Inequality Is Not the Problem

Metropolitan Museum of Art

Adriaen Isenbrant: Man Weighing Gold (detail), circa 1515–1520

Jeff Madrick

In his celebrated book Capital in the 21st Century, Thomas Piketty notes that Napoleon justified concentrations of wealth and high levels of inequality in France because, he claimed, the nation was a meritocracy. If you worked hard and had talent, you could rise—even back then.

Such inflated claims about income mobility have long been the refuge of the privileged at the top of the distribution of wealth. The American dream is of course built on this central assertion. Since the beginning of the year, however, the powerful findings of Piketty and other economists have entered mainstream debate as never before, challenging long-held assumptions that America is a meritocracy. Bringing into focus how lopsided the income distribution is, these findings have not only shown that inequality is widespread. They have also demonstrated that there is relatively little opportunity for those in the lower quintiles of earners to move up to a higher bracket.

Traditionally, economic conservatives have maintained that inequality is fine as long as income mobility is robust. So what if a few people make huge fortunes; everyone else has a fair chance at the opportunity to do so. But these days, even important members of the Republican Party, the traditional bastion of America privilege, have given up on this argument.

Economic data gathered since the early 2000s have shown conclusively that American social mobility is low and has been so for half a century—indeed, it is considerably lower than the nation’s supposedly stultified European competitors, where social safety nets are much larger and taxes much higher. Among the most impressive of the new work is a comprehensive study, led by Raj Chetty of Harvard and Emmanuel Saez of Berkeley, among others, published this January. It shows that income mobility has remained at roughly the same low levels since the 1970s.

The way income mobility is generally measured is to determine whether children born to parents in one quintile of earners—say, the bottom 20 percent—move to the next quintile, and then up and beyond. According to the Harvard-Berkeley study, only 8.4 percent of children born in 1971 to parents in the bottom fifth rose to the top fifth as adults, a proportion that grew only slightly, to 9 percent, for those born in 1986. More sobering, children born into the second quintile from the bottom are now doing worse. In 1971, such a child had a 17.7 percent chance to move to a higher quintile; for those born in 1986, the odds were only 13.8 percent, or less than one in seven.

These figures—measuring what we think of as traditional or “relative” income mobility—provide a stark picture of how fluid economic opportunity is and many progressives have flocked to them. In recent weeks, many commentators have decried the unequal distribution of income and wealth and argued that we should take steps to limit inequality at the top and make it easier for people to climb the ladder.

But for every poor kid who rises to the top fifth in income, roughly speaking, someone must fall out of the top fifth. And the proportion of those who rose was probably never robust, even in the nineteenth century. What matters still more, then, is “absolute” mobility: the degree to which the economy can produce rising wages for all.

The American dream should be built on expanding opportunities for the entire society, which can only come about if average real wages go up. Earning more than your parents is as much or even more a result of the rise of wages after inflation across the economy as it is a reflection of income mobility. In other words, if you are born into the bottom quintile but real wages rise, you will likely exceed your parents’ income even if you remain in that quintile.

Such real incomes rose throughout the nineteenth and twentieth centuries in America, but they rose especially fast in the twenty to thirty years after World War II. As Isabel Sawhill of Brookings pointed out in one of the finest studies of income mobility, made with the Pew Foundation five years ago,

from 1947 to 1973, the rate of growth of the typical family’s income was unusually rapid, roughly doubling in a generation’s time. However, since 1973 the increase over a generation’s time has been much smaller, about 20 percent.

Since the Great Recession, there has been even less growth. Such historic comparisons of family income can be tricky. On the one hand, families tend to have fewer children than they did a generation ago, but on the other, the rapid growth of households with two working parents creates additional childcare costs. The distribution of family income is also skewed as more children are born to unwed mothers, who don’t benefit from two incomes. According to Sawhill, none of this overturns “the basic conclusion that family income growth has slowed.”

The New York Times just published calculations based on the detailed data collected by the Luxembourg Income Study that show middle class incomes in America are now lower than in some other nations. And Sawhill shows that out of every three adults who were children in 1968, one is earning less than his or her parents did. That latter number is troublingly big, and since the Great Recession it has probably risen.

What we now know is that we can’t rely on income mobility to solve these problems. Because there has been growth, if modest compared to earlier times, about two out of three children are doing better than their parents. But many of them are not doing much better—about half of this group remain in the same quintile they were born into. Indeed, rising income inequality also makes it harder to move from one quintile to another: the rungs on the ladder are farther apart.

Consider that we now know 42 percent of those born into the bottom fifth of earners will remain there, and another 42 percent will rise only to the next two levels. At the same time, 39 percent born into the top will remain at the top, and 23 percent will fall but only to the next level down.

Yet for all this, the problem of inequality is an inadequate description of the situation. Inequality has traditionally meant that incomes at the top grow faster than the next category down, which in turn grow faster than the next category, and so on. All categories can grow to some extent. As has been apparent to economists for several years, however, this is no longer the case. We now have stagnating incomes for a large majority of Americans and runaway incomes at the very top—especially the top tenth of the top one percent. This is not so much “inequality” as a complete lack of growth for much of the country. And this is what the nation should focus on.

The authors of the recent Harvard-Berkeley study provide some clues about how to proceed. They find both relative and absolute mobility differs by cities. Those in the Southeast have generally low mobility rates while those in the mountain and western states high rates, for example. In urban areas with more healthy economies, like San Francisco, Seattle, and Salt Lake City, the poor are less segregated, the quality of education is higher, and there are fewer unwed mothers. But these conditions cannot be readily duplicated elsewhere.

The main lesson is that a combination of social policies and growth policies are needed that aim at producing rising wages for all. They could include a higher minimum wage, child allowances, and educational programs for the young about the disadvantages of early pregnancies.

But they should also include serious stimulus measures by the federal government, including a recognition that deficits are now low enough and that further austerity is unnecessary. In particular, government spending programs should aim to sustain decent income levels through unemployment insurance, expanded earned income and child tax credits, and outright cash allowances. The government should also aim at foundational projects that facilitate long-term economic growth, including intelligent and aggressive expansion of transportation, and Internet infrastructure.

There is simply no escaping the central fact that the welfare of Americans depends on faster economic growth. Progressives and conservatives should agree on this. This economic recovery so far has been slow. Debt overhangs from the mortgage crisis explain part of it, but the lack of appropriate policy to offset the ramifications of the financial and housing crashes are inexcusable. Efforts to enhance income mobility alone cannot be the answer.

April 24, 2014, 5:57 p.m.