Income Inequality

The joys of summer and having nothing to do allowed me the opportunity to finally read all of Timothy Noah's excellent analysis of The Great Divergence, which has, since its publication in September 2010, won the Hillman Prize for magazine journalism for reporting that "fosters social and economic justice." The piece fully merits the prize and if you have time, I suggest reading it in entirety for yourself. I thought I'd offer a brief synopsis and then suggest some relevance given the Republican Presidential Candidates Debate last night.

The great divergence refers to the growing income inequality in the United States. Income inequality refers to the difference between the percentage of income taken in by the wealthy and by the poor. A superficial acquaintance with the last century of American history is probably enough to take a stab at what the charts look like. Income inequality (measured by the income share of the top 10%) was extremely high through the Great Depression (at about 45%), but dropped dramatically during World War II, as many more women entered the workforce and men who previously didn't have access to higher education went to college on the GI Bill. From the 40's through the 70's, income inequality remained fairly stagnant with top 10% income share in the low 30%s. Since that time, however, income inequality has exploded. There were enormous leaps during the Reagan, Clinton, and Bush II years, leading to almost 50% of income being concentrated in the wealthiest 10% of all Americans by 2007.

Noah's report on income inequality takes the form of a ten-part series, with part 1 being an introduction and part 10, the conclusion. In parts 2-8, Noah assesses some of the possible explanations for the great divergence, and offers a breakdown of the degree to which each factored into the rapid rise in income inequality. Each of the sections is available individually, so if you want a more complete analysis of any one, please feel free to read the individual sections, but I'll offer Noah's final analysis.

Race/gender: 0%

Immigration: 5%

"Imagined uniqueness of computers as a transformative technology": 0%

Tax Policy: 5%

Decline of Labor: 20%

Trade: 10%

Wall Street "pampering" of the "Stinking Rich": 30%

Education system failures: 30%

The breakdowns of the cause don't necessarily equate to the breakdowns of the solutions. For example, tax policy could in fact have consequences on things such as Wall Street's pampering of the Stinking Rich, and government policy could well have an impact on the decline of labor. In essence, everything on the list can be controlled by some form of government policy. So now let's take a step back to last night, and think about some of the Republican ideas for ways to stimulate the economy.

One proposal was the removal or halving of the capital gains tax. A capital gain taxes income from investments such as stock dividends, mutual funds, hedge funds, money markets, and all sorts of other advanced things I don't really understand. Of course, you have to have a lot of money to have more than a negligible amount of capital gains. While the tax on short term capital gains is identical to the income tax rate, the tax on long term capital gains is already significantly less than the income tax rate for the same income bracket. Cutting the capital gains tax, then, is equivalent to cutting taxes on a large source of income for the wealthiest segment of the American population.

Another key point articulated over and over again by Republicans last night was that the government should stop regulating Wall Street. Of course, if the pampering of Wall Street executives is one of the primary causes of income inequality (as Noah suggests), then if the government has a vested interest in reducing income inequality, regulating compensation to Wall Street executives (especially those of failing companies) doesn't seem like the worst idea.

Republicans have also been long-time opponents of organized labor, but this issue has been thrust into the spotlight again recently because of the high profile case in Wisconsin. But if the decline of labor is one of the biggest factors of the great divergence, then shouldn't the government be looking to encourage organized labor rather than break it apart?

In short, most of the major economic policies of the Republican field expressed last night will not only fail to end the great divergence, they will encourage its growth. Reducing taxes on the wealthy, in the form of capital gains, estate, or general income tax, will result in the budget deficit becoming even greater, yet Republicans want to cap the ceiling on the national debt. So either there must be enormous cuts in spending or the tax rate on lower and middle income families is going to have to be raised. Even Obama has been drawn into this mess, extending the Bush era tax cuts for everyone, after it had been thought that he would allow them to lapse on the highest two income brackets.

With American society now being more unequal than almost all of its counterparts in the developed world, history has witnessed a 180 degree reversal. Whereas in the early years of the republic, Europeans migrated to America for reasons of social mobility, it would now be logical if the trend shifted, with poor Americans emigrating to a more mobile more equal Europe. If I were to speak the language of politics, I would say that America has forsaken its founding creed as the land of opportunity.