The Economics and Politics of Contemporary Inequality, Part 1

Barring some unforeseeable event, Mitt Romney is virtually certain to be the GOP nominee for president. Judging by President Obama’s decision to make inequality a main theme of his State of the Union address, the White House has been counting on facing Romney. More than anyone else in national politics, Mitt Romney’s own deeds and words may be said to embody the dynamics which define the top end of contemporary inequality. He spent his adult life accumulating capital assets, he deployed those assets to earn higher returns than those available to middle-class people, and he took aggressive advantage of the highly favorable tax treatment accorded those assets.

Even so, why have wealth and economic inequality become powerful political issues today, when the fortunes of John Kennedy, both George Bushes, John Kerry, and even the billionaire Ross Perot did not? The big difference, of course, is timing. For one, the rich have become much richer, both absolutely and relatively. In 2007, the top 1 percent took home 23.5 percent of all of the income earned in the United States. That’s the same share the top 1 percent claimed in 1928. But for the next half-century, the income share of the top 1 percent fell slowly but steadily, reaching less than 9 percent of national income in 1976. Throughout those years, the incomes of everyone else grew faster than the incomes of those at the top, creating a vast American middle class. But since 1976, incomes at the top have once again grown faster than everyone else’s incomes, restoring their pre-Depression share.

That still doesn’t explain why the very rich in politics inspire so much more wariness and anger today than just 12 years ago, when George W. Bush’s wealth didn’t faze most Americans — and unlike Romney, he didn’t even earn it. After all, one standard liberal meme cites the data on median incomes in 1976 and 2010 to insist that most Americans have stagnated economically for 35 years. Behind those two data points, however, lies a more complicated reality which shows that most Americans did make real economic progress — until the last decade.

First of all, everybody ages; and as we do, most of us see our incomes move from somewhere below the median to somewhere above it. Moreover, real median incomes did increase at respectable rates throughout the expansions of both the 1980s and 1990s, although the recessions which followed took back some of those gains. From 1983 to 1989, real median income increased more than 2 percent per-year, before giving back nearly half of those gains in the 1990–1991 recession and its aftermath. It happened again from 1993 to 1999, when median income rose by nearly 2.5 percent per-year, and then gave back 30 percent of those gains in the 2001 recession and the following three years.

The reason Americans seem so much more skeptical of the very wealthy today, is that this pattern has broken down. Not only did median income fall for three more years after the 2001 recession, that was followed by annual gains of barely 1 percent from 2004 through 2007. Moreover, the 2008–2009 recession and the year following it took back all of those gains, twice over. The result is that by 2010, median income was back to levels last seen in 1996 and 1989.

Also, while the recessions of the 1980s and 1990s drove down median income, those losses were fairly concentrated near the bottom and at the top. The people most likely to lose their jobs in recessions are those in the second and third income quintile, and their incomes fall fairly sharply. At the top, most income comes from financial assets. And since recessions drive down both stock markets and interest rates, they cut sharply into and the capital gains, dividends and interest that especially enrich the top 1 percent. So, for example, the 1990–1991 recession and the initially slow recovery that followed cost an average household in the second income quintile more than 2 percent of their annual incomes. Moreover, the average household in top 1 percent saw their annual capital income fall by nearly 20 percent. In between, most Americans kept their jobs and held on to most of their incomes gains from the 1980s and 1990s.

So, from 1983 to 2000, the average income of the first three income quintiles — covering the less affluent 60 percent of Americans — grew steadily by an average of 1.3 percent per-year. People in the fourth income quintile — the equivalent of a $90,000 income today — did better. They registered average income gains of nearly 1.7 percent per-year from 1983 to 2000. Households in top-earning quintile did better still, with annual income gains of more than 4 percent from 1983 to 2000. And consistent with the top 1 percent’s outsized share of total income, those households way outpaced everyone else: Their incomes grew by nearly 10 percent per year from 1983 to 2000.

After 2000, most people’s gains first turned to losses, then grew slowly for a few years, and then fell back sharply in the 2007–2009 recession. But once again, the story is different for those at the top. To be sure, the incomes of the top 1 percent fell by nearly 30 percent from 2000 to 2002, along with stock and bond markets. From 2003 to 2006, however, those markets recovered, and the incomes of the top 1 percent increased 65 percent. More recent income data for the very wealthy are not yet publicly available. But while everyone else struggles to regain their financial footing, the top 1 percent has seen the S&P 500 and other market indexes already recover. And if all of this wasn’t enough to make Americans pause before making one of the country’s richest men the president, federal tax changes pressed by presidents over the same period have exacerbated the inequalities. That will be our topic for next week’s blog.

John Kennedy famously reminded us that life can be unfair. JFK’s focus, unsurprisingly, was on matters of greater import than wealth: To illustrate that “[t]here is always inequality in life,” he notes, “[s]ome men are killed in a war, and some men are wounded, and some men never leave the country. Life is unfair.” Mitt Romney has had a lion’s share of extraordinarily good luck in his life. Now, he will have to make his run for president at a time — perhaps the first such time in generations — when millions of Americans will be very wary of a candidate who grew rich while everyone else struggled just to hold on.