Given that this deficit conversation was  inane and destructive, the OWS movement deserves great credit for breaking it up. Further, given that the element OWS introduced in the nation’s conversation—the growth of inequality in recent decades—is the most important economic trend in the past generation, they deserve even further credit; they didn’t just interrupt a dumb conversation, they tried to start a relevant one.

We tried to argue that many of the claims of the OWS movement were well-supported by economic-data—see our paper here. Since then, we have released our newest edition of The State of Working America—see the website (and data) here—which further cements the case that inequality was  the primary barrier to decent growth in low– and middle-income households living standards, and which links the growth of this inequality to intentional policy decisions made explicitly to redistribute income upwards.

I will note that previous editions of State of Working America were ground-breaking in using the language of the 99 versus the 1 percent. Unfortunately for EPI, it was Barbara Ehrenreich, and not the authors of State of Working America, who deserved the credit for this one, as she blurbed on the cover:

“This book is our nation’s report card on how the economy is performing—not just for the class that owns private jets and more homes than they can recall—but for the other 99 percent of us as well.”

So, two cheers for OWS for getting more attention paid to the problem of growing inequality than EPI has managed to generate in years of tracking data and writing books.

Why not three cheers? Just a nagging reservation about the path not taken.

In the fall of 2011, the elite policy discussion was mostly about the supposed evils of large budget deficits. But the most-pressing economic problem facing the nation was 9 percent unemployment (and which had been at or above 8.9 percent for more than two years), and the primary tool that would have been effective for reducing this unemployment was larger budget deficits to finance job-sustaining spending like infrastructure investments and safety-net programs. Further, President Obama had just announced a policy proposal (the American Jobs Act) that exactly called for larger near-term deficits to finance these job-sustaining investments and spending to reduce unemployment.

Given all of this, if you had told me that a social movement was about to sweep the land and draw crowds into the street, I would have bet big money that it would have been one focused on reducing joblessness in the near term and which would have fallen into line behind the American Jobs Act. Yet it wasn’t—it was a social movement that had much less to say about unemployment than about inequality. This is a real puzzle to me.

Is it obviously a bad thing that OWS focused on inequality rather than unemployment?

I don’t know. By associating itself more with concrete policy proposals and a problem (unemployment) that was much more solvable in the near term through one-off policies, I think OWS could have borne more immediate fruit by getting behind that fight.

But, the fight over a fair sharing of economic rewards is one that has been with us for a generation and which shows little signs of having swung in a useful direction. By lobbing this issue into the nation’s attention, and by focusing on how elites have too often captured the tools of economic policymaking and used them to redistribute income their way, OWS clearly performed a hugely valuable service. With (lots of) luck, we will look back and say that their protests were the foot-in-the-door of this fight.

People would be well-advised to keep this in mind – too many observers, such as Megan McArdle, have highlighted this drop in top incomes by 2009 and suggested that maybe income inequality has stopped growing, saying “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.” A New York Times article echoed this perspective. EPI countered in a post yesterday with new data showing that wages for top earners have restarted their upward march after hitting a post-recession low in 2009 – meaning that income inequality (or at least inequality of wages) is, not surprisingly, already rising again.

The fall in incomes at the top between 2007 and 2009 had much to do with the fall in realized capital gains and EPI pointed out that capital gains actually fell far more than the stock market decline. That makes sense since households would not want to sell off their stock when prices are low. The graph below plots average capital gains income for the top 1 percent of income earners along with the S&P 500 index (both indexed to 1989) and shows that this “overreaction” of realized capital gains relative to stock market movements is far from unusual.

This dynamic was very much at play in the 1990s and 2000s. Capital gains income for top earners skyrocketed faster in the 1990s than the growth of the stock market and then fell faster after the technology bubble crash. This was followed by capital gains growth faster than the stock market in the recovery period from 2003 to 2007. Unfortunately, the data from Emmanuel Saez and Thomas Piketty on incomes used in this graph only extend to 2008, but it isn’t difficult to see what is happening here. The behavior of the S&P 500 since 2008 is shown, with the recovery from the 2009 bottom clearly visible. As reported in our blog post yesterday, we know that capital gains fell further in 2009, which surely helps to explain the dip in the top 1 percent of incomes that McCardle highlights.

