Who's Gorging and Who's Getting
Roasted in the Economic Barbecue?
by James M. Cypher
Dollars and Sense, March 26, 2007
Not since the Gilded Age of the late 19th
century has America witnessed such a rapid shift in the distribution
of economic wealth as it has in the past 30 years.
Economic inequality has been on the rise
in the United States for 30-odd years. Not since the Gilded Age
of the late 19th century -- during what Mark Twain referred to
as "the Great Barbeque" -- has the country witnessed
such a rapid shift in the distribution of economic resources.
Still, most mainstream economists do not
pay too much attention to the distribution of income and wealth
-- that is, how the value of current production (income) and past
accumulated assets (wealth) is divided up among U.S. households.
Some economists focus their attention on theory for theory's sake
and do not work much with empirical data of any kind. Others who
are interested in these on-the-ground data simply assume that
each individual or group gets what it deserves from a capitalist
economy. In their view, if the share of income going to wage earners
goes up, that must mean that wage earners are more productive
and thus deserve a larger slice of the nation's total income --
and vice versa if that share goes down.
Heterodox economists, however, frequently
look upon the distribution of income and wealth as among the most
important shorthand guides to the overall state of a society and
its economy. Some are interested in economic justice; others may
or may not be, but nonetheless are convinced that changes in income
distribution signal underlying societal trends and perhaps important
points of political tension. And the general public appears to
be paying increasing attention to income and wealth inequality.
Consider the strong support voters have given to recent ballot
questions raising state minimum wages and the extensive coverage
of economic inequality that has suddenly begun to appear in mainstream
news outlets like the New York Times, the Los Angeles Times, and
the Wall Street Journal, all of which published lengthy article
series on the topic in the past few years. Just last month, news
outlets around the country spotlighted the extravagant bonuses
paid out by investment firm Goldman Sachs, including a $53.4 million
bonus to the firm's CEO.
By now, economists and others who do pay
attention to the issue are aware that income and wealth inequality
in the United States rose steadily during the last three decades
of the 20th century. But now that we are several years into the
21st, what do we know about income and wealth distribution today?
Has the trend toward inequality continued, or are there signs
of a reversal? And what can an understanding of the entire post-World
War II era tell us about how to move again toward greater economic
The short answers are: (1) Income distribution
is even more unequal that we thought; (2) The newest data suggest
the trend toward greater inequality continues, with no signs of
a reversal; (3) We all do better when we all do better. During
the 30 or so years after World War II the economy boomed and every
stratum of society did better -- pretty much at the same rate.
When the era of shared growth ended, so too did much of the growth:
the U.S. economy slowed down and recessions were deeper, more
frequent, and harder to overcome. Growth spurts that did occur
left most people out: the bottom 60% of U.S. households earned
only 95 cents in 2004 for every dollar they made in 1979. A quarter
century of falling incomes for the vast majority, even though
average household income rose by 27% in real terms. Whew!
The classless society
Throughout the 1950s, 1960s, and 1970s,
sociologists preached that the United States was an essentially
"classless" society in which everyone belonged to the
middle class. A new "mass market" society with an essentially
affluent, economically homogeneous population, they claimed, had
emerged. Exaggerated as these claims were in the 1950s, there
was some reason for their popular acceptance. Union membership
reached its peak share of the privatesector labor force in the
early 1950s; unions were able to force corporations of the day
to share the benefits of strong economic growth. The union wage
created a target for nonunion workers as well, pulling up all
but the lowest of wages as workers sought to match the union wage
and employers often granted it as a tactic for keeping unions
out. Under these circumstances, millions of families entered the
lower middle class and saw their standard of living rise markedly.
