From 1979 to 2006, 36% of household income growth went to the top 1-in-100 of Americans, and 20% went to the top 1-in-1000. What took us from Broadland to Richistan? (More)

Winner-Take-All Politics, Part I – Broadland to Richistan

This week Morning Feature reviews Paul Pierson and Jacob Hacker’s Winner-Take-All Politics. Today we look at rising income inequality and the conventional wisdom causes: the rising value of education and technical skills, and natural forces of a modern economy. Tomorrow we’ll consider political causes: action, drift, and the “black hats” and “gray hats” of the two major parties. Saturday we’ll look at Pierson and Hacker’s solutions.

A Thirty-Year War

The post-World War II economic boom had many causes. With most of the world’s other industrial economies devastated, the U.S. accounted for almost half the world’s GDP in 1946. We held almost all of the world’s gold, were the top oil exporter, and the number one creditor nation. Combined with domestic demand repressed since the Great Depression and opportunities offered by the G.I. Bill, those fueled extraordinary economic growth over the next three decades. That growth was spread throughout the economy, with incomes in the top, middle, and bottom quintiles rising at about the same rates. Pierson and Hacker call that Broadland: not an egalitarian utopia, but a widely-shared prosperity.

That began to change in the late 1970s. The U.S. economy still grew, albeit not at the incredible post-war rates, but most Americans didn’t share in that growth. While the median family income did rise since 1979, Pierson and Hacker show that was largely due to the rise in two-income families and greater combined work hours. Factor in indirect compensation – retirement, access to health care, etc. – and the picture is even more stark. Guaranteed pensions were replaced by 401(K)s and other retirement plans that shifted risk onto employees. Employers paid more for health insurance, but rising deductibles, exclusions, and denials still left employees exposed to huge medical costs.

The picture at the top was very different. In 1974, the top 1-in-100 Americans brought home 8% of America’s earned income. By 2007, that same 1-in-100 brought home 18% of our combined earned income. Add income from capital gains and the difference is greater still: the top 1% went from 9% of our nation’s total income in 1974 to 23.5% in 2007. If we narrow our focus to the top 0.1% – the richest 1-in-1000 – the contrast grows. In 1974, their average annual income was just over $1 million (in 2007 dollars). In 2007, it was over $7 million. Their share of America’s total income went from 2.7% in 1974 to 12.3% in 2007. And for the richest 1-in-10,000, the average income leaped from $4 million in 1974 to over $35 million in 2007, from less than 1% to more than 6% of America’s combined income.

This, write Pierson and Hacker, is Richistan. But how did we get there?

Conventional Wisdom #1: Education and technical skills

According to Gregory Mankiw, former head of the Council of Economic Advisors to President George W. Bush, “Education is the key to understanding broad inequality trends.” President Bush himself said “We have an economy that increasingly rewards education and skills because of that education.”

The econ-speak for that is SBTC: skills-based technological change. The SBTC theory says highly-skilled employees are far more valuable now than ever before. Some variations attribute that to globalization and the availability of cheap unskilled labor overseas. Others say our economy is increasingly driven by computers and the Internet. Still others say America’s schools have not kept pace with the demands of the “knowledge economy.” Regardless, it’s all about education and skills.

But Pierson and Hacker show that is not true. In 2007, 29% of Americans had a college degree, so almost everyone in the top 20% of incomes should be highly-educated. If education were the key, Pierson and Hacker posit, we should see the top 20% pulling away from the bottom 80%. And the top 20% have pulled away, thanks to the top 1%. Incomes in “the next 19%” grew only one-fourth as fast … not much better than median family incomes.

There are flaws in their argument. Maybe not everyone in the top 20% has a college degree. Maybe some college degrees are far more valuable than others. In short, maybe the difference is a specific kind of education and skills, and that’s why income growth concentrated in the top 1%. Pierson and Hacker admit these flaws, and present an even more compelling counter-argument … both to SBTC and the other conventional wisdom to explain rising inequality.

Conventional Wisdom #2: Natural market forces

The other conventional wisdom is less an argument than a statement of surrender. Yes, the rich get richer. They can take advantage of more opportunities, and can avoid or absorb more risks. It’s a natural function of market forces. Always has been. Always will be. Even more in a technological economy. Yes, that’s hard for the non-rich, but the alternative is communism and that’s worse for everyone, including the non-rich. Get over it.

Pierson and Hacker debunk that by comparing the U.S. to other modern, technological, wealthy, highly-educated nations. It turns out that if natural market forces and SBTC are the culprits, they are very selective. Western European economies are just as advanced as ours, and education and skill gaps there are slightly greater. Yet income inequality is much less than in the U.S., not only overall but also among workers with the same skill levels. Top executives and financiers in Europe earn more than other workers. But not as much more as do top executives and financiers in the U.S.

And as Pierson and Hacker show, that divergence began in the late 1970s. In 1974, the top 1% of Americans brought home about the same share of our nation’s total income as did the top 1%  in Britain, France, and Canada, and less than the top 1% in Sweden. By 2000, the top 1% of Americans had broken away from the pack relative to the top 1% elsewhere. Other English-speaking nations – Australia, Britain, Canada, Ireland, and New Zealand – also saw the top 1% pull away, but only by about half as much.

If not education and natural market forces, why did the U.S. shift from Broadland to Richistan? Pierson and Hacker present a compelling case that the answer is government policies that favored our archetypal wealthy Charles over our archetypal median Fred.

Tomorrow we’ll see how that happened.

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Happy Thursday