Saturday, December 04, 2010

Income Inequality: Towards a Banana Republic?

Slate has an important series about income inequality in the U.S.  If you go to the article, you can launch a helpful slide show that gives a visual guide to this matter.

What will the Great Divergence mean for the Church? What sort of virtues will we need as Christians to meet this challenge? Is it a matter of justice for Christians to work for income equality? Or should we accept it and direct our energies toward ministering to individuals? Do any of the popular finance programs evangelicals host address the connection between income inequality and consumer debt?

From the first installment in the series:

...[In 1915, ] the richest 1 percent accounted for 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income. What caused this to happen? ...
Income inequality in the United States has not worsened steadily since 1915. It dropped a bit in the late teens, then started climbing again in the 1920s, reaching its peak just before the 1929 crash. The trend then reversed itself. Incomes started to become more equal in the 1930s and then became dramatically more equal in the 1940s. (During the 1930s the richest 1 percent’s share of the nation’s income dropped. Overall, the income-equality trend of the Great Depression was somewhat equivocal. On the one hand, the rich lost income. On the other hand, middle-class incomes stagnated and a high level of unemployment (which peaked at 25 percent) hit those at the bottom of the income scale especially hard. I note all this to emphasize that it is neither necessary nor desirable to achieve equality through economic catastrophe.)  Income distribution remained roughly stable through the postwar economic boom of the 1950s and 1960s. Economic historians Claudia Goldin and Robert Margo have termed this midcentury era the "Great Compression." The deep nostalgia for that period felt by the World War II generation­the era of Life magazine and the bowling league­reflects something more than mere sentimentality. Assuming you were white, not of draft age, and Christian, there probably was no better time to belong to America's middle class.

The Great Compression ended in the 1970s. Wages stagnated, inflation raged, and by the decade's end, income inequality had started to rise. Income inequality grew through the 1980s, slackened briefly at the end of the 1990s, and then resumed with a vengeance in the aughts. In his 2007 book The Conscience of a Liberal, the Nobel laureate, Princeton economist and New York Times columnist Paul Krugman labeled the post-1979 epoch the "Great Divergence."

It's generally understood that we live in a time of growing income inequality, but "the ordinary person is not really aware of how big it is," Krugman told me. During the late 1980s and the late 1990s, the United States experienced two unprecedentedly long periods of sustained economic growth: ­ the "seven fat years" and the " long boom." Yet from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent. Economic growth was more sluggish in the aughts, but the decade saw productivity increase by about 20 percent. Yet virtually none of the increase translated into wage growth at middle and lower incomes, an outcome that left many economists scratching their heads.

Here is a snapshot of income distribution during the past 100 years:

Chart of the Top Ten Percent Income Share, 1917 - 2008.

All my life I've heard Latin America described as a failed society (or collection of failed societies) because of its grotesque maldistribution of wealth. Peasants in rags beg for food outside the high walls of opulent villas, and so on. But according to the Central Intelligence Agency (whose patriotism I hesitate to question), income distribution in the United States is more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States. Economically speaking, the richest nation on earth is starting to resemble a banana republic. The main difference is that the United States is big enough to maintain geographic distance between the villa-dweller and the beggar. As Ralston Thorpe tells his St. Paul's classmate, the investment banker Sherman McCoy, in Tom Wolfe's 1987 novel The Bonfire of the Vanities: "You've got to insulate, insulate, insulate."

But income inequality is a topic of huge importance to American society and therefore a subject of large and growing interest to a host of economists, political scientists, and other wonky types. Except for a few Libertarian outliers (whose views we'll examine later), these experts agree that the country's growing income inequality is deeply worrying. Even Alan Greenspan, the former Federal Reserve Board chairman and onetime Ayn Rand acolyte, has registered concern. "This is not the type of thing which a democratic society­a capitalist democratic society­can really accept without addressing," Greenspan said in 2005. Greenspan's Republican-appointed successor, Ben Bernanke, has also fretted about income inequality.

Yet few of these experts have much idea how to reverse the trend. That's because almost no one can agree about what's causing it. This week and next, I will detail and weigh the strengths and weaknesses of various prominent theories as to what has brought about the income inequality boom of the last three decades. At the same time, I'll try to convey the magnitude of its effects on American life. The Great Divergence may represent the most significant change in American society in your lifetime­ and it's not a change for the better. Let's see if we can figure out what got us here.


(from the final installment in the series: )
The United States' economy is currently struggling to emerge from a severe recession brought on by the financial crisis of 2008. Was that crisis brought about by income inequality? Some economists are starting to think it may have been. David Moss of Harvard Business School has produced an intriguing chart that shows bank failures tend to coincide with periods of growing income inequality. "I could hardly believe how tight the fit was," he told the New York Times. Princeton's Paul Krugman has similarly been considering whether the Great Divergence helped cause the recession by pushing middle-income Americans into debt. The growth of household debt has followed a pattern strikingly similar to the growth in income inequality (see the final graph). Raghuram G. Rajan, a business school professor at the University of Chicago, recently argued on the New Republic's Web site that "let them eat credit" was "the mantra of the political establishment in the go-go years before the crisis." Christopher Brown, an economist at Arkansas State University, wrote a paper in 2004 affirming that "inequality can exert a significant drag on effective demand." Reducing inequality, he argued, would also reduce consumer debt. Today, Brown's paper looks prescient.
Heightened partisanship in Washington and declining trust in government have many causes (and the latter slide predates the Great Divergence). But surely the growing income chasm between the poor and middle class and the rich, between the Sort of Rich and the Rich, and even between the Rich and the Stinking Rich, make it especially difficult to reestablish any spirit of e pluribus unum. Republicans and Democrats compete to show which party more fervently opposes the elite, with each side battling to define what "elite" means. In a more equal society, the elite would still be resented. But I doubt that opposing it would be an organizing principle of politics to the same extent that it is today.
I find myself returning to the gut-level feeling expressed at the start of this series: I do not wish to live in a banana republic. There is a reason why, in years past, Americans scorned societies starkly divided into the privileged and the destitute. They were repellent. Is it my imagination, or do we hear less criticism of such societies today in the United States? Might it be harder for Americans to sustain in such discussions the necessary sense of moral superiority?
What is the ideal distribution of income in society? I couldn't tell you, and historically much mischief has been accomplished by addressing this question too precisely. But I can tell you this: We've been headed in the wrong direction for far too long.

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