All of this made the distribution of income more equal for decades
until the late 1970s. Of course there were outliers -- some millions
of poor, disproportionately blacks, and the rich family here and
Something serious must have happened in
the 1970s as the trend toward greater economic equality rapidly
reversed. Here are the numbers. The share of income received by
the bottom 90% of the population was a modest 67% in 1970, but
by 2000 this had shrunk to a mere 52%, according to a detailed
study of U.S. income distribution conducted by Thomas Piketty
and Emmanuel Saez, published by the prestigious National Bureau
of Economic Research in 2002. Put another way, the top 10% increased
their overall share of the nation's total income by 15 percentage
points from 1970 to 2000. This is a rather astonishing jump --
the gain of the top 10% in these years was equivalent to more
than the total income received annually by the bottom 40% of households.
To get on the bottom rung of the top 10% of households in 2000,
it would have been necessary to have an adjusted gross income
of $104,000 a year. The real money, though, starts on the 99th
rung of the income ladder -- the top 1% received an unbelievable
21.7% of all income in 2000. To get a handhold on the very bottom
of this top rung took more than $384,000.
The Piketty-Saez study (and subsequent
updates), which included in its measure of annual household income
some data, such as income from capital gains, that generally are
not factored in, verified a rising trend in income inequality
which had been widely noted by others, and a degree of inequality
which was far beyond most current estimates. The Internal Revenue
Service has essentially duplicated the Piketty-Saez study. They
find that in 2003, the share of total income going to the "bottom"
four-fifths of households (that's 80% of the population!) was
only slightly above 40%. Both of these studies show much higher
levels of inequality than were previously thought to exist based
on widely referenced Census Bureau studies. The Census studies
still attribute 50% of total income to the top fifth for 2003,
but this number appears to understate what the top fifth now receives
-- nearly 60%, according to the IRS.
A brave new globalized world for workers
Why the big change from 1970 to 2000?
That is too long a story to tell here in full. But briefly, we
can say that beginning in the early 1970s, U.S. corporations and
the wealthy individuals who largely own them had the means, the
motive, and the opportunity to garner a larger share of the nation's
income -- and they did so.
Let's start with the motive. The 1970s
saw a significant slowdown in U.S. economic growth, which made
corporations and stockholders anxious to stop sharing the benefits
of growth to the degree they had in the immediate postwar era.
Opportunity appeared in the form of an
accelerating globalization of economic activity. Beginning in
the 1970s, more and more U.S.-based corporations began to set
up production operations overseas. The trend has only accelerated
since, in part because international communication and transportation
costs have fallen dramatically. Until the 1970s, it was very difficult
-- essentially unprofitable -- for giants like General Electric
or General Motors to operate plants offshore and then import their
foreign-made products into the United States. So from the 1940s
to the 1970s, U.S. workers had a geographic lever, one they have
now almost entirely lost. This erosion in workers' bargaining
power has undermined the middle class and decimated the unions
that once managed to assure the working class a generally comfortable
economic existence. And today, of course, the tendency to send
jobs offshore is affecting many highly trained professionals such
as engineers. So this process of gutting the middle class has
not run its course.
Given the opportunity presented by globalization,
companies took a two-pronged approach to strengthening their hand
vis-à-vis workers: (1) a frontal assault on unions, with
decertification elections and get-tough tactics during unionization
attempts, and (2) a debilitating war of nerves whereby corporations
threatened to move offshore unless workers scaled back their demands
or agreed to givebacks of prior gains in wage and benefit levels
or working conditions.
A succession of U.S. governments that
pursued conservative -- or pro-corporate -- economic policies
provided the means. Since the 1970s, both Republican and Democratic
administrations have tailored their economic policies to benefit
corporations and shareholders over workers. The laundry list of
such policies includes:
* new trade agreements, such as NAFTA,
that allow companies to cement favorable deals to move offshore
to host nations such as Mexico;
* tax cuts for corporations and for the
wealthiest households, along with hikes in the payroll taxes that
represent the largest share of the tax burden on the working and
* lax enforcement of labor laws that are
supposed to protect the right to organize unions and bargain collectively.
