Inequality and The American Dream

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“It’s called the American Dream because you have to be asleep to believe it.” George Carlin’s famous one liner seemed to laugh in the face of one of the most consecrated and quintessentially American ideas – the American Dream. Yet his quote is more relevant than ever as  the United States drifts farther and farther away from the idyllic scene of prosperity and opportunity that can be found in Horatio Alger’s rags-to-riches stories and closer to the stark reality of inequality that came to define the gilded age as well as the years leading up to the Great Depression. It’s not possible to definitely say whether or not the American Dream still exists, but if we’re going to try to answer that question, our story begins in the late 1940s as World War II drew to a close.

The post-war boom that occurred following the end of World War II was one of the greatest periods of economic growth in our nation’s history. This period of economic growth was marked by large-scale aid and infrastructure projects such as the Marshall Plan and the Interstate Highway System (which to this date remains to be the most expensive government building project in U.S. history). During this period, economic growth benefited almost all segments of society. From the late 1940s until the early 1970s, income among all socioeconomic groups approximately doubled in real terms. During this time, the gap between the richest and poorest segments of American society, while substantial, remained roughly the same in percentage terms.

By the end of the the 1970s, all this had changed. Real income growth for the bottom 80% of households grew at a significantly slower pace than it did for the top 20%. In particular, the top five and top one percent saw their real incomes increase at a rate that was nine and twenty-seven times greater respectively than the rate at which real income grew for the bottom eighty percent of Americans. This unequal growth in income radically altered the distribution of wealth within the United States. Right now, income inequality in the United States, as measured by a number of different benchmarks, is at an unprecedented level.

 

 Wealth Inequality

The issue of wealth and income disparities in the United States is far from obscure. The economic populism that manifested itself in the “Occupy Wall Street” movement helped bring wealth and income disparity to the forefront of public consciousness in late 2011 and 2012. Thousands of Americans took to Zucotti Park in New York City to protest what they saw as gross disparities and a trend in wealth and income distribution which benefited the rich at the expense of the poor.

In late 2011, a Harvard business professor and a behavioral economist from Duke surveyed five thousand Americans and asked them how they thought wealth was distributed among Americans. These five thousand respondents were then asked how they thought wealth should be distributed. The vast majority of those surveyed – 92% of them – chose a distribution of wealth that was more equitable than the distribution they thought existed. Pictured below are three bar charts. The bottom one depicts how Americans perceived wealth to be distributed, the middle one shows how the majority of respondents believed wealth should be distributed, and the top bar revealed how wealth was actually disrupted – in a way which was even less equitable than the distribution which most Americans believed existed.

This inequality in income and wealth distribution isn’t something which arose overnight. Instead, the distribution of wealth and income has become increasingly unequal over time. The Center on Budget and Policy Priorities found that between 1979 and 2008,  the top one percent of households saw their after-tax income increase by a whopping 281% whereas the middle fifth of households saw theirs increase by only 25%.While there is a tenfold difference in the rate of growth among the top one percent and the middle fifth of households, it’s the bottom twenty percent and their rate of income growth which best highlights the disparities in real income growth which have occurred since the 1970s. The liberal group United For a Fair Economy found (and Politifact confirmed) that the bottom 20% saw their real incomes decrease by 4% to 7% during the same period that the top 1% saw triple digit growth.

While the largest data sets for this trend towards greater inequality contain data from 1979-2008, this is a trend which has continued since then. Two months ago, economist Emmanuel Saez took a look at income data from 2012 and found that between 2009 and 2012, average real income grew by a modest 6%. Unsurprisingly however, this growth was not evenly distributed among income groups. The top 1% of incomes grew by 31.4% percent whereas the bottom 99% (this is quite literally a one percent vs ninety-nine percent comparison) grew by a meager 0.4%. Ninety-five percent of the income growth from 2009 – 2012 was captured by the top one percent. Two primary causes of this increase in the concentrated of wealth and income among not only the top 10 or 20 percent, but among the top one percent, are the rapid growth of pre-tax income disparities and an increasingly inequitable tax system.

The first cause of an increase in income inequality is a change in pre-tax incomes. The Center for Strategic and International Studies found that in 2010 the ratio between the average pay for CEOs and the average pay for workers was a staggering 319 to 1. This figure stands out for two reasons other than its sheer magnitude. The first is because of how much this ratio has increased over time. During the 1960s – 1980s this number hovered between 30 and 40 to 1, less than a tenth of what it is now. The other anomaly about this figure is how it ranks in comparison to other countries. Rather than being replicated in other countries, which would allow it to be dismissed as a “product of our time”, it represents one of the greatest ratios among all industrialized nations.  For instance, in Japan the ratio is 11 to 1, in Germany it is 12 to 1, and even Mexico, a country which sees thousands of its own citizens immigrate to the United States in search of greater economic freedom and opportunity, has a ratio of 47 to 1. This finding was corroborated by a recently published paper authored by economists from the United Kingdom, United States, and Argentina which found that the United States tops the list of industrialized nations when it comes to  the total percentage of wealth held by the top 1%, and the change in percentage of wealth owned by the top 1% – both of which are measures of economic inequality.

This graph shows the ratio of CEO to worker pay for ten OECD member states. The United States is at the bottom of the list, with the highest ratio which is 475:1.

