Why Inequality Matters
Widening chasms in income and wealth imperil the American Dream
It's a presidential election year. And a frequent claim amidst the campaign-fueled hyperbole — made by both sides — is that we live in the greatest country in the world.
Yet the U.S. ranks an abysmal fifth worst in income equality among the 37 market-based economies that make up the Organization for Economic Co-operation and Development (OECD). Similarly, the U.S. has more wealth inequality than almost any other developed nation.
"Wealth begets wealth. Inequality follows."
And both income and wealth inequality in the U.S. are escalating. In a single generation, CEO compensation has skyrocketed 1,085% while a typical worker's compensation has risen just 24%. CEOs, who were paid 21 times as much as a typical worker in 1965 now are paid almost 300 times as much. And the share of wealth held by the bottom 90% of Americans fell from 33% to 23% over the past three decades.
These disparities have weighty consequences, from food insecurity and substandard housing to wildly unequal political power — and a foundering of the American Dream.
How Bad Is It?
"The U.S. is an outlier among advanced economies in its extremes of income and wealth inequality," says Monique Morrissey, an economist with the Economic Policy Institute, a nonpartisan think tank.
Worldwide, our level of income inequality is comparable to that of Haiti, Benin, Iran and Tanzania — probably not the cohort with which Americans would want to be associated. In 2022, the top 10% of American earners took home nearly half of the country's income. That puts us in the same non-brag-worthy bracket as Myanmar, Russia, South Sudan and Uzbekistan.
Wealth statistics are worse: That top 10%? They hold nearly 70% of America's wealth.
"The U.S. is an outlier among advanced economies in its extremes of income and wealth inequality."
The statistics are even more dismal as you go up the economic food chain, says Morrissey. "The shares of income (21%) and wealth (35%) held by the top 1% in the U.S. are what we might expect to see in developing or middle-income countries."
And it's getting worse.
"Inequality in pre-tax income in the U.S. has been growing quickly over time, whereas in most other developed countries it has been relatively stable or growing much slower," says Chloe East, an economics professor at the University of Colorado and a non-resident fellow at the Brookings Institution.
That "pre-tax" descriptor refers to earnings before taxes are deducted and "safety net" subsidies such as food stamps and child tax credits are added. Morrissey points out that America has less-progressive taxes and weaker safety nets than other developed economies — and that results in even more inequitable "post-tax" incomes.
Causes of Economic Inequality
It wasn't always this bad.
After World War II, America enjoyed a period of relative income equality. "The postwar decades in the West have been dubbed the 'golden age of capitalism' because they were a time of broad-based prosperity," says Morrissey. Incomes across the economic spectrum grew at a rapid clip, roughly doubling (adjusted for inflation) between the late 1940s and early '70s.
"The 'have nots' need to work so much harder to climb into the middle class . . . than the 'haves' need to work to keep and grow their affluence."
That all began to change in the late '70s. Morrissey notes that many blame the end of that "golden age" on factors like the Vietnam War, the OPEC oil embargo and a recession in the mid-1970s.
But many experts feel that policy choices have been the real drivers of our increasing inequality. Morrissey attributes the trend "to a rightward political shift and conscious policy choices" that reversed those postwar equality gains.
Here's a look at some of those policies:
Tax Rates
One factor was our shift away from progressive taxation. In 1964, the top marginal tax rate 77%; today it is 37%.
Both income and wealth inequality are exacerbated by low taxes. "Untaxed, wealth generates more wealth and tends to snowball," says Morrissey.
The 'Erosion of Worker Power'
"Another big driver of the increase in income inequality is the fact that there has been a large erosion of worker power," observes East. "Unions and union membership have been on the decline in the U.S. for decades." In 1964, 29.3% of the country's workforce was unionized; in 2022 the rate had fallen to 10.1%.
Contributing to that erosion of power are "right to work" laws in 26 states and Congress' failure to ensure that the federal minimum wage — now $7.25 an hour — keeps up with inflation.
"Without unions, companies are able to pay workers less and less over time, while they raise pay for the CEOs," says East, a clear cause and effect of those skyrocketing management salaries.
Racism
"A key driver of inequality in both income and wealth is the long-standing history of racial discrimination in our country," she adds. "Because wealth is usually built up across generations, the legacy of slavery, segregation and other racist policies live on and manifest today in the racial wealth gap."