Given these shifts in the political economy
of the United States, it is not surprising that economic inequality
in 2000 was higher than in 1970. But at this point, careful readers
may well ask whether it is misleading to use data for the year
2000, as the studies reported above do, to demonstrate rising
inequality. After all, wasn't 2000 the year the NASDAQ peaked,
the year the dot-com bubble reached its maximum volume? So if
the wealthiest households received an especially large slice of
the nation's total income that year, doesn't that just reflect
a bubble about to burst rather than an underlying trend?
To begin to answer this question, we need
to look at the trends in income and wealth distribution since
2000. And it turns out that after a slight pause in 2000-2001,
inequality has continued to rise. Look at household income, for
example. According to the standard indicators, the U.S. economy
saw a brief recession in 2000-2001 and has been in a recovery
ever since. But the median household income has failed to recover.*
In 2000 the median household had an annual income of $49,133;
by 2005, after adjusting for inflation, the figure stood at $46,242.
This 6% drop in median household income occurred while the inflation-adjusted
Gross Domestic Product expanded by 14.4%. When the Census Bureau
released these data, it noted that median household income had
gone up slightly between 2004 and 2005. This point was seized
upon by Bush administration officials to bolster their claim that
times are good for American workers. A closer look at the data,
however, revealed a rather astounding fact: Only 23 million households
moved ahead in 2005, most headed by someone aged 65 or above.
In other words, subtracting out the cost-of-living increase in
Social Security benefits and increases in investment income (such
as profits, dividends, interest, capital gains, and rents) to
the over-65 group, workers again suffered a decline in income
Another bit of evidence is the number
of millionaire households -- those with net worth of $1 million
or more excluding the value of a primary residence and any IRAs.
In 1999, just before the bubbles burst, there were 7.1 million
millionaire households in the United States. In 2005, there were
8.9 million, a record number. Ordinary workers may not have recovered
from the 2000-2001 rough patch yet, but evidently the wealthiest
Many economists pay scant attention to
income distribution patterns on the assumption that those shifts
merely reflect trends in the productivity of labor or the return
to risk-taking. But worker productivity rose in the 2000-2005
period, by 27.1%. At the same time, from 2003 to 2005 average
hourly pay fell by 1.2%. (Total compensation, including all forms
of benefits, rose by 7.2% between 2000 and 2005. Most of the higher
compensation spending merely reflects rapid increases in the health
insurance premiums that employers have to pay just to maintain
the same levels of coverage. But even if benefits are counted
as part of workers' pay -- a common and questionable practice
-- productivity growth outpaced this elastic definition of "pay"
by 50% between 1972 and 2005.)
And at the macro level, recent data released
by the Commerce Department demonstrate that the share of the country's
GDP going to wages and salaries sank to its lowest postwar level,
45.4%, in the third quarter of 2006. And this figure actually
overstates how well ordinary workers are doing. The "Wage
& Salary" share includes all income of this type, not
just production workers' pay. Corporate executives' increasingly
munificent salaries are included as well. Workers got roughly
65% of total wage and salary income in 2005, according to survey
data from the U.S. Department of Labor; the other 35% went to
salaried professionals -- medical doctors and technicians, managers,
and lawyers -- who comprised only 15.6% of the sample.
Moreover, the "Wage & Salary"
share shown in the National Income and Product Accounts includes
bonuses, overtime, and other forms of payment not included in
the Labor Department survey. If this income were factored in,
the share going to nonprofessional, nonmanagerial workers would
be even smaller. Bonuses and other forms of income to top employees
can be many times base pay in important areas such as law and
banking. Goldman Sachs's notorious 2006 bonuses are a case in
point; the typical managing director on Wall Street garnered a
bonus ranging between $1 and $3 million.
So, labor's share of the nation's income
is falling, as Figure 3 shows, but it is actually falling much
faster than these data suggest. Profits, meanwhile, are at their
highest level as a share of GDP since the booming 1960s.
