In Part I, statistics led to the conclusion that the lower-income population has not benefited in any significant way from the policy of trickle-down economics, a finding which upends the moral justification for that policy. And it is at least open to serious question whether reduced taxes for the wealthy contribute much or anything to economic growth, which means the economic justification for the policy is also on shaky ground.
In Part II, I will discuss (1) the extent of our economic inequality, (2) its causes, including if or how reduced taxes for the wealthy contributes to that inequality, and (3) the question of whether existing upward economic mobility and opportunity, or other factors, make significant and growing inequality morally acceptable.
The extent of the inequality
Facts being facts, it is generally agreed that the economic inequality that exists is very wide and growing. I can thus be relatively brief in providing corroborating evidence in wage and wealth levels.
As for wages, I find the following a dramatic indication of wage trends and of the transformation of the American economy over the years: from 1948 to 1979 American productivity was up 97%, and the corresponding wages and benefits for production/nonsupervisory workers increased 91%. However, between 1979 and 2013, productivity was up 74% but corresponding wage and benefit increases for the same class of workers was up just 9%. So where did the growth in productivity end up? Yes, in profits and capital and business owners, but much of it went to the top wage earners: Between 1979 and 2017, the wages of the bottom 90% increased by 22%, the top 1% by 158%, and the top 0.1% by 343% (“Decades of Rising Economic Inequality in the U.S.,” Economic Policy Institute, 2019).
Another study found that between 1978 and 2018, CEO compensation increased by more than 900%, while worker compensation increased by just 11.9% (“The U.S. Inequality Debate,” Council on Foreign Relations, 2020). While proponents and fans of trickle-down economics can point to increases at the bottom, what these statistics show us is that the fruits of economic growth are being shared at starkly different levels. Besides, we showed in Part I, that the gains among lower-income individuals or households do not mark a significant economic improvement for them, given their low level of wages to begin with; and as we shall see next, the gains have not been sufficient for them to enjoy more wealth or net worth. As it is often said, income allows a family to get by; wealth allows it to get ahead.
A family’s net worth, or wealth, is its assets; for example, 401(k)s and real estate—minus what is owed on mortgages, credit cards, and student loans. According to a report by the St. Louis Federal Reserve Bank (“What Wealth Inequality in America Looks Like,” 2019), from 1989 to 2016, the percent of wealth in the hands of the top 10% went up from 67% to 77%; the percent of wealth fell from 30% to 22% for those in the top 10 – 50%; and for the bottom 50% of wealth holders, their share of wealth fell from 3% to 1%. And worse, one out of 10 families in that last group had a negative net worth.
Between 1983 and 2016, the top one percent of households received 45 percent of the total growth in net worth, while the top 20 percent got close to 100% of that growth.
To look at this from somewhat different perspectives, between 1983 and 2016, the top one percent received 45 percent of the total growth in net worth, while the top 20 percent got close to 100 percent of that growth. (“Household Wealth trends in the United States, 1962 to 2016, National Bureau of Economic Research, 2017) To get an idea of just how much growth in net worth that can be at issue, 9 of the top U.S. billionaires in this year of COVID-19 increased their wealth by 360 billion dollars (“The Billionaire Boom,” Washington Post, March 12, 2021). In one year, and in a year when many were suffering economic setbacks, to put it mildly. I just find this unimaginable. And finally, it should perhaps also be mentioned that the picture of inequality in the U.S. is not improved by comparing it to other countries with developed economies. This is measured by what is called a Gini coefficient; the higher the Gini number the higher the inequality. The U.S. Gini coefficient was higher than all other OECD nations in 2017 except Chile, Mexico, and Turkey (OECD statistics).
At least at first blush, it would seem most Americans are not sharing meaningfully in the proceeds from economic growth. Again at first blush, this phenomenon seems disturbing, unfair and not in line with what is morally commendable. Proponents of the trickle-down economy, however, say that our economic opportunity and upward mobility rates are sufficiently high to render inequality neither a negative or a moral issue. We will explore that issue later on, after looking at the causes of inequality.
