Hellegers: American Income Inequality is the Cause of our Crisis

Plutarch, writing almost 2,000 years ago, told us that “an imbalance between rich and poor is the oldest and most fatal ailment of all republics.”

Below is a chart that shows the course of income imbalance over the last 93 years in the U.S. If it showed the course of net worth imbalance, it would be much more dramatic. If it showed data for the top tenth of one percent– not just the top ten percent– it would be extraordinarily dramatic.

Inter alia, the chart shows that both the Great Depression of the ’30s and the present crisis were immediately preceded by great buildups in inequality. When ordinary people lack the wealth to buy things– houses for example–the system crashes.

There’s also a lot of data that show that economic equality conduces, quite literally, to the health of society. The correlation between equality and most measures of well-being is stronger than the correlation between wealth and well-being. See Richard G. Wilkinson & Kate Pickett, The Spirit Level (2009). For a good review of that book, see David Runciman in the London Review of Books, Oct. 22, 2009, .

Still, the rich consistently try to destroy egalitarianism, because for their segment, inequality is fine. It means increasingly desperate people trying increasingly hard to serve the rich. The rich also try to destroy the political means by which the rest of society might seek relief, which is exactly Plutarch’s point. Witness the rise of the present-day Tea Parties. A recent article in the New Yorker describes how the Koch brothers– Texas billionaires– have lavishly financed that movement.

In 1980 Ronald Reagan managed to break the egalitarian consensus that had held since FDR. (See the chart.) The key was playing on racial divisions. Reagan’s first campaign speech was in Philadelphia, Misssissippi. That town is famous for one thing only. It’s where three civil rights workers were lynched and murdered in the 1960s. Reagan’s target audience didn’t miss his message. Social justice was cast in terms of giveaways to demonized blacks– mythologized welfare queens in Cadillacs. Reagan’s ascendancy, by his exploitation of the race issue, is described by Thomas B. & Mary D. Edsall in Chain Reaction (1992). Thomas Edsall, until his retirement, was a reporter for the Washington Post.

The U.S. is now more unequal than a number of countries in Latin America. When I was younger it was accepted wisdom that those countries would never get anywhere until they solved the inequality problem.

John Hellegers

23 Responses

  1. Reagan may have broken the egalitarian consensus, but it took Clinton to “end welfare as we know it.” The bipartisan turning from the New Deal and the enshrinement of retrograde economic orthodoxy is complete with Obama and his University of Chicago economic team.

  2. Love this blog for the range of important topics it covers. Top quality and highly educative resource.

  3. I wonder – why not a word about uniformed Iraqi killing USA soldiers on “Iraqi war base”? Was this a desperate dead of the defeated Sunni, or the sign of new tactic by resistance? Could such tactics bring FULL end to USA occupation of Iraq?

    I suppose it could.

  4. This graph is just that: graphic. You really should show the graphs for the other two cases which you mention: net worth and data for the top tenth of one percent. I would be extremely interested to see them.

  5. When my Dad came home from WW II there was a kind of golden age. The elites had learned from the Bonus Marchers that it is dangerous to have a corps of discontented and angry veterans who feel disrespected by the society they served. So there was the GI Bill, Veterans home loans, education and opportunity. An average man with an average education could put in a reasonable effort working and get a secure, comfortable life for his family and raise his children in confidence that they would have a still better life. He and his wife would be able to have some support in their old age and not fear to end their lives in poverty and destitution.

    At some point, after these people got into their 50′s and 60′s and their children grew up, society decided that on special people with higher than average intelligence and education deserved to have a comfortable secure life. Then the great mass of average people began to sink and the minority of special people began to rise. Who did it? They did it to themselves by not being willing to share their prosperity and tax themselves to support their country.

  6. Agreed — we should be able to see ALL the graphs. Are they available? can they be made available? What are the (public) data-sources?

  7. What happened in 1941 to so suddenly and dramatically change the income balance? The US didn’t really enter the war until 1942, correct? If it was WWII, what was it about that war that led so swiftly to more quality when the current wars have not?

    • The trick is that it takes time for tax hikes to kick in. The top tax rate was hiked up, I think, to 63% in the late ’30s, and at the start of the war it went up to 91%. There was a temporary hike to 94% during the war. However, FDR’s redistribution went far beyond taxes. The war created full employment, but for once the war machine was on the side of the workers, who got better wages with less gender and race discrimination than ever before seen in new government-sponsored factories. Also, much of the war was financed by selling billions in war bonds to ordinary Americans at rather low interest rates. Note that Reagan’s final chapter of the Cold War was financed in exactly the opposite way: tax cuts for the rich, high-interest rate t-bills sold to the rich and paid off with interest. I think that had a big effect.