That "racial wealth gap" is pronounced: The net worth of the average white American family is about 10 times that of a typical Black family.
And More…
Other policy trends that Morrissey points to include financial deregulation, inadequate stimulus to counter economic slumps and "trade policies that have, essentially, decimated U.S. manufacturing." Indeed, research suggests that globalization has reduced global wealth inequality between nations but has increased wealth inequality within nations.
The bottom line, says Mark Iwry, a non-resident fellow at the Brookings Institution, is that "the 'have nots' need to work so much harder to climb into the middle class — and try to maintain a foothold there — than the 'haves' need to work to keep and grow their affluence."
He adds that the wealth enjoyed by the "haves" affords them easy access to "financial, tax, legal, estate planning and wealth management expertise optimally growing their wealth, and purchasing the political influence to keep it all going."
"Wealth begets wealth," Iwry concludes. "Inequality follows."
Why Economic Inequality Matters
If your gut is telling you that it's just common sense that extreme economic inequality is wrong, listen to those instincts.
Here are some of the evils that inequality breeds:
Unmet Basic Needs and Well-Being
The foremost reason that economic inequality is important is the simple fact that it prevents people from meeting their basic needs. "Inequality at the bottom causes material hardship — food insecurity, poor health, substandard housing, unsafe neighborhoods and bad schools," says Morrissey.
In addition, research indicates that the higher the share of income held by the top 1%, the lower the overall happiness and well-being of the general population.
Frustration of the American Dream
The American Dream — that belief that anyone who works hard can scale the socioeconomic ladder — is jeopardized by rising inequality.
"The late Alan Krueger used the phrase The Great Gatsby Curve to describe how economic inequality hinders economic mobility," says Morrissey. That disparity "prevents people from taking advantage of their talents and hard work to improve their lives and reach their full potential."
East warns that "as income and wealth inequality grow, the U.S. will move further away from our ideal of a meritocracy and closer to an aristocracy."
Unequal Political Power
"The main problem with inequality at the top is the concentration and entrenchment of economic and political power," Morrissey says. "Wealth generates wealth and concentrates power, including the political power to prevent wealth redistribution through a tax-and-transfer system," she adds.
In the U.S., it takes many millions of dollars to run successful federal (and even state and local) political campaigns, and there are few effective restrictions on those contributions.
Essentially unlimited election spending and an estimated 12,000 lobbyists result in a self-perpetuating cycle: Money equals power and that power is used to promote the inequitable economic status quo.
Societal Harms
On a macro level, economic inequality tends to end badly historically. In his book, "The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century," historian Walter Scheidel reports that large, unabated rises in inequality can lead to revolutions, warfare, carnage — even plagues.
It's best we get ahead of that, don't you think?
What Can the Country Do?
Economic inequality is not inevitable. Looking at the causes of income and wealth disparity provides clues as to what can be done to reverse this trend.
"Progressive taxation is key to reducing income inequality, but so are laws that protect workers' rights to unionize and ensure employers pay workers a fair wage," says East. Morrissey adds that "using taxes to counter wealth inequality is crucial for limiting the power of the billionaire class."
Iwry lists a number of policy initiatives, including raising the minimum wage, making income and estate taxes more progressive and expanding the earned income tax credit, child tax credits and health insurance subsidies.
Higher marginal tax rates and more progressive estate taxation could also address structural racism and its impact on inequality, according to East.
What Can Individuals Do?
Americans care about this issue with 61% saying there is too much economic inequality in the U.S. and 42% agreeing that reducing inequality should be a top priority for the federal government.
Concerned citizens can support one of the dozens of groups working on the root causes of economic equality — from Citizens for Tax Justice (advocating for a more progressive tax system) to Fight for a Union (backing a national $15 minimum wage and unions for all) to Ninety to Zero (seeking to counter centuries of racially-based economic discrimination).
Getting Big Money out of politics is a critical step toward limiting our top-heavy political power structure — and many organizations are working toward that end.
Gandhi is quoted as saying, "A nation's greatness is measured by how it treats its weakest members."
Perhaps we should contemplate that the next time we claim that we're the greatest country in the world.