The causes of inequality
In the literature one can find various causes believed to contribute to inequality. Among the most common are globalization, technological development with automation causing loss of middle-skill jobs, decline in union membership and power, pressure on companies from Wall Street to maximize profits for shareholders, foreign competition and trade policies, tax policies such as significantly reduced taxes on the wealthy, deregulation, differences in educational levels, and superstar status for CEOs.
Economists differ on which causes they regard as most important or even on which causes they include in their analyses. Some of their discussions focus on inter-country vs intra-country inequality. Much of the literature targets causes rather than solutions. Sometimes inequality is thought of as a problem, other times not. It is no doubt a complex issue.
However, important to this context is that there is evidence to include trickle-down economics as a contributing factor to inequality. In fact, a major, recent study referred to in Part I indicating a lack of connection between significant reduction of tax on the wealthy and economic growth in the 18 OECD countries studied also analyzed the relation between such tax reductions and inequality. Looking at trends in the five years before significant tax reductions to make sure other factors were not at play, the authors concluded that there was significant growth of income inequality in the five years after major tax reductions for the wealthy, as measured by the top 1% share of pre-tax national income (“The Economic Consequences of Major Tax Cuts for the Rich,” research conducted by David Hope and Julian Limberg for an institute at the London School of Economics).
Another recent paper cautioned economists and others from focusing on globalization as the main culprit (Ravallion, Martin. 2018. “Inequality and Globalization: A Review Essay.” Journal of Economic Literature, 56 (2): 620-42). While on average, he argues, inequality is up globally, there are many exceptions and the picture is far from uniform among developed countries and there can be ups and downs in inequality rates within a country. He concludes from this pattern that it is the policies of a country that help to explain these differences: as nations adopt stances on education and health policies, minimum wages, taxes, social programs, and basic incomes, they can mitigate or exacerbate the effects of globalization. The importance of this is that countries are not passive victims of inequality; if they desire to mitigate, there are ways to do so, including raising taxes on the wealthy.
Is the existing inequality morally acceptable?
Given the abundant evidence of sizable and increasing inequality, proponents of trickle-down economics resort to argue that the situation is acceptable because the U.S. maintains upward economic mobility and opportunity. Does it, though, or does it to a sufficient degree? What chances do children have to earn more than their parents and ascend the economic ladder over the course of their lifetime?
An extensive, recent study indicates that “the United States is very immobile.” Children raised in low-income families, it concluded, will generally have very low incomes as adults, while children raised in high-income families can anticipate very high incomes as adults. The differences are extreme: The expected income of children raised in well-off families (90th percentile) is about 200 percent larger than the expected income of children raised in poor families (10th percentile) and about 75 percent larger than that of children raised in middle-class families (50th percentile) (“Economic Mobility in the United States,” Pablo Mitnik and David Grusky, research associate and director respectively of Stanford University’s Poverty and Inequality Center, 2015).
Sure, exceptions exist; but according to this study, what children can expect for income reflects what their parents earn. In other words, there is little mobility and a lack of anything approaching equal opportunity in the U.S. This study was able to overcome limitations of previous research through the use of new information based on tax data and other administrative sources developed by the Statistics of Income Division of the Internal Revenue Service. And we have already noted, the U.S. has higher levels of immobility than almost all other OECD countries.
Moreover, not only are our mobility rates low, they have declined: Over 90% of Americans born in 1940 ended up with higher incomes, adjusted for inflation, than that of their parents at the same age. Only half of those of those born in 1980 have done so (“The Fading American Dream: Trends in Absolute Income Mobility Since 1940,” Raj Chetty and others, 2017). That is not going to be a surprise to most Americans, but what is hugely important was another finding of this study: Because a large fraction of the growth in the GDP [Gross Domestic Product] goes to a small fraction of high-income households today, higher GDP growth does not substantially increase the number of children who earn more than their parents. Such a finding completely undercuts the argument for trickle-down economics.
