For the true believers in laissez faire economic policy, the recent and ongoing national discussion over income and wealth inequality probably seems like it was started as a cynical ploy for those on the left to gain a political advantage. After all, if rising inequality is a problem, you would be hard pressed to find any solutions offered by the right wing.
It would be laughable to argue that left-leaning politicians aren’t using the issue for political advantage. But focusing on that fact alone misses one of the main reasons we have begun to pay more attention to inequality, which is the fact that we have better tools for measuring and understanding inequality than ever before. This is thanks to the work of economists like Emmanuel Saez and Gabriel Zucman, who have dedicated their careers to compiling and analyzing wealth and income data. Without these numbers, advocates for concerted effort to combat inequality would have no foundation for their argument.
Saez and Zucman released another working paper this week, which studies capitalized income data to get a picture of how wealth inequality in America, rather than income inequality, has evolved since 1913. (Income inequality describes the gap in how much individuals earn from the work they do and the investments they make. Wealth inequality measures the difference in how much money and other assets individuals have accumulated altogether.) In a blog post at the London School of Economics explaining the paper, Saez and Zucman write:
There is no dispute that income inequality has been on the rise in the United States for the past four decades. The share of total income earned by the top 1 percent of families was less than 10 percent in the late 1970s but now exceeds 20 percent as of the end of 2012. A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs. But is the rise in U.S. economic inequality purely a matter of rising labor compensation at the top, or did wealth inequality rise as well?
The advent of the income tax has made measuring income much easier for economists, but measuring wealth is not as easy. To solve the problem of not having detailed government records of wealth, Saez and Zucman developed a method of capitalizing income records to estimate wealth distribution. They write:
Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratization of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1 percent increasing to 22 percent in 2012 from 7 percent in the late 1970s. The top 0.1 percent includes 160,000 families with total net assets of more than $20 million in 2012.
Saez and Zucman show that, in America, the wealthiest 160,000 families own as much wealth as the poorest 145 million families, and that wealth is about 10 times as unequal as income. They argue that the drastic rise in wealth inequality has occurred for the same reasons as income inequality; namely, the trend of making taxes less progressive since the 1970s, and a changing job market that has forced many blue collar workers to compete with cheaper labor abroad. But wealth inequality specifically is affected by a lack of saving by the middle class. Stagnant wage growth makes it difficult for middle and lower class workers to set aside money, but Saez and Zucman argue that the trend could also be a product of the ease at which people are able to get into debt, writing:
Financial deregulation may have expanded borrowing opportunities (through consumer credit, home equity loans, subprime mortgages) and in some cases might have left consumers insufficiently protected against some forms of predatory lending. In that case, greater consumer protection and financial regulation could help increasing middle-class saving. Tuition increases may have increased student loans, in which case limits to university tuition fees may have a role to play.
So, why should we care that wealth inequality is so much greater than even the historic levels of income inequality? While inequality is a natural result of competitive, capitalist economies, there’s plenty of evidence that shows that extreme levels of inequality is bad for business. For instance, retailers are once again bracing for a miserable holiday shopping season due mostly to the fact that most Americans simply aren’t seeing their incomes rise and have learned their lesson about the consequences of augmenting their income with debt. Unless your business caters to the richest of the rich, opportunities for real growth are scarce.
Furthermore, there’s reason to believe that such levels of inequality can have even worse consequences. The late historian Tony Judt addressed these effects in Ill Fares the Land, a book on the consequences of the financial crisis, writing:
There has been a collapse in intergenerational mobility: in contrast to their parents and grandparents, children today in the UK as in the US have very little expectation of improving upon the condition into which they were born. The poor stay poor. Economic disadvantage for the overwhelming majority translates into ill health, missed educational opportunity, and—increasingly—the familiar symptoms of depression: alcoholism, obesity, gambling, and minor criminality.
In other words, there’s evidence that rising inequality and many other intractable social problems are related. Not only is rising inequality bad for business, it’s bad for society, too.