  8. I used to think that the assassination of JFK marked the beginning of the end of the good times in the US, but more and more I have been thinking the election of Ronald Reagan played more of a role. We had weathered Vietnam and Watergate, but lost our course during the “me” generation ushered in by Reagan. Interesting article by John Hellegers, and his old friends from EDF days say “Hi”

  9. Inequality applies to all living things this time around because of all living things on Earth mankind alone is pulling the trigger on global overheat by insisting on using fossil fuels and doing things like cutting down the world’s forests.. It’s apt that the graph of US wealth distribution can’t even include the top tenth of a percent’s accumulated wealth due to scale limitations because it speaks to the differences with what’s happening today compared to all that came before. I think these differences in scale apply to the indigenous peoples of the world who are simply being run over by the changes forced on them by the very desperate situation indeed about the collision course modern history is on with the fate of the Earth’s ability to remain full of life.

  10. The myth that Reagan created an economic miracle and defeated the Soviets by sacrificing the lazy, un-American poor is so deeply ingrained in our greedy souls that it can’t be refuted with all the evidence in the world. I think that the only way a society learns it was wrong is by catastrophe. The three big catastrophes of the 20th Century, the world wars and the Depression, shocked Europe out of its belief in a divinely-ordained class order that overrides democracy. But America really only suffered one of those, and the lesson was not taught deeply enough to create more than the one generation that swore to remember, and the thin layer of financial regulations to prevent it recurring. When that generation died out, so did the regulations. Instead, the plutocrats have prepared by creating what their 1929 predecessors didn’t have, a media machine so pervasive and seductive that people vote against their interests and evidence. The solution to every problem is further to the Right, always rightward, always the certainty that if inequality grows, MY superior merit will finally be recognized over my lazy, worthless peers, and if things get bad enough, we will know who to throw out of the lifeboat.

    It is the difference between what happened in America in 1933 – and what happened in Germany. I now believe white middle-class America would have to end up like Germany in 1945 to really change, and you know what that would mean.

  11. If america is stupid enough to think austerity is the solution to our current economic troubles then we will doom ouselves and our children to a generational recession. The Paradox of Thrift is at work big time! The only way to prevent near permanent crippling of our economy is for the government to spend. We will eventually have to pay the price for this spending but the alternative – a permanently depressed economy – is far more ominous. This much should be made clear to the austerity yahoos: If the Paradox of Thrift leads to the demise of major industries – which it will if austerity is implemented – then those industries not return … ever. This will deepen the recession into a full scake depression from which we may not exist as a nation.

    The piper must be paid. The question is one of limiting damage.

  12. This is the natural consequence of shipping mid-level manufacturing, data processing and other mid-to-high income jobs overseas. What is left is a few high-income professional jobs, corporate CEOs, the truly rich families and lots of people working at Wal-Mart, fast-food joints and other menial service jobs that must be delivered in person. Naturally this will be reflected in income distribution.

    Unfortunately our government gave incentives to corporations to do destroy American jobs and they took every opportunity to do so. In addition those corporate CEOs were already focused on the quarter-to-quarter bottom line results and had a very myopic view of what was “good for America” (which turns out to be what is good for them). In fact I would say “American” companies really don’t give a rat’s ass for the American worker. Unfortunately I see no turnaround in this situation which will result in a continually declining standard of living for our children.

  13. Dr. Cole gets right to the political heart of the matter: inequality kills republics. Unfortunately, what usually results afterwards is a principate.

    @Curt Freed,

    The USA, and most of the developed world, needs redistribution rather than mere stimulus. What’s the point of massive fiscal stimulus, when the tax structure heavily favours the rich, and therefore the debt incurred falls upon those least able to repay it? What’s the point of loose monetary policy, for instance, if it just leads to an explosion of housing costs?

    Without aggressive redistribution, “stimulus” is pointless in the current situation. The Western economies have had all kinds of stimulus thrown at them in the past decade: the lowest interest rates seen in a lifetime, government deficits every year, tax reductions. This has happened not only in the USA, but almost throughout the developed world. From France to Japan, we all followed more or less the same recipe, merely seasoned to local tastes.

    But almost everywhere, there is a crisis. In the USA, social security is about to get the chop. In Canada, healthcare is being rampantly privatized. In Europe, pensions are getting retrenched. The post-WWII welfare states, briefly put, are getting slaughtered. Why? Maldistribution!

    Right now some of the Democrats in the USA are urging “stimulus,” because they’re too timid to face the fact that what is really needed is a big social shift in the ownership and control of capital.

    The other way the debt-financed stimulus proposals are disingenuous is that they wish to eventually inflate away the value of the US debt held by foreigners–in effect to make the already ill-paid Chinese worker bear the brunt of stimulating the US economy (the Chinese of course have their own distribution and control problems).

