Did inequality really surge in the US from the 1970s? Did earnings for the majority really flatline from the bicentennial?
Recently, there has been a fair amount of pushback on these two cornerstones of the new inequality narrative. The academic criticism of Piketty never ends. Revising the cost of living index and allowing for non-wage income makes a big difference to whether or not you think the standard of living of the median American household has improved or not.
But the problem and the questions about it are not going away. Recently, two important new articles about inequality in the US restate the scale of the inequality problem and reaffirm the basic narrative, which points to the 1970s and 1980s as a moment of break.
To do so, both make use of an important source the Survey of Consumer Finances: This is fascinating because it is based not on separate series for income and wealth, but on a sequence of snapshots of a households overall financial situation including both income and wealth position. So income and wealth data can be linked.
Kuhns, Schularick and Steins (all at Bonn University) have a paper – “Income and Wealth Inequality in America, 1949-2016″ – that tracks inequality back to World War II using the survey.
For me four things stand out from its conclusion:
Yes there was a dramatic surge in income inequality in the US from the 1970s to the 1980s.
In addition, there was also a significant increase in wealth inequality in the wake of the financial crisis of 2008 and its aftermath. Between 1949 and 2000 the development of wealth across the distribution ran broadly in parallel. That at the bottom began to fall behind seriously from 2000. After 2008 only those at the top have recovered well.
Underlying these dynamics in the general pool there is striking evidence for the failure of black Americans to make progress in relation to the white population. The huge black-white income and wealth gaps are essentially static in relative terms since 1949. There are some cyclical fluctuations but these are offset by the severe impact on black households of shocks like those in the 1970s and 1980s and 2008.
Since these are data not for individuals but households they fully account for changes in working patterns, female labour market participation and the mass incarceration of African-American men.
In addition the data show what a huge difference it makes whether you have any wealth to start with and how that wealth is invested. The bottom half of the distribution have negligible wealth or negative net worth. For those who have some assets the crucial question is whether they are diversified, or held essentially in the form of housing. For the vast majority of households their family home is the only marketable asset, this leaves them extremely vulnerable to fluctuations in the housing market.
It is, to say the least, not a recipe for stable long-term accumulation. This is reserved for those at the top of the wealth distribution who can hold a wider array of financial assets and benefit from longer run trends in accumulation.
Kuhns, Schularick and Steins describe what they call a “race between the stock market and the housing market”. Since the crisis it is the ability of the upper wealth groups to benefit from the surge in non-housing asset prices that has seen their share of total wealth rise dramatically:
Another important new study also draws on Surveys of Consumer Finance, this time from 1989 and also with a view to combining multiple dimensions of inequality. Jonathan Fisher (Stanford University). David Johnson (University of Michigan), Timothy Smeeding (University of Wisconsin Madison) and Jeffrey Thompson (Board of Governors of the Federal Reserve System) bring together not just income and wealth but consumption too.
As the authors show, their data for income and wealth track those used by Piketty and Saez well. To link consumption estimates to income and wealth requires some further fancy footwork.
In so doing they make a powerful argument for a multi-dimensional view of inequality
As the authors put it with regard to wealth: “The stock of wealth is more than just an annuitized income flow, as it represents the power to consume, the power to self-insure, and the power to transfer wealth across generations.”
It is an approach that Stiglitz, Sen, and Fitoussi proposed in (2009) suggesting that “the most pertinent measures of the distribution of material living standards are probably based on jointly considering the income, consumption, and wealth position of households or individuals.”
There are two types of question that pertain to multi-dimensional inquality: (1) how tightly do the three measures overlap? To what extent do low income high spenders and cash strapped aristos offset the monolithic closure of income-wealth and consumption? (2) what share of income, wealth and consumption, does the privileged hard core (those who score high on all three dimension) command?
This approach is obvious for anyone who comes from a background in sociology or political economy. The reason that economists are becoming involved is that in business-cycle models it is important to recognize how households with different budget constraints respond to shocks. Some will be able to buffer shocks. Others will not. Some will respond with a large surge in demand to increases in income or wealth. Others will not. If inequality changes, so do the response functions of household consumption.
What the analysis of the data found is that:
“In 1989 1.7 percent of households were in the top 5% of income, consumption, and wealth (Figure VI), well below the percent of households in the top 5% of two of these three measures. By 2007 the share in the top 5% of all three measures increased to 2.5 percent, which is comparable to the percent of households in the top 5% of any two measures in 1989. Inequality in three dimensions in 2007 equaled the level of inequality in two dimensions in 1989. Another way to relate these results is that half of the households in the top 5% of one measure in 2007 are in the top 5% of all three measures. The top 5% was a much more exclusive group in 2007 than it was in 1989. Since 2007, the percent of households in the top 5% of all three measures declined to 2.2 percent, but it still exceeds the 1989 level. The decline in the percent of households in the top 5% of all three measures indicates that the Great Recession uncoupled some of the relationship between income, consumption, and wealth”
As regards the second question: how much income, wealth and consumption the inner core of the privileged command the answers are even more unambiguous: “Reflecting what we saw in the two-dimensional shares, the share of income received by those in the top 5% of consumption and wealth increased faster between 1989 and 2016 than the own share of income. Those in top 5% of consumption and wealth increased their share of income by 64 percent. The income own share increased by 15 percent.”
If we bring all three dimensions into play simultaneously the result is even stronger:
“The share of consumption for those in the top 5% of income and wealth increased 81 percent since 1989 (Figure VII). The share of wealth for those in the top 5% of both income and consumption increased 56 percent since 1989. These findings represent an increase in inequality in three dimensions and an increase in three-dimensional inequality that exceeds increases in two-dimensional and one-dimensional inequality.”
The result is stark: “Those in the top 5% of consumption and wealth had mean income of $668,000 in 2016, which is higher than mean income of those in the top 5% of income (Table II). Similarly, those in the top 5% of income and wealth had higher mean consumption ($257,000) than those in the top 5% of consumption ($240,000). The difference is even more dramatic for wealth, with the top 5% of income and consumption holding $10.7 million in wealth on average, compared to $8.9 million for the top 5% of the wealth distribution.” If those numbers seem outrageous to you it is because they are means not medians and thus distorted by the enormous incomes and wealth of those in the top fraction of 1 %.
After performing this analysis on those in the top 5 % the authors also present preliminary results on developments in multi-dimensional inequality across the distribution. At the bottom of the distribution there is very little action. The bottom of the American social hierarchy, has no wealth and its income and consumption share are low and also broadly static. The real action is in the middle of the distribution:
“The middle quintile continued its pattern of losing shares. The biggest losses for the middle quintile were in wealth (Figure IX). The share of consumption for the middle quintile of income and the middle quintile of wealth fell 15 percent and 14 percent. Shares of wealth fell even more, with the share of wealth held by the middle quintile of income and the middle quintile of consumption falling by 49 percent and 46 percent (Figure IX). These changes in wealth shares were primarily focused around the two financial crashes, between 1998 and 2001 and between 2007 and 2010. The middle quintiles lost shares of wealth during both of these financial crashes and never recovered. The patterns for the middle quintile persist into the fourth quintile.”
As the authors conclude: “Viewing inequality through one dimension greatly understates the level and the growth in inequality in two and three dimensions. The conclusion is that the U.S. is becoming more economically unequal than is generally understood.”