureau data
The Census Bureau ranks all households by household income based on its
surveys and then divides them into quintiles. The highest-ranked
household in each quintile provides the upper income limit for that
quintile.
Census data reflects market income without adjustments, and is not
amenable to adjustment for taxes and transfers. Because census data does
not measure changes in individual households, it is not suitable for
studying income mobility.
A major gap in the measurement of income inequality is the exclusion of capital gains,
profits made on increases in the value of investments. Capital gains
are excluded for purely practical reasons. The Census doesn't ask about
them, so they can't be included in inequality statistics.
Obviously, the rich earn much more from investments than the poor. As a
result, real levels of income inequality in America are much higher than
the official Census Bureau figures would suggest.
Gary Burtless
noted that for this reason census data overstated the income losses
that middle-income families suffered in the Great Recession.
Internal Revenue Service data
Saez and Piketty pioneered the use of IRS data for the analysis of income distribution in 1998.
GDP distribution
Another approach attempts to allocate GDP to individuals, to
compensate for the 40% of GDP that does not appear on tax returns. One
source of the disagreement is the growth of tax-free retirement
accounts, such as pension funds, IRAs and 401Ks. Another source is tax evasion, whose distribution is also disputed.
Income measures: pre-and post-tax
Inequality
can be measured before and after the effects of taxes and transfer
payments such as social security and unemployment insurance.
Measuring inequality after accounting for taxes and transfers
reduces observed inequality, because both the income tax system and
transfer systems are designed to do so. The impacts of those polieices
varies as the policy regime changes. CBO reported in 2011 that: "The
equalizing effect of transfers declined over the 1979–2007 period
primarily because the distribution of transfers became less progressive.
The equalizing effect of federal taxes also declined over the period,
in part because the amount of federal taxes shrank as a share of market
income and in part because of changes in the progressivity of the
federal tax system."
CBO income statistics show the growing importance of these items.
In 1980, in-kind benefits and employer and government spending on
health insurance accounted for just 6% of the after-tax incomes of
households in the middle one-fifth of the distribution. By 2010 these
in-kind income sources represented 17% of middle class households'
after-tax income. Post-tax income items are increasing faster than
pre-tax items. As a result of these programs, the spendable incomes of
poor and middle-class families have been better insulated against
recession-driven losses than the incomes of Americans in the top 1%.
Incomes in the middle and at the bottom of the distribution have fared
better since 2000 than incomes at the very top.
Continuing increases in transfers, e.g., resulting from the Affordable Care Act, reduced inequality, while tax changes in the Tax Cuts and Jobs Act of 2017 had the opposite effect.
CBO, incorporates capital gains.
Demographic issues
Comparisons
of household income over time should control for changes in average
age, family size, number of breadwinners, and other characteristics.
Measuring personal income ignores dependent children, but household income also has problems – a household of ten has a lower standard of living than one of two people, though their incomes may be the same.
People's earnings tend to rise over their working lifetimes, so
point-in-time estimates can be misleading. (A world in which each person
received a lifetime of income on their 21st birthday and no income
thereafter would have an extremely high Gini, even if everyone received
the exact same amount. Real-world incomes also tend to be spiky,
although not to that extreme.) Some 11% of households eventually appear in the 1% at some point.
The inequality of a recent college graduate and a 55-year-old at the
peak of his/her career is not an issue if the graduate has the same
career path.
Conservative researchers and organizations have focused on the
flaws of household income as a measure for standard of living in order
to refute claims that income inequality is growing, is excessive or
poses a problem.
According to a 2004 analysis of income quintile data by The Heritage Foundation,
inequality is less after adjusting for household size. Aggregate share
of income held by the upper quintile (the top earning 20 percent)
decreases by 20.3% when figures are adjusted to reflect household size.
However the Pew Research Center found household income declined
less than individual income in the twenty-first century, because those
no longer able to afford separate housing moved in with relatives,
creating larger households with more earners.
A 2011 CBO study adjusted for household size so that its quintiles
contain an equal number of people, not an equal number of households. CBO found income distribution over a multi-year period "modestly" more equal than annual income, confirming earlier studies.
According to Noah, adjusting for demographic factors such as
increasing age and smaller households, indicates that income inequality
is less extreme but growing faster than without the adjustment.
The Gini coefficient was developed by Italian statistician and sociologistCorrado Gini and published in his 1912 paper Variability and Mutability (Italian: Variabilità e mutabilità).
Gini ratings can be used to compare inequality (by race, gender,
employment) within and between jurisdictions, using a variety of income
measures and data sources, with differing results. For example, the Census Bureau's official market Gini for the US was 47.6 in 2013, up from 45.4 in 1993. By contrast, OECD's US adjusted compensation Gini was 37 in 2012.
Other indicators of inequality
Income, however measured, is only one indicator of equality. Others include equality of opportunity, consumption and wealth.
Other
researchers argued that income is less important than consumption. Two
individuals (or other units) who consume the same amount have similar
outcomes despite differences in their incomes. Consumption inequality is
also less extreme. Will Wilkinson wrote, "the run-up in consumption inequality has been considerably less dramatic than the rise in income inequality". According to Johnson, Smeeding and Tory, consumption inequality was lower in 2001 than in 1986.Other studies have not found consumption inequality less dramatic than household income inequality. A CBO study found consumption data not capturing consumption by high-income households as well as it does their incomes, though it found that household consumption numbers are less unequal than household income.
