U.S. poverty rates by county. Source: Wikimedia.

Big Issues: The Roots of America’s Exceptional Inequality

In Yale SOM’s Global Leadership: Big Issues course, Yale experts lead discussions of some of the most significant challenges facing the planet. Yale political scientist Jacob Hacker joined the class to discuss the tax, policy, and political forces that have disproportionately benefited the richest Americans —and caused many to feel left behind.

American inequality is distinctive, and the place to start is to go out to the highest level and to think a little bit about global inequality. The figure that I think has gotten the most attention on this topic in recent years has come from the work of Branko Milanovic and here it is in updated form thanks to the work of two other inequality experts Thomas Piketty and Emmanuel Saez who worked with a team of researchers to develop a very comprehensive set of measures of inequality across a wide range of political and economic systems across a wide range of nations.

This figure is unusual in that it’s looking not at countries, which is our usual focus when we look across the world of inequality but in individuals. This is the percentiles of the world income distribution here. You can think of this on the left is the world’s poor and on the right is the world’s super rich. You can see that they had to spread it out quite a bit at the top, and we’ll talk more about that.

What do you see here? I think you see two stories, or three maybe. You see the continuing stagnation at the very bottom. Though that’s not as clear as it’s drawn here because you can see that right after you get to the super poor countries you actually see pretty strong growth, and this is most of the story of China and India. That’s the lower middle class, if you will, of the world economy.

Then you see that the middle class of affluent democracy is being squeezed. Their income has been much, much more modest and then of course you see that at the very top growth has been dramatic. This is spring time for the global 1%. This is the U.S. story. The story of the rise of the top 1% and the fall of the rest, particularly the bottom half of the income distribution, over the last generation. Back in the 1980s, you saw the share of national income basically being, middle class had between 20 and 22%, top one percent had between 10 and 12%, but in 2015 that relationship reversed.

If this was a story that was exactly the same or very similar across all rich democracy you’d see the same thing in other Western nations, and you don’t. The story in Europe is much more… you’ve got a gradual increase in the share of income going to the top and a slow decline of the share of income going to the bottom half of the income distribution. It’s still really clear that politics and policy have to matter.

If we go back to 1979 we can see that there were definitely inequalities at the time. Average income for the middle fifth of families was in the… you can’t tell because it’s so small on the scale. It’s in the 40 to $50,000 range. For the top 1% it’s around 400,000. Now let’s fast forward to just before the financial crisis in the United States. What happened in the run up to this enormous economic cataclysm?

Basically the rich pulled away. You’ve seen very disproportion income growth and if you’re thinking, well what are we talking about in the top 1%? We’re talking about people whose household incomes on average are around seven million dollars in this group, and the entry point to which is in the one-to-two-million-dollar range. We’re talking more specifically about corporate and financial executives. Based on tax data, about 60% of those in the top 1% are corporate non-finance executives and financial executives. This is as of 2004. If you want to ask, why have we seen the top 1% pull away, you have to ask why have corporate and financial executives done so much better.

Financialization had two effects. One thing that financialization did was that it increased financial instability or set us up for this fall, but the other thing it did is it made a lot of people really, really rich. Deregulation was quite good for those at the top, but the systemic risk that they were generating was their activities posed enormous potential costs for the rest of Americans. So that we write about financialization as well. 

One other area we write about is the decline of unions. Union decline in the United States—unions in the U.S. basically are rounding error now in the private sector. They’re below 10% of the workforce, well below 10% of the workforce. Even when you include public sector unions you’re talking about 10 to 12% of the workforce overall, which is very, very, very low by international standards and of course it’s a decline from the heights in the postwar era when unionization rates in the U.S. were about a third of the workforce. And there’s no question that that played a role in the declining bargaining power of workers, and particularly workers with lower levels of education.

I want to focus on a case that’s very topical. Just last year, at the very end of the year, the congress passed a huge tax cut package, and they’ve already gone into effect. Resulting in, as you probably noticed, a very good situation in board rooms and on Wall Street. These tax cuts continue a string of tax cuts that have had one singular characteristic: they’ve been really good to people at the top. Remember when I showed you those income trends within the top 1%? We’re going to go revisit that question with a different focus. Here we’re looking at the average federal tax rate that is paid by people in these different income groups.

