Why Income Inequality Might Continue to Rise: An Interview with Jacob Hacker
Wednesday, September 29, 2010 at 7:43 am
Income inequality — the difference between what the rich earn and what the middle-class and poor do — is higher in the United States than in other developed countries. The income gap has widened over the past 30 years, unlike in most other developed countries. And, worryingly, it has yawned further during the recession, contrary to most economists’ predictions. Since the 1990s, the richest of the rich have pulled away from the merely wealthy, while the recession has made more and more Americans poor.
[Economy1] Jacob Hacker, a Yale political scientist, has researched this phenomenon — underscored again in Census reports released yesterday and last week. He and University of California, Berkeley, political scientist Paul Pierson argue in a new book, Winner-Take-All Politics, that political dynamics helped the have-the-mosts run away from the haves and, well, everyone else. And Hacker offers sobering evidence that there is nothing to stop the United States’ income inequality from growing worse in the near term.
Hacker spoke with TWI yesterday, and the interview is lightly edited for clarity and length.
TWI: The 2009 Census numbers show that the income gap is, by some measures at least, at the greatest levels ever recorded. Normally economists would say that recessions would close the gap up. Why were 2008 and 2009 different?
Hacker: Well, the first thing to say is that there are different ways of looking at rising inequality. The Census’ numbers are one way. And the other common measure is using income tax statistics. Those also show record levels — both for the top tenth of one percent [in terms of the percentage of income accrued] and the top one percent. [Analysis by economists Thomas Piketty and Emmanuel Saez] did show a little bit of a fallback in the position of the very rich between 2007 and 2008.
The reason economists expect income inequality to decrease during a recession is because recessions are usually associated with a big drop in the stock market. That means that wealthier people, who make more of their income from stocks and investments, see a big drop in capital gains. That actually explains both the Census statistics and the early results from tax statistics, because between 2007 and 2008, the stock market decline would have a negative effect, but it started to roar back in 2009. That meant the hit to the rich was pretty mild, at least from a historical perspective.
TWI: Do you expect inequality to continue to increase?
Hacker: There is reason to think that gap will continue to widen unless there’s some changes in public policy and in the economy.
The hallmark of the last three downturns has been very anemic job growth after the recession ends, leading to high long-term unemployment and putting very little pressure on employers to raise wages for workers. It’s reasonable to expect middle-class income will be stagnant at best. Meanwhile, there’s no reason right now to expect the runaway gains are going to end for the rich.
They seem to be driven by the financial market and by the very good results we’re seeing in corporate profits. It could continue to be that companies won’t be hiring, even though they will pay their chief executives a lot and their stocks will boom. That means stagnation for the middle class, and income for the rich.
So, inequality is continuing to widen. Those of us who have been following this trend for a while wonder if there’s some natural limit. The United States has experienced the same dynamics as a lot of other developed countries, but its inequality has widened whereas other countries’ has not. Inequality looks in the United States more like some developing countries. And, again, there is no natural limit to that. There’s no natural course correction I see. It will take some substantial response in public policy.
TWI: Is rising income inequality accelerating?
Hacker: It doesn’t look as if it’s accelerating, but it does look as if it has been sustained, with the only declines coming from the stock market reversals of 2000 and then in the late 1980s.
Evidence suggests that it has become more concentrated. The rich are getting richer, but it is also because the middle class had such a poor experience in the 2000s. Our calculations are that over the 1979 to 2006 period, roughly 40 percent of household income gains went to the richest 1 percent. The number is closer to 53 percent during the recent expansion, a particularly dramatic period of rising income inequality.
Middle class incomes hardly grew at all, but the overall economy expanded relatively well. The rich got wealthier, but the middle class didn’t. The 1990s featured large increases in the share of income going to top 1 percent, but times were not as difficult for the middle class.
TWI: So, the rich are getting richer, pulling away from the upper middle class and the middle class. But something we hear about less is that the poor are getting poorer, or at least that more Americans are poor.