These numbers should come as no surprise
to anyone who reads the paper: story after story illustrates how
corporations are continuing to squeeze workers. For instance,
workers at the giant auto parts manufacturer Delphi have been
told to prepare for a drop in wages from $27.50 an hour in 2006
to $16.50 an hour in 2007. In order to keep some of Caterpillar's
manufacturing work in the United States, the union was cornered
into accepting a contract in 2006 that limits new workers to a
maximum salary of $27,000 a year -- no matter how long they work
there -- compared to the $38,000 or more that long-time Caterpillar
workers make today. More generally, for young women with a high
school diploma, average entry-level pay fell to only $9.08 an
hour in 2005, down by 4.9% just since 2001. For male college graduates,
starter-job pay fell by 7.3% over the same period.
Aiding and abetting
And the federal government is continuing
to play its part, facilitating the transfer of an ever-larger
share of the nation's income to its wealthiest households. George
W. Bush once joked that his constituency was "the haves and
the have-mores" -- this may have been one of the few instances
in which he was actually leveling with his audience. Consider
aspects of the four tax cuts for individuals that Bush has implemented
since taking office. The first two cut the top nominal tax rate
from 39.6% to 35%. Then, in 2003, the third cut benefited solely
those who hold wealth, reducing taxes on dividends from 39.6%
to 15% and on capital gains from 20% to 15%. ( Bush's fourth tax
cut -- in 2006 -- is expected to drop taxes by 4.8% percent for
the top one tenth of one percent of all households, while the
median household will luxuriate with an extra nickel per day.)
So, if you make your money by the sweat
of your brow and you earned $200,000 in 2003, you paid an effective
tax rate of 21%. If you earned a bit more, say another $60,500,
you paid an effective tax rate of 35% on the additional income.
But if, with a flick of the wrist on your laptop, you flipped
some stock you had held for six months and cleared $60,500 on
the transaction, you paid the IRS an effective tax rate of only
15%. What difference does it make? Well, in 2003 the 6,126 households
with incomes over $10 million saw their taxes go down by an average
of $521,905 from this one tax cut alone.
These tax cuts represent only one of the
many Bush administration policies that have abetted the ongoing
shift of income away from most households and toward the wealthiest
ones. And what do these top-tier households do with all this newfound
money? For one thing, they save. This is in sharp contrast to
most households. While the top fifth of households by income has
a savings rate of 23%, the bottom 80% as a group dissave -- in
other words, they go into debt, spending more than they earn.
Households headed by a person under 35 currently show a negative
savings rate of 16% of income. Today overall savings -- the savings
of the top fifth minus the dis-savings of the bottom four-fifths
-- are slightly negative, for the first time since the Great Depression.
Here we find the crucial link between
income and wealth accumulation. Able to save nearly a quarter
of their income, the rich search out financial assets (and sometimes
real assets such as houses and businesses) to pour their vast
funds into. In many instances, sometimes with inside information,
they are able to generate considerable future income from their
invested savings. Like a snowball rolling downhill, savings for
the rich can have a turbo effect -- more savings generates more
income, which then accumulates as wealth.
Lifestyles of the rich
Make the rich even richer and the creative
forces of market capitalism will be unleashed, resulting in more
savings and consequently more capital investment, raising productivity
and creating abundance for all. At any rate, that's the supply-side/neoliberal
theory. However -- and reminiscent of the false boom that defined
the Japanese economy in the late 1980s -- the big money has not
gone into productive investments in the United States. Stripping
out the money pumped into the residential real estate bubble,
inflation-adjusted investment in machinery, equipment, technology,
and structures increased only 1.4% from 1999 through 2005 -- an
average of 0.23% per year. Essentially, productive investment
has stagnated since the close of the dot-com boom.
Instead, the money has poured into high-risk
hedge funds. These are vast pools of unregulated funds that are
now generating 40% to 50% of the trades in the New York Stock
Exchange and account for very large portions of trading in many
U.S. and foreign credit and debt markets.
And where is the income from these investments
going? Last fall media mogul David Geffen sold two paintings at
record prices, a Jasper Johns ($80 million) and a Willem de Kooning
($63.5 million), to two of "today's crop of hedge-fund billionaires"
whose cash is making the art market "red-hot," according
to the New York Times.