Remember, these folks have done really well, especially these folks. Presumably their average federal tax rates should remain relatively similar over this period because why should we give them big tax cuts, which both encourages them to bargain harder for higher pay but also further enriches those at the top? The answer is that at the bottom half of the 1%, people have not actually received huge tax cuts, but as you go up the income distribution you see very sharp declines. This is really a story of the late ’70s and early ’80s and it’s really a story about the decline of progressivity at the very top. There’s really been not much change for the middle class.

We’ve seen a big decline at the top. The recent tax cuts were also extremely skewed toward the very rich—in fact, about 83% of the benefits of the tax cuts accrued to the top 1% of the income distribution. This is from the Tax Policy Center. This is about as well targeted as tax cuts can be if you want to cut taxes for rich people…the reason why the United States is going face a very tough fiscal position in the future. 

“We’ve seen a big tilt, with some pushback after the financial crisis, in a direction that has favored those who are at the very top, many of whom are making their money through what economists call rent seeking.”

I want to be clear, tax cuts might be good or bad for growth. The evidence suggests that they’re not the supercharger of the economy that often gets argued but it’s important to understand that if you do big tax cuts without paying for them, you run up debt, which means you have to deal with that fiscal overhang in the future, usually by cutting programs that are good for people who aren’t at the very top.

Why in a democracy would this happen? So, the big answer is polarization but a certain kind of polarization. I call it asymmetric polarization. Mainly if you think about polarization as you would think about it in terms of, say, magnets. They’re polarized, and they’re pushing against each other. You would think about equal forces of resistance. The polarization of the United States has been highly unequal. It has basically been driven by Republicans, the Republican Party, the more conservative party in our political system, moving farther and farther to the right without, at least until recently, corresponding movements from Democrats.

One way to look at this, imperfect but useful, is to look at voting records. What you can do using these voting records is roughly scale where members of Congress are on the left to right dimension and what this shows is that House Democrats and House Republicans in the 1960s and ’80s were pretty centrist. Fewer than 20% of them were outside essentially the moderate center. The way that is calculated here is basically there are these scores are constrained to be between negative one and one and if you’re within one half, negative one half and one half, you’re considered centrist. It’s arbitrary but what matters it’s the same for both parties. Democrats and Republicans were relatively centrist. 

Democrats remain so, Republicans not so much. This is the House. This story’s very similar in the Senate. 

This is a map of the United States, and I’ve put three different sets of outcomes on this map. One of these is election returns, with red being Republicans. One of these is gun suicide death rates, with red being higher, and one of these is opioid overdose rates, with red being higher. Which is which? I’m not going to actually have you answer that question because they’re all the same map, right? They all look almost identical. As it turns out, firearm suicide death rates are here, overdose death rates are here, this is the electoral map.

There is a deep, deep irony in the changing geographic story in the United States, where prosperity is moving to the cities and hardships of these sorts are concentrated outside of urban areas. Those nonurban areas remain solidly Republican. So the Republican party is a party that is increasingly getting its votes from less educated, white Americans who are facing significant social problems. If we’re going to address this and I think we must and I think we can, we’re going to have to push back against a number of policies that have exacerbated inequality.

I do think it’s not a just a question of Republicans versus Democrats, although the Democrats are more likely to push back against those policies, because a lot of the same forces that affect the Republican Party, like high-end donors who aren’t that keen to reverse the tax cuts, will affect the Democratic Party too. It’s also a matter, I think, of changing the debate.

I want to leave you with one thought.

I mentioned this idea of pre-distribution. Pre-distribution is the notion that one of the primary ways in which government affects the distribution of income is through shaping the market. I think across three or four areas—labor unions, intellectual property, antitrust enforcement and corporate governance and financial regulation…that might be five areas—we’ve seen a big tilt in a direction, with some pushback after the financial crisis, in a direction that has favored those who are at the very top, many of whom are making their money through what economists call rent seeking. Rent seeking is when you get an above market reward because of the ways in which government policy distorts the market.

Stanley B. Resor Professor of Political Science and Director of the Institution for Social and Policy Studies, Yale University