Because a large fraction of the growth in the GDP [Gross Domestic Product] goes to a small fraction of high-income households today, higher GDP growth does not substantially increase the number of children who earn more than their parents. Such a finding completely undercuts the argument for trickle-down economics.
Inequality thus affects mobility rates: as Miles Corak concludes from his research, “inequality lowers mobility because it shapes opportunity. It heightens the income consequences of innate differences between individuals; it also changes opportunities, incentives, and institutions that form, develop, and transmit characteristics and skills valued in the labor market; and it shifts the balance of power so that some groups are in a position to structure policies or otherwise support their hat some groups are in a position to support their children’s achievement independent of talent. (“Income Inequality, Equality of Opportunity, and Intergenerational Mobility,” 2013).
Two more points before drawing conclusions: First, the role of housing patterns in the decline of upward mobility. Inequality is driving increasing residential segregation by income. The shares of families in neighborhoods of concentrated poverty and neighborhoods of concentrated wealth both more than doubled between 1970 and 2009, while the share of families in middle-income neighborhoods declined from 65 percent to 42 percent. Those high-poverty neighborhoods—where more and more families are living—do not generally provide an environment or advantages that favor upward mobility (“Inequality Matters,” The Atlantic, June 5, 2015). As Chetty observes, given that place matters for mobility, we would expect children who move from a low-mobility area to a higher-mobility area to do better in life. And they, in fact, do. The benefits are observable in earnings, education, and marriage rates (The Impacts of Neighborhoods on Intergenerational Mobility I: Childhood Exposure Effects, 2017).
And second, the role of education in mobility. Of course, traditionally, college could serve as a path forward to upward mobility. And its potential is still routinely touted. However, income inequality has even affected the college educated: 60 percent of workers with a college degree still have lower wages than they did in 2000. Growing inequality is not being driven by a differential in wages between college and high school graduates but between top earners relative to the vast majority of workers (“Higher returns on education can’t explain growing wage inequality,” Gould, 2019).
While the college income premium over a lifetime of earnings still exists, it has been reduced. Moreover, the college wealth premium is declining more precipitously. White college graduates born in the 1930s had 247% greater net worth than non-college graduates, but only 42% greater net worth for those born in the 80s. The premium for black college graduates has fallen to zero, and that is a significant problem. What is driving this decline in part is more consumer debt and loans to pay for high college costs.
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In conclusion, then, there is markedly insufficient upward mobility in the U.S. to compensate for inequality and render it morally acceptable. Indeed, our analysis has not only shown that upward mobility and opportunity are declining, but that inequality is a driver of the decline.
And in Part I we saw that the economy has not produced wage and wealth gains for those in the lower quintiles that are significant enough to justify morally the trickle-down economy and such policies as significantly reduced taxes for the wealthy. We found also that it is far from certain that such policies are economically justified since it is unclear that they actually create a robust economy.
What we need to do economically and morally is to find ways to reduce the inequality that has been spawned. Approaches have been suggested; there just has to be the will to do something. Many people think that the inequality is too large, but they do not see it as a priority issue. But in fact, we have seen that it explains why the majority of wage earners are suffering in this economy, but many are not seeing the connection. Indeed, a large group of those whose wages and net worth have been pretty much stagnant or even falling are feeling left out and resentful of government attempts to provide assistance to those even worse off at the poverty level.
The big question is whether we can step back and agree to come together to seek the common good, without resorting to partisanship, soundbites, and resentment. An admittedly tall order in this environment. In my book I suggested how moral education can prepare citizens for such an approach (Nurturing Decent Human Beings: The Case for Moral Education in Our Schools), but that would only be helpful in the long run. The need for change is right now.