The American Dream Is Alive and Well

Imagine you could wave a magic wand and double the incomes of the bottom 20 percent of Americans. Would you do it? I imagine your answer is yes.

Now, suppose that in order to increase the incomes of people at the bottom by a factor of two, you had no choice but to increase the incomes of the top 20 percent by a factor of 2.5. Would you still wave the wand? If so, you may be less concerned about inequality than you think.

Inequality is the gap between people at the top and those at the bottom. Over the past decade, the national debate is mostly concerned with inequality of income, but other inequalities — in consumption and wealth, for example — are also frequently discussed. I think the magnitude of attention the top-bottom gap receives is misplaced, in part because of the thought experiment we discussed above.

Many people, myself included, would wave the wand in the second scenario because they would want to increase incomes of those at the bottom. In doing so, they would also be increasing inequality, because incomes at the top would increase by more than those at the bottom. But for those of us who care more about the absolute condition of those at the bottom than about the size of the rich-poor gap, waving the wand is the right choice to make.

Indeed, the size of the income gap — income inequality — is not high on my list of economic and social challenges facing the United States. Of course, the most immediate concern is the coronavirus pandemic and the economic policy and public health responses to it. But the longer-term trend in inequality is not nearly as important to economic prosperity and the health of society as some other critical problems. Those include the relatively slow rate of productivity growth the U.S. has experienced for many years, challenges in imparting education and skills to all Americans, the long-term decline in male employment and reduced economic dynamism, to name a few. And they include the absolute condition of low-income Americans, regardless of the size of the gap between them and households at the top.

Am I unusual in this regard? Do Americans really care as much about inequality as the attention by media and liberal politicians suggest? It may seem absurd to ask that question, but bear with me. During the 1990s, the income gap between households at the top and those at the bottom increased substantially. Inequality of market income — which includes labor, business and capital income — increased by 8 percent from 1991 to 2000, according to the nonpartisan Congressional Budget Office. The top-bottom gap in household income after taxes and government transfers increased by 11 percent. And yet income inequality received relatively little attention at that time.

Compare that period to the decade from 2007 to 2016 — the most recent period with budget office income data — when the attention inequality received exploded. Over this period, the rich-poor gap in market income grew by less than 2 percent. Inequality of post-tax-and-transfer income — the most comprehensive measure of the flow of resources available to households — actually fell by 7 percent. So as concern about inequality was exploding, measured inequality growth was stagnant or falling.

What could explain this? There’s a lot going on here, of course. But I would argue that part of the answer must be that inflation-adjusted wages for typical workers grew 44 percent more in the 1990s than in the 10 years beginning in 2007. It may be that concern about inequality is driven more by how people are faring in the labor market than the actual size of the rich-poor gap.

The last few years have witnessed much discussion about whether inequality suggests that capitalism itself is broken. Given that income inequality has been stagnant or declining over the most recent decade, the timing of that conversation is odd. Moreover, as of January — the month before the coronavirus pandemic began dealing a crippling blow to the economy — weekly earnings for workers in the bottom 10 percent were growing faster than those at the median, the unemployment rate for workers without a high-school diploma was further below its long-term average than the rate for college graduates, and the rewards from economic growth were flowing to vulnerable workers, including those with disabilities and criminal backgrounds.

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