Changing Inequality in the United States Today
Changing Inequality in the United States Today
Abstract and Keywords
This chapter focuses explicitly on the current economic environment in the United States. It discusses possible ways in which the major economic shock caused by the recently experienced global economic recession might influence long-term trends in inequality. It notes that the most likely outcome is that the current trends will persist and that the forces that have been driving increased inequality over the past three decades will continue to operate. It adds that there are possible economic and political changes that may emerge from a deep and sustained recession that could alter the recent trend toward increased inequality and equalize incomes in the years ahead.
This last chapter speculates about possible changes in inequality in the United States within the next few decades. Like all prognostication, this is highly risky, since we are all constantly surprised as our personal and national histories unfold.
The United States has been experiencing an extended period of rising inequality since the mid-1970s, following an extended period of downward-trending inequality that began sometime after 1910, including sharp reductions in inequality in the 1920s and the early 1940s. What are the factors that might lead inequality to stabilize or even reverse itself in the near future? What opposing factors might lead to continuing growth in inequality?
On the one hand, the best prediction of a long-term trend is that it will continue. Among the factors that are likely to continue the current trend toward increasing inequality are the following:
• Ongoing technological changes that will continue to advantage more-skilled workers in the United States. There is little evidence that skill-biased technological (p.159) change has reached an end. Indeed, as markets become increasingly international, the biggest returns will be to persons who can work in a global marketplace. This requires people with high degrees of managerial, technical, and interpersonal skills. The growth in the share of highly educated workers in the United States over the past two decades has been slow. Should demand continue to rise faster than supply, the returns to skill in the marketplace will continue to increase, generating ongoing widening in inequality.
• Greater competition from the developing world may also reduce economic opportunity for U.S. workers who are not among the most highly skilled. The large economies of China and India have grown rapidly in the last decade. They will continue to develop more-sophisticated economies, competing with the United States to produce exportable goods and services. This may affect the demand for and the wages of middle- and lower-wage workers. Of course, the rising incomes in these countries will also create new markets for U.S.-produced goods, and the rising output of these countries will reduce the prices faced by U.S. consumers at all income levels.
• Since Ronald Reagan’s presidency in the 1980s, the U.S. political environment has generally favored lower taxes and has been wary of expanding redistributional programs. For instance, there have been substantial cuts in taxes, with the largest cuts for higher-income families. Benefits in cash assistance programs have declined markedly. Despite minimum-wage increases, the value of the minimum wage is far below its historical high point in the 1970s. In (p.160) contrast, the income subsidies through the Earned Income Tax Credit have grown markedly, but this is a conditional transfer that occurs only if a low-income individual is employed, and it provides less of a safety net than do more-traditional public-assistance programs.1 If Americans feel economically insecure in the years ahead, the demand for even lower taxes and less redistribution could dominate the political environment.
On the other hand, the deep recession of 2008–09 was an economic shock that changed the economic environment. Certain factors may cause economic inequality to cease rising and even reverse itself.
• The collapse of the financial sector, with a sharp decline in the stock market, created a steep wealth loss in 2008. If the stock market does not recover its previous highs, this will result in a more equal wealth distribution and a somewhat more equal income distribution.
• The economic recession of 2008–09 led companies throughout the private sector to rethink their business plans, including salary structure. The financial sector was a poster child for high executive salaries over the 1990s and 2000s. The symbolic enforced reductions in the salaries of executives of companies that took federal bailout money may translate into lower executive salaries throughout the private sector, and this more equal structure might remain in place for some time. An examples is the pay cut taken in 2009 by Lloyd C. Blankfein, CEO of Goldman Sachs. Blankfein received just $9 million in bonuses, an 87 percent cut from his record $68-million bonus just three years earlier.
(p.161) • High and sustained unemployment may lead many Americans to feel greater empathy with those facing economic difficulties, and to perceive a greater risk of becoming low-income themselves. This can shift the political environment as it did in the 1930s, resulting in a greater willingness to provide redistributive programs through the government.
• The acceptance of somewhat higher tax rates or new taxes may grow in the years ahead. Higher taxes may be needed to reduce the growing government deficit that was in place before the recession and that has been exacerbated by large expenditures on fiscal stimulus. Higher taxes could also be needed at the state level, to address serious state deficits and to fund public-sector pension payments. It is likely that the burden of any tax reform is going to fall more heavily on higher-income families.
Which of these scenarios is most likely to occur is uncertain. Political leadership will matter a great deal. For instance, the health-care reform legislation passed in 2010 provides insurance options to uninsured persons and could make reductions in inequality more likely. Congressional reluctance to raise taxes on higher-income families could make declines in inequality less likely.
Of course, as the discussion in the earlier part of this chapter made clear, there are other, less foreseeable future events that could also affect economic inequality. A major global catastrophe, such as a deadly pandemic flu or the explosion of a nuclear bomb in an unstable part of the world, could shift inequality in ways that are hard to predict. More optimistically, new and yet unknown technological changes (such as new and cleaner (p.162) energy options) could create great opportunities for new wealth creation as well as new job and earnings opportunities.
A major political push to fund the programs that would substantially increase attendance and completion of postsecondary education by American youth could change the skill mix in our nation. This not only would raise incomes for American families, but could increase productivity and innovation in the entire economy leading to greater long-term growth that in turn leads to higher wage and income increases. Skill improvements have the promise of creating a “virtuous cycle” of change. The slowing rate of skill gains in the U.S. workforce threatens long-term economic growth in this country relative to other countries that are either catching up with or exceeding the United States in the share of their population with college and postcollege training.
All of these possibilities could change the distribution of economic resources in this nation. Whatever does occur, however, is unlikely to have “just happened.” The discussion of past economic shocks in chapter 5 suggests that their effects are very much determined by the specific nature of when and how they happen and how the policy environment responds. There is little in any economic shock—deep recession or major technological improvement—that inherently mandates that its effects on inequality will be positive or negative.
The review in chapter 6 of possible policies that might reverse the trend toward rising inequality indicated that even substantial changes in behavior or economic opportunities will go only partway toward reversing the long-term rise in inequality. Indeed, it is not clear that it is desirable to return to the same level of inequality as in some arbitrary past year. While ongoing increases in inequality may lead to increasing social and economic problems, an abatement of this trend or a partial reversal (p.163) may be sufficient, particularly if these changes come along with increases in income among all groups in society. Many of the changes simulated in chapter 6 produced substantial income gains that were focused among lower-income families. As this book has repeatedly noted, inequality levels may matter less in an economic environment in which income levels are rising for all groups.
Particularly in a nation with the resources and the governmental expertise of the United States, the long-term effects of economic change will depend upon the actions of the public and the private sectors. If the rising inequality of the past three decades is of concern, this nation can take steps that make it more likely that this trend will be reversed. These steps could include expanding the skills and educational opportunities of all American children. Skill increases should go along with policies that assure that less-skilled workers have the incentives to work and can earn enough to escape poverty. This in turn will encourage greater labor-force participation. Over time, a greater public willingness to enact progressive taxes or to expand redistributional programs will also mean less inequality.
We can select policies that are likely to produce economic gains among lower-income families, which will over time reduce inequality. Or we can ignore these issues and act in ways that further long-term growth in inequality. These are real choices, and they will matter.
(1) . The largest growth in redistributive programs has occurred in Medicaid, providing health insurance for a subset of persons in low-income families. Most of the growth in spending in Medicaid, however, has occurred not because of legislated expansions in the program (p.202) (although Medicaid coverage for children has expanded) but because of unforeseen changes in the cost and type of medical services provided. Indeed, several legislative efforts have tried (with only some success) to control costs in Medicaid.