Changes in pre-tax income alone can’t account for the entirety of this trend towards increasing inequality. Another factor which contributes to the current trend is the United States’ tax system and it’s relative lack of equitability when compared to tax systems in other industrialized nations. One way to measure how equitable a nation’s tax system is by comparing a nation’s Gini coefficient before and after taxes. The Gini coefficient is a measure of how concentration wealth is in a specific country and is derived from the Lorenz Curve. A Gini coefficient of zero represents total equality, with every individual having the exact same amount of wealth. On the other hand, a Gini coefficient of one represents maximum inequality; all of the wealth is owned by a single individual. The CSIS in its Issues in International Political Economy Journal found that in the United States, the pre-tax Gini coefficient is 0.46 and the post-tax Gini coefficient is 0.38, a difference of only 0.08. This is essentially a measure of how much wealth distribution changed after accounting for taxes. This change accounts for income taxes, capital gains taxes, payroll taxes, and all other individual taxes.

The difference in pre-tax and post-tax Gini coefficients for the United States pales in comparison to that of other industrialized nations such as Germany where the difference is 0.21. This difference between the pre-tax and post-tax wealth distributions in the United States and other countries shows that the United States has one of the least redistributive tax systems. Without  passing judgement as to whether or not having a tax system that’s less redistributive than its international counterparts is a good or a bad thing, one can safely say that the current U.S. tax code, even though it has become slightly more equitable since the Fiscal Cliff negotiations and compromise, is the reason why the U.S.’s trend towards greater wealth and income inequality outpaces that same trend in other industrialized nations.

 

Social and Economic Mobility

It would be foolish to look at the state of income and economic inequality in the United States and from that alone conclude that the American Dream is dead. At its core, the American Dream isn’t about economic equality. Rather, it’s the belief that everyone, regardless of where they start, can better themselves materially, economically, and socially. This traditional concept of the American dream was accompanied by the belief that the path to prosperity was one which was unimpeded by barriers such as a rigid social order that benefits one class at the expense of the others. This belief which was held by millions of immigrants and provided hope to Americans throughout much of the Twentieth Century is quite analogous to an economic concept known as mobility. Mobility, simply put, is the ability for an individual, household, or family to change their economic standing. Upward economic mobility is what we associated with the American Dream and downward economic mobility would be what occurs when an individual’s economic status declines due to a decrease in real wealth. By evaluating current trends in economic and social mobility and then pairing that with what we’ve already seen concerning wealth distribution, we can have attain a better understanding of the vitality – or lack thereof – of the American Dream.

Downward economic mobility is often measured and defined in two distinct ways, both of which rely on data from the National Longitudinal Survey of Youth 1979 cohort and an assumption that the “middle class” consists of everyone who falls between the 30th and 70th percentile of income distribution. The first definition of someone who is downwardly mobile is a middle class youth surveyed during the 1979 cohort who falls below the 30th percentile mark when he or she is reassessed in 2006. The other definition of downward mobility is an individual whose income rank when they’re reassessed is twenty or more percentiles below their parent’s income rank in 1979. Using the alternate definition of downward mobility can be useful because it removes arbitrary cutoffs (such as the 30th percentile) to determine middle class vs lower class. As a result, the second definition would not consider someone who moves from the 31st percentile as a child to the 29th percentile as an adult to be downwardly mobile, but would view someone who falls from the 70th percentile to the 50th percentile as downwardly mobile, even if that person is still well-off in real terms. By using these two definitions of downward economic mobility, it’s possible to allow for adjustments based on inflation and family size, and still come up with a picture which includes both absolute and relative mobility.

Using the second definition of downward mobility, The Pew Charitable Trusts finds that in 2006, the most recent year during which individuals had their economic standing reassessed, 28 percent of individuals fell twenty percentiles or more from their parents income rank in 1979.  A greater percentage of individuals saw their percentile ranking decrease by twenty percentiles than the percentage who saw their percentile rankings increase by that same amount. The reason why this is evidence of an unjust economic system is because it violates one of the most consecrated aspects of the American psyche.

The causes for downward economic mobility are varied. Among the potential explanations for this trend, education is one which stands out because of the statistical evidence which supports it. The link between education and economic well being is from from a novel one. Much research has been conducted which shows that s as education level increases, so do earning power, economic well-being, and mobility. Data from the National Longitudinal Survey of Youth supports the conclusion that there is a direct – and causal – link between not receiving a high school or college degree and being downwardly mobile. By both measures of downward mobility, men and women who earned a college degree were a full 16% less likely to become downwardly mobile when compared to individuals who didn’t earn a post-secondary degree.

The American landscape is as rich and varied as ever. Countless Americans continue to rise out of poverty, seize opportunities and provide for themselves and their families in ways which were unimaginable to their parents or grandparents. Anyone who tells you otherwise is wrong. Nonetheless, it is becoming harder to achieve this economic mobility and success. Fewer and fewer Americans are benefiting from economic growth. The gap between the richest Americans and the poorest Americans isn’t only increasing, but is doing so at an alarming rate. The American Dream isn’t dead yet, but it’s closer to death than it ever has been before.

 

1. Neither figure has been adjusted for inflation. All other figures have been adjusted for inflation unless otherwise noted. The full 2010 report from the CBPP can be found here.

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