Inequality is on the Rise, and it Matters

Be careful what you wish for. I started out by chiding Schmidtz for his abstraction, and now we’re on the verge of debating the technical bases of the Consumer Price Index (CPI)!

I don’t want to go there—not because I am not familiar with the debate, or don’t have things to say, but because I truly don’t think it’s crucial to our differences. If the CPI is overstated, then, yes, middle-class Americans have seen better income growth than the official statistics suggest. But this potential alternative scenario does not change two essential facts: First, that growth has been dwarfed by growth at the top (obviously, if the CPI is wrong, it’s wrong for the rich as well as the middle class). Second, whatever the true inflation level, the United States has still seen a massive reversal of the twin post-war trends of (a) declining inequality and (b) huge income gains for the middle class. From the end of World War II until the mid-1970s, the incomes of middle-class families rose in lockstep with the overall economy, essentially doubling during the period. Since then, they’ve not. The economy has grown fairly quickly. Middle-class incomes have not, mostly because most of the gains in the economy have gone to those at the top. The fact that the economy failed to lift all boats after the early 1970s as it had before—indeed, that it lifted the yachts at the top much more than the rowboats in the middle or the lifeboats at the bottom—doesn’t hinge on any assumptions about the CPI.

By the way, the dramatic concentration at the top of the income ladder since the 1970s—which is well documented—seriously undercuts any attempt to link America’s openness to immigrants to rising inequality. Struggling immigrants might drag down the bottom, but it’s hard to see how they bring up the top.

Schmidtz mentions fringe benefits as a conflating factor in earnings figures, but he’s treading on thin ice here. Inequality of fringe benefits—both the likelihood of getting them and their generosity—has actually grown much faster than inequality of earnings in the last two decades. I won’t go into the specifics, but there is good analysis by Brooks Pierce available online here.

The same goes for the wealth holdings that emerge out of fringe benefits: The economist Edward Wolff has calculated that only families with wealth holdings above $1 million saw consistent increases in their retirement wealth during the massive run-up of the stock market between 1983 and 1998. All other families saw their retirement wealth fall. In 1983, a family with enough wealth to place it at the 99th percentile of the wealth distribution held just over four times as much pension wealth as families in the middle of the wealth distribution. By 1998, they held almost eleven times as much.

And this is inequality that truly matters. If a worker’s employer doesn’t offer a health plan (true for more than 75 percent of workers in the lowest wage quintile—up from around 60 percent in the late 1970s), then that worker is going to be very hard pressed to find adequate private coverage on his or her own. Ditto for workplace pension accounts like 401(k) plans, the tax advantages of which can only be enjoyed if one’s employer actually offers an account.

David says he writes a lot about social mobility. I do not—or at least not upward mobility. But I still find myself concerned that none of the major measures of upward mobility (intergenerational, movement from one income share to another, and so on) appears to have risen during the era in which inequality has dramatically increased—indeed, that some may even have dropped. The reason for my concern is that social mobility can be a powerful equalizer of long-term incomes, guaranteeing that large inequalities we see in one year or one generation don’t persist over time. If those inequalities are instead as stark and enduring as recent mobility studies suggest they are, then our society is almost certainly not doing enough to ensure equality of opportunity for all Americans.

And if we are going to talk about mobility, we shouldn’t forget about downward mobility. (To my mind, economic insecurity is at least as serious a concern as economic inequality—though the two are so intertwined they’re hard to rank.). My own research indicates that families are facing much greater year-to-year income swings than they did a generation ago, and that families that experience drops in income—about half of families in most years, now and in the past—are experiencing much larger drops.

I return, however, to fundamental message of my response. Inequality is very high in the United States—much higher than in other nations, and much higher than in past. There is no real debate about that. What there is debate about is whether this is cause for concern—whether, in Schmidtz phraseology, it “matters.” I provided two strong reasons to think it matters. They are not the only reasons, but I still think they are good reasons.

1. Rising inequality suggests that equality of opportunity is being compromised. There are other indicators that also point in this direction: financial assets that are increasingly crucial to starting out on an equal footing are more unequally distributed than ever, with a higher share of families having essentially no wealth at all; the gap in college attendance between kids from high-income families and kids from low-income families has grown; the financial profile of children in selective institutions of higher education has become progressively more affluent.

2. Rising political inequality has abetted political inequality, which in turn may be helping to further cement and widen economic inequality. Disparities in political participation across economic lines have, in crucial areas, grown. Money is more important in politics than it was a generation ago, and money is of course the most unequally distributed political resource—and growing more unequal. Fraternal organizations, labor unions, and other groups that once incorporated and represented less affluent voters have substantially atrophied, without other organizations fully taking their place.

I appreciate having had the chance to participate in this discussion and to consider the important issues that Schmidtz, Singer, Palmer, and the others who have weighed in have raised.

Also from this issue

Lead Essay

  • “Everyone cares about inequality. Caring about inequality, though, is not enough to make inequality matter,” writes political philosopher David Schmidtz. “Unless we have the right sorts of reasons to care, equality does not matter, at least not in the way justice matters. So, why care about inequality?” Drawing on his illuminating new book, Elements of Justice, Schmidtz lucidly clarifies which inequalities matter, and why, in a world where our fellow citizens are partners in a cooperative system of joint production, not competitors in a race.

Response Essays

  • “When Jeremy Bentham first suggested that the pains and pleasures of an African should count as much as the happiness of an English person,” philosopher Peter Singer writes, “this view had radical implications, for slavery was still legal in the British colonies. Today, the suggestion that the pain of a nonhuman animal might count as much as the pain of a member of our own species is still radical. That is why this sense of equality remains important.”

  • Picking up where David Schmidtz’s lead essay ends, Cato Institute Senior Fellow Tom G. Palmer argues that a common line of reasoning used to justify the authority of the state to rearrange the unequal distribution of wealth is based on a mistake. The kind of equality that matters, Palmer argues, is the “equal right of every person to exercise choice over his or her own person.” The inequalities that emerge from the voluntary interaction of persons exercising that right are not “ours” to reconfigure.

  • In his reply to David Schmidtz’s lead essay, Yale political scientist Jacob Hacker agrees that material inequality as such is not our greatest concern. “The problems arise,” Hacker argues, “when resource inequalities translate into substantial, cumulative, and self-reinforcing inequalities of political power.”