  14. The two other indicators of the impending collapse of an empire are;

    1. Military over reach (the US has something like 700+ bases in over 100 countries), the cost of which will eventually cripple the country
    2. Infant mortality. “America may be the world’s superpower, but its survival rate for newborn babies ranks near the bottom among modern nations, better only than Latvia.” link to msnbc.msn.com

    Emerging powers most notably the BRIC countries are already writing America’s obituary.

  15. It is obviously correct (per “The Spirit Level” and other studies) that a lower Gini co-efficient correlates with something akin to welfare and happiness within societies. Northern European countries — Scandinavia in particular — are reported to have higher levels of “happiness” than the US, however “happiness” is defined). In the longer term, income and wealth inequality may be the single best metric for charting the rise and fall of great powers.

    Looking at this chart, the question is: What led to the dramatic drop in US income distribution in the early 1940s? The obvious answer is war. And what accompanied the coming of war? Big government, higher taxes and all manner of controls, acceptable only at a time of national emergency when divisiveness — class, ideology, geography etc. — dissolved overnight into unity. Thus the discombobulating possibility arises that the “normal” political cacophony of America, the virtues of which are enshrined under rubrics such as “democracy” and “liberty” in the standard civics text-books, may in fact be bad for the health of a republic, and that the key variable in determining the willingness of this or any other society to endure income and wealth “compression”, may be unity of purpose and a shared national consensus — essentially “un-American” values. In other words, America, built as it is on notions of pluralism and diversity, may be preternaturally doomed to last longer at the summit and descend more rapidly than other super-powers have in the past. Absent major external threats, it looks from these charts as though that could be the case. If so, the only hope of salvaging this great nation and reversing its precipitate descent toward second-rateness may be war. Not small expeditionary colonial wars like Afghanistan, Granada, Panama or Iraq. But big war, real war, all consuming war, like the one in 1942. What a depressing thought.

  16. September 9, 2010 at 7:42 am

    CORRECTION: (The earlier version of this post was sent with several typos and small errors for which I apologize).

    It is obviously correct (per “The Spirit Level” and other studies) that a lower Gini co-efficient correlates with something akin to welfare and a sense of well being within societies. Northern European countries — Scandinavia in particular — are reported to have higher levels of “happiness” than the US, however “happiness” is defined. In the longer term, income and wealth inequality may be the single best metric for charting the rise and fall of great powers.

    Looking at this chart, the question is: What led to the dramatic drop in US income distribution in the early 1940s? The obvious answer is war. And what accompanied the coming of war? Big government, higher taxes and all manner of controls, acceptable only at a time of national emergency when divisiveness — class, ideology, geography etc. — dissolved overnight into unity. Thus the discombobulating possibility arises that the “normal” political cacophony of America, the virtues of which are enshrined under rubrics such as “democracy” and “liberty” in the standard civics text-books, may in fact be bad for the health of a republic, and that the key variable in determining the willingness of this or any other society to endure income and wealth “compression”, may be unity of purpose and a shared national consensus — essentially “un-American” values. In other words, America, built as it is on notions of pluralism and diversity, may be preternaturally doomed to remain at the “summit of power” for a shorter stretch and descend more rapidly than other super-powers have in the past. Absent major external threats, it looks from these charts, as though that could be the case. If so, the only hope of salvaging this great nation and reversing its precipitate path toward “second-rateness may be war. Not small expeditionary colonial wars like Afghanistan, Granada, Panama or Iraq. But big war, real war, all consuming war, like the one in 1942. What a depressing thought.

    • Yours is an excellent analysis. Many people have noted a relationship between ethnic homogeniety and support for welfare and redistribution. Because in the long run the poor must do their part by using their benefits wisely, which they may be more likely to do if the rich don’t view them as an inferior alien race who they will never hire anyway. This was the way it was in the old Scandinavia, but the consensus fell apart once there was an immigrant population. For America that tribal brotherhood could only be induced artificially by WW2 and the Cold War. Liberals paid a price for using those struggles to make the argument, “We must do these things for minorities and the poor or they won’t be loyal to us against the Nazis and Reds”. Because once the Cold War was over, it was time for the rich to party consequence-free, and they’re still doing it. No one really believes that blacks or Latinos will switch over to al-Qaeda nor must they comply with a draft, so the War on Terror has simply upped the self-righteousness of the “good” Americans who obviously merited their vast war bonanza.

  17. [...] American Income Inequality is the Cause of our Crisis – “the rich consistently try to destroy egalitarianism, because for their segment, inequality is fine. It means increasingly desperate people trying increasingly hard to serve the rich. The rich also try to destroy the political means by which the rest of society might seek relief” [...]

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