If you feel that you are not receiving your share of America’s treasure, then you are not alone. Data on income and wealth from the US show that as the American economy develops, both income and wealth become increasingly concentrated into the hands of the richest Americans. For example, since 1967 the share of income earned by each quintile of households defined by income, except the quintile of highest income earners, has fallen (see graph 1.) This means that you are probably one of the many income earners, a full 80 percent, who has seen your share of our bountiful American output fall. This is explicit when you compare the top 20 percent of income earners to the bottom 80 percent (see graph 2.) In fact, not only has the share of income earned by the bottom 80 percent of households fallen, but the income earned by the top 20 percent has reached parity with that of the entire bottom 80 percent of income earners!
Wealth data suggest the same trend as income data. Since 1989 the share of total US wealth owned by the wealthiest 10 percent has increased from 67 percent to 71 percent (see graph 3.) Even if you assume away the apparent trend of increasing wealth inequality, ten percent of the US population holding around 70 percent of the wealth is plainly obscene.
These graphs of income and wealth data support the hypothesis that the free-market economy in America produces rising inequality as it develops over time. Fewer and fewer Americans enjoy the benefits of growth that the US economy produces. If the trend continues, and there is no evidence to suggest that it will not, the share of income earned by the highest fifth of households will climb to over 60 percent of total US income within the next 30 years (see graph 4.) This is because the data suggest that the inequality trend has been accelerating over time. Another alarming statistic is the share of income taken by the top five percent of households in terms of income. This share has risen from around seventeen percent of total US income in 1967 to around 21 percent in 2007. Following this trend thirty years out, the share of total US income taken by this top five percent could reach into the high twenties. This would produce even more alarming statistics in the distribution of wealth, pushing the percent of total wealth commanded by the top 10 percent even higher than the current 70 percent.
Beginning from the observation that American economic growth is coincident with more inequality, one can conclude that as this economy grows or slows over time, there should be a corresponding growth or reduction in inequality. If you look at graph 5 you can see that the pattern of real gross domestic output (GDP) and the pattern of the highest fifth’s share of total income, used here as a proxy for inequality, are very similar, tending to move synchronously. There is indeed a strong, positive correlation between the movements up or down in GDP and the nation’s inequality as seen by the corresponding crests and ebbs in the two series of values. These data support the hypothesis that economic growth in our free-market economy has come with higher inequality of income and wealth.
The question of mechanics arises from these data: how or why are these two trends related? The answer becomes readily apparent when you think through how the economy has grown over the last thirty to forty years. Investments have pursued higher profits through lower wages, first across state boundaries, and later beyond our national borders. Investment moved first from the traditional areas of production within the US to lower-wage areas elsewhere in the US, and then later to other countries with even lower wages as transportation costs declined and businesses lobbied for lower barriers to trade.
The determining factor for this migration of production was always the investors. In addition, as the data on wealth in this country show that a minority controls the overwhelming majority of our wealth, this leads us to the answer why growth has accompanied greater inequality – the wealthy few have pursued investments at the expense of the many wage earners in the country. A crude example will suffice to explain how. If one person were to pull his investments out of firms engaged in US production to seek lower costs in another country by paying very low wages, as long as his increased profits outweighed the wages lost by American workers thrown out of work, the free market would deem this a beneficial investment. It does not take long for thousands or millions of such decisions over decades to lead to the ruin of our country, which we are beginning to observe today.
If we do not force our country to change the path it is on, increasingly fewer people will see greater rewards, while the rest of us see a diminishing relative, perhaps even absolute, share of the American Dream. This has been the story of American development since at least the end of the 1950s when one working adult per family was sufficient to provide the agreed standard of living. Today, two working adults cannot deliver the necessary provision for our standard of living, as our nation’s consumer debt attests.
