By Karen Petrou
- In 1975, the rewards of national economic growth were evenly distributed regardless of income. By 2018, most Americans lost their fair share based on per capita GDP.
- The cost of lost income due to increased inequality to the bottom 90% over this period amounts to $2.5 trillion compared to what it would have been if GDP had remained as equitably distributed as it was before 1975.
- Looked at another way, the majority of U.S. workers never shared in the economic growth from 1975 to 2018.
- It may seem that racial disparities in U.S. income improved over this period, but this wasn’t the result of a society become more fair, if not also economically more equal. In fact, racial disparity dropped not because Black male workers with below-median income held their own, but because white men did worse than before. The same phenomenon erases what appears to be a drop in the gender gap for working women who did a bit better – largely due to more working hours – than men.
- Fed policy premised on aggregates and averages as well as the benefits of GDP growth without regard to distributional realities is not only doomed to fail, but sure to continue to exacerbate inequality.
In all the equality data and financial policy premised on it, there’s no error as fatal as assuming that averages describe the American economy. The Fed isn’t the only one making major mistakes premised on presumptions of a continuing U.S. middle class – as we recently demonstrated, pollsters misjudged both the 2016 and 2020 elections for precisely the same reason. If the proverbial rising tide lifted all boats, then everyone would be glad to see the tide roll in. However, GDP’s rising tide floats only superyachts.
We have shown this before in prior blog posts, but now come data in hard dollars putting a price tag for the nation and for each household on the cost of income inequality to every household not blessed to be in the top ten percent. Although dry and dispassionate, the new working paper from Rand Corporation staff paints a deeply disquieting picture of not just current American inequality, but also prospective populist tumult – in just two generations, America has gone from a nation in which each household earned its fair share of economic growth to one in which growth leaves almost everyone farther and farther behind.
The Rand researchers do an excellent job of combing an array of data, adjusting them for the business cycle, capturing inflation, mastering the various differences in each data set, and acknowledging areas where data fall short and adjusting accordingly. The work is also a significant advance to empirical understanding of the extent to which the U.S. turned from a nation in which the poorest households gained the most from economic growth to one in which they now lose the most no matter the GDP in which the Fed takes such pride. Key take-aways include:
- Growth in median income from 1975 to 2018 brought it to $36,000, but an equitable share of real per-capita GDP would have led to a median income of $57,000. Thus, median-income families earned about a third less of what they would have if 1975’s equitable shares continued through 2018.
- Even what growth there was for the lowest-income families came not due to higher wages, but instead to more hours worked. This is a sharp reminder of the continuing fallacy that household income indicates prosperity – it doesn’t when income gains are due to still more work for the same or less compensation, when more household members need to work to sustain income, or when the cost of consumption drains income to sustain household security comparable to that enjoyed in 1975.
- In sharp contrast, the income of the top 99th percent grew 171% by 2018 compared to what its fair share would have garnered. Due to increases in dispersions of income in the 99th percent the average income growth in the top one percent was 300% more than its equitable share of real per capita GDP, providing an average income of $1,160,000 in 2018.
- In 1975, rural and urban population and income shares were about the same. In 2018, population and income share were each heavily concentrated in urban areas. Urban-area residents retained their income share from 1975 to 2018, but this appears due largely to income segregation and gentrification, not shared prosperity in urban centers. Low-income rural areas did the worst of any geography in both real income and equality share from 1975 to 2018, but even high-income rural residents didn’t share in per-capita growth.
- College-educated workers did better over this period, but still only gained 75 percent of what the counterfactual, equitable-share data say would have been theirs if 1975’s equality continued to 2018. The cost of student debt isn’t captured in these income data, but of course strongly and adversely affects any equality comparison.
These data are of course profoundly dispiriting, but they under-estimate American inequality because they focus only on income, not also on the wealth that ensures financial security and inter-generational mobility. They also do not reflect the net resources available to families even for day-to-day consumption because they reflect gross taxable income, not after-tax income and the implications of rising prices on sustainable family life. The income data are real – i.e., adjusted for inflation, but inflation data mask enormous increases in critical expenses such as child and health care or education, the latter of which saw cost increases of more than 600 percentage points relative to the changes in income over the approximate period studied here.
A Way Out
It will take a lot to fix the structural forces that underpin these dismal data, but the first step to a less-inequitable future is simple: stop seeing the U.S. in terms of averages or even medians and set policy instead on distributional reality. Statistics may seem a scant reed on which to rest hopes of a more equitable future, but without good data, we cannot have good policy.