Hacker: We’re seeing levels of poverty back where they were in the 1990s, right. But it is notable that over the last decade, the poverty rate remained relatively low, the middle class stagnated and the economy was expanding. The poor and the middle class seem to have something in common in the last decade: Neither experienced any income growth, despite the expanding economy.
There is severe disadvantage in the United States, alongside great wealth. What makes this such a politically explosive issue right now is the divorce between a very small share of the population and, really, most Americans. The Census stats show that essentially the top 20 percent have half of income in the United States, which is a pretty remarkable finding.
We’ve been so long accustomed to talking about the less-educated falling behind the more-educated, and the haves behind the have-mores, but now the have mores are falling behind the have-it-alls.
TWI: Was there anything else surprising in the 2009 American Community Survey or the Census report released two weeks ago, showing one in seven Americans lives in poverty?
Hacker: No. We were prepared for the fact that there would be high inequality. It’s what you said at the outset: It’s quite striking that this economic downturn seems to have not reduced the income gap between the richest and the rest in any substantial way.
TWI: So the backdrop for all of this is the Bush tax cut debate. Would raising income taxes on high earners, or making taxes more progressive, help?
Hacker: It’s obvious that the extension of all the Bush tax cuts, including those for the very richest, will exacerbate this imbalance. But, we have seen that that issue is not going to be front and center in the midterms. You would think that Democrats would gain political ground by emphasizing the rising inequality, still rising. But democrats aren’t wiling to support tax increases at all.
And I think it’s just a reminder that while those at the very top may be paying a large share of the nation’s taxes, they actually have been paying lower and lower rates over this period. Government has added to their gains via federal tax policy. Again, it suggests to me that there is not any natural tendency for things to come back. It requires leadership and action, politically, and it is not a particularly encouraging sign that the party that has the most to make from emphasizing the rising inequality is not doing it.
The Democrats are afraid to talk about taxes, afraid they’ll be tarred as big government liberals if they stick to their guns and stick to the middle tax cuts only. That’s suggestive of the degree to which the debate has been shaped by those criticizing government and arguing that the manifest problems in the economy aren’t a result of recklessness or misbehavior or mismanagement. People are upset. There’s no natural reason — it’s not inevitable that they’ll connect the problems in their lives to these trend in inequality. So, instead, it is about a runaway government that’s spending too much and hasn’t dealt with the debt.
One thing worth noting is that despite the attacks on government is that Americans still seem to be pretty strongly supportive of the idea that the taxes for the richest should expire. Surveys suggest strongly that rising inequality is not a good thing, and they’re being squeezed. It is a volatile mix. As I said it’s not going to naturally rebound, to the benefit of the Republicans. It will take political leaders explaining to Americans what is at stake.
TWI: The relationship between taxes and income is a little more complicated than it first seems, but would raising taxes on the wealthy start to close the gap immediately? Would we be able to see that, soon?
Hacker: It would have a real but modest effect. The estimates are that the — if the tax cuts, the upper-income tax cuts were extended, it would increase after-tax income with people with $1 million in income by about $128,000 on average. That’s not a trivial amount. But, given that the average income of the richest 1 percent is now in the $1.2 million range, even $100,000 or $130,000 is not necessarily going to make a huge impact.
We’ve been talking about 30 years in policy changes. If you look at the top 400 taxpayers, David Cay Johnson, the New York Times journalist, calculated that the average effective tax rate was about 40 percent in the 1960s. The Center on Budget and Policy Priorities said in 1995 it was 30 percent. And in 2007 it was 16.5 percent. I don’t know what this change would mean for that group. But, that implies we’re only going to be able to move back in the other direction slightly.
it’s not just what happens this particular round, but how policy changes going forward. One thing that is often missed is that it isn’t just tax rates. It is how well financial regulation works, how well we regulate CEO pay, how well we regulate corporate governance. A lot of these things work out through the adjustment of private sector actors. And those actors have huge incentives to counteract the law.
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