Others dispute the importance of consumption, pointing out that
if middle and lower incomes are consuming more than they earn, it is
because they are saving less or going deeper into debt. Alternatively, higher income persons may be consuming less than their income, saving/investing the balance.
The average personal wealth of people in the top 1% is more than a thousand times that of people in bottom 50%.
The logarithmic scale shows how wealth has increased for all percentile groups, though moreso for wealthier people.
Wealth inequality
refers to the distribution of net worth (i.e., what is owned minus what
is owed) as opposed to annual income. Wealth is affected by movements
in the prices of assets, such as stocks, bonds and real estate, which
fluctuate over the short-term. Income inequality has significant effects
over long-term shifts in wealth inequality. Wealth inequality is
increasing:
The top .1% owned approximately 22% of the wealth in 2012,
versus 7% in 1978. The top 1% share of wealth was at or below 10% from
1950 to 1987. A conflicting estimate found that they held some 15%.
The top 400 Americans had net worth of $2 trillion in 2013, more than the bottom 50%. Their average net worth was $5 billion.
The lower 50% of households held 3% of the wealth in 1989 and 1% in
2013. Their average net worth in 2013 was approximately $11,000.
The threshold for the wealthiest 1% was approximately $8.4 million
measured for the 2008–2010 period. Nearly half the top 1% by income were
also in the top 1% by wealth.
In 2010, the wealthiest 5% of households owned approximately 72% of
financial wealth, while the bottom 80% of households had 5%.
The top 1% controlled 38.6% of the country's wealth in 2016.
Much of the wealth gain came to those in the top 1%. Those between
the top 1 percent and top 5 percent controlled a smaller percent of
wealth than before.
Education and family structure
Ivy-Plus
university admissions rates vary with the income of the students'
parents, with the acceptance rate of the top 0.1% income percentile
being almost twice as much as other students.
A
1916 ad for a vocational school appealed to Americans' belief in the
possibility of self-betterment, as well as threatening economic
insecurity through lack of education.
Pundit David Brooks
argued that in the 1970s, high school and college graduates had "very
similar family structures", while later high school grads were much less
likely to get married, and much more likely to smoke, be obese, get
divorced, and/or become a single parent.
"The zooming wealth of the top one percent is a problem, but it's not
nearly as big a problem as the tens of millions of Americans who have
dropped out of high school or college. It's not nearly as big a problem
as the 40 percent of children who are born out of wedlock. It's not
nearly as big a problem as the nation's stagnant human capital, its
stagnant social mobility and the disorganized social fabric for the
bottom 50 percent."
Hollowing out of the Middle Class
Hollowing out of the middle class refers to its loss in income share beginning with Reaganomics.
The middle class is defined as the middle 20% of the income
distribution, i.e. those between the 40th and 60th percentile. In 1980
the middle class earned 17% of total income in the United States.However, by 2019 its share decreased to 14%, a drop of 3%. Another way
to see this is that in 1980 the share of the middle class was the same
as that of the top 5% but by 2019 the top 5% was 9 percentage points
ahead of the middle class.
Opinions of notable individuals
Although some spoke out in favor of moderate inequality as a form of incentive, others warned against excessive levels of inequality, including Robert J. Shiller, (who called rising economic inequality "the most important problem that we are facing now today"), former Federal ReserveBoard chairmanAlan Greenspan, ("This is not the type of thing which a democratic society – a capitalistdemocratic society – can really accept without addressing"), and PresidentBarack Obama (who referred to the widening income gap as the "defining challenge of our time").
United Nations special rapporteurPhilip Alston,
following a fact finding mission to the United States in December 2017,
said in his report that "the United States already leads the developed
world in income and wealth inequality, and it is now moving full steam
ahead to make itself even more unequal."
Alan Krueger summarized research studies in 2012, stating that as income inequality increases:
Income shifts to the wealthy, who tend to consume less of each
marginal dollar, slowing consumption and therefore economic growth;
Income mobility falls: parents' income better predicts their children's income;
Middle and lower-income families borrow more to maintain their consumption, a contributing factor to financial crises; and
The wealthy gain more political power, which results in policies that further slow economic growth.
Many economists claim that America's growing income inequality is "deeply worrying", unjust, a danger to democracy/social stability, or a sign of national decline. NobelistRobert Shiller
after receiving the award stated, "The most important problem that we
are facing now today, I think, is rising inequality in the United States
and elsewhere in the world." Piketty warned, "The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century's globalized economy." Angus Deaton
asserts that the prevailing orthodoxy which promotes the idea of
unfettered free markets and limited government intervention helped to
establish a predatory capitalist system in the US that enriches
corporations and the wealthy at the expense of the working class.
Others claim that the increase is not significant, that America's economic growth and/or equality of opportunity should be the primary focus, that rising inequaity is a global phenomenon that would be foolish to try to change through US domestic policy, that it "has many economic benefits and is the result of ... a well-functioning economy", and has or may become an excuse for "class-warfare rhetoric". They argue against "redistribution of wealth",
instead advocating for "sound economic policy to reduce poverty [which]
would lift people out of poverty (increase their productivity) while
not reducing the well-being of wealthier individuals".