Other forms of conspicuous consumption
have their allure as well. Boeing and Lufthansa are expecting
brisk business for the newly introduced 787 airplane. The commercial
version of the new Boeing jet will seat 330, but the VIP version
offered by Lufthansa Technik (for a mere $240 million) will have
seating for 35 or fewer, leaving room for master bedrooms, a bar,
and the transport of racehorses or Rolls Royces. And if you lose
your auto assembly job? It should be easy to find work as a dog
walker: High-end pet care services are booming, with sales more
than doubling between 2000 and 2004. Opened in 2001, Just Dogs
Gourmet expects to have 45 franchises in place by the end of 2006
selling hand-decorated doggie treats. And then there is Camp Bow
Wow, which offers piped-in classical music for the dogs (oops,
"guests") and a live Camper Cam for their owners. Started
only three years ago, the company already has 140 franchises up
According to David Butler, the manager
of a premiere auto dealership outside of Detroit, sales of Bentleys,
at $180,000 a pop, are brisk. But not many $300,000 Rolls Royces
are selling. "It's not that they can't afford it," Butler
told the New York Times, "it's because of the image it would
give." Just what is the image problem in Detroit? Well, maybe
it has something to do with those Delphi workers facing a 40%
pay cut. Michigan's economy is one of the hardest-hit in the nation.
GM, long a symbol of U.S. manufacturing prowess, is staggering,
with rumors of possible bankruptcy rife. The best union in terms
of delivering the goods for the U.S. working class, the United
Auto Workers, is facing an implosion. Thousands of Michigan workers
at Delphi, GM, and Ford will be out on the streets very soon.
(The top three domestic car makers are determined to permanently
lay off three-quarters of their U.S. assembly-line workers --
nearly 200,000 hourly employees. If they do, then the number of
autoworkers employed by the Big Three -- Ford, Chrysler, and GM
-- will have shrunk by a staggering 900,000 since 1978.) So, this
might not be the time to buy a Rolls. But a mere $180,000 Bentley
-- why not?
Had enough of the "haves"?
In the era Twain decried as the "great
barbeque," the outrageous concentration of income and wealth
eventually sparked a reaction and a vast reform movement. But
it was not until the onset of the Great Depression, decades later,
that massive labor/social unrest and economic collapse forced
the country's political elite to check the growing concentration
of income and wealth.
Today, it does not appear that there are,
as yet, any viable forces at work to put the brakes on the current
runaway process of rising inequality. Nor does it appear that
this era's power elite is ready to accept any new social compact.
In a recent report on the "new king of Wall Street"
(a co-founder of the hedge fund/private-equity buyout corporation
Blackstone Group) that seemed to typify elite perspectives on
today's inequality, the New York Times gushed that "a crashing
wave of capital is minting new billionaires each year." Naturally,
the Times was too discreet to mention is that those same "crashing
waves" have flattened the middle class. And their backwash
has turned the working class every-which-way while pulling it
down, down, down.
But perhaps those who decry the trend
can find at least symbolic hope in the new boom in yet another
luxury good. Private mausoleums, in vogue during that earlier
Gilded Age, are back. For $650,000, one was recently constructed
at Daytona Memorial Park in Florida -- with matching $4,000 Medjool
date palms for shade. Another, complete with granite patio, meditation
room, and doors of hand cast bronze, went up in the same cemetery.
Business is booming, apparently, with 2,000 private mausoleums
sold in 2005, up from a single-year peak of 65 in the 1980s. Some
cost "well into the millions," according to one the
nation's largest makers of cemetery monuments. Who knows: maybe
the mausoleum boom portends the ultimate (dead) end for the neo-Gilded
James M. Cypher is profesor-investigador,
Programa de Doctorado en Estudios del Desarrollo, Universidad
Autónoma de Zacatecas, Mexico, and a Dollars & Sense
Class War watch