But we also can see the stock market increase in 2010 and 2011, which is surely driving capital gains income for the top 1 percent higher. The important part of the inequality debate is not to cherry-pick individual years where the rich suffer, or do exceptionally well, but to show the unmistakable trend over time. Temporary reductions in the relative income of the very rich are a common feature during recessions – but so far, the long-run trend of growing income concentration has re-established itself quickly after these cyclical downturns. Given this, it is most unlikely that the financial crisis has fixed income inequality.

(Wonky note: The spike in capital gains income in 1986 was due to a change in tax law in 1986: The Tax Reform Act of 1986. The law raised the rate on capital gains income, effective January 1 1987, from 20 percent to 28 percent.  Long-term capital gains on corporate stock were seven times their December 1985 levels in December 1986. For more, see “The Labyrinth of Capital Gains Tax Policy: A guide for the perplexed” by Leonard Burman, Brookings Institution Press, 1999.)

Wage and salary data show wage inequality rising from 2009 to 2010 (recovering more than a third of lost ground), suggesting that it is too early to shed crocodile tears for the top 1 percent. Regardless of last year’s trend, it remains the case that income inequality in 2009 was still substantially greater than it was in the late 1970s. Moreover, the conclusion that a lion’s share of income gains accrued to the top 1 percent or even the top 0.1 percent, while income growth was modest for the bottom 90 percent (as Josh Bivens and I recently wrote) remains absolutely true.

As Josh and I explained, there are three dynamics at play in the shift of income up to the top 1 percent and the top 0.1 percent. First, there’s the shift upwards in the distribution of wage and salaries, which also reflects the “realized option income” provided to CEOs that are counted as wage income. Second, there’s the shift upwards in the distribution of capital income (capital gains, interest, dividends): According to the Congressional Budget Office, the top 1 percent reaped 57 percent of capital income in 2007, up from 38 percent in 1979. Last, there is a shift toward greater capital income and proportionately less labor compensation since 1979.

What’s happened to these dynamics in the recession? We know the stock market declined more than a third from 2007 to 2009 (judged by the NYSE and the S&P indices) and the realized capital gains at the top fell over 70 percent (according to the IRS data for those  with incomes $500,000 or more, which I will refer to as those with top incomes). Though capital gains comprised 36 percent of top incomes in 2007, the stock market decline and an even far greater drop in capital gains meant that capital gains contributed only 16 percent of their income in 2009. That explains a lot of the fall in inequality between 2007 and 2009. However, the 20 percent gain in the stock market in 2010 should have helped top incomes recover a bunch of lost ground, don’t you think? I would expect gains in the stock market and realized capital gains to fare better than real wages over the next few years, fueling greater inequality.

We also know that corporate profits are now substantially greater than they were before the recession. In fact, as Heidi Shierholz and I wrote in August, “In 2010 the share of corporate income going to profits was 26.2%, the highest share since the years during World War II, when national policy used wage and price controls to consciously suppress wage growth.” So, it seems that one of the dynamics causing greater inequality is certainly going strong.

I (along with research assistant Nicholas Finio) have been tracking the trends in top wages using the historical data produced by Wojciech Kopczuk, Emmanuel Saez, and Jae Song for 1979 through 2004 (developed with access to Social Security earnings microdata) and updating their analysis using wage data published by the Social Security Administration. These wage data are available for 2010 so we can get a look at part of the overall income picture to see how quickly, if at all, income inequality is recovering lost ground. As the graph shows, the share of wages earned by the top 1 percent fell from its historic high in 2007 of 14.1 percent to 12.2 percent in 2009. That is what the top 1 percent’s share of wages was back in 2003 in the last recession and what it was in 1996, seemingly reversing more than a decade of wage inequality. However, the top 1 percent’s share of wages was just 7.3 percent in 1979 so the drop by 2009 was nowhere close to reversing the three-decades growth of wage inequality.

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In 2010, the wages of those in the top 1 percent grew 6.8 percent in inflation-adjusted terms while those in the bottom 90 percent saw their real annual earnings fall 0.7 percent. Consequently, the top 1 percent’s share of wages grew to 12.9 percent, the same as in 2004, and recovered more than a third of the loss from 2007 to 2009. The shift in wage distribution has mostly occurred among the top 5 percent and hasn’t really trickled down to the bottom 90 percent, whose wage share in 2010 was 61.5 percent. That puts the bottom 90 percent’s wage share back to where it was in 2006 when it was the lowest in any year (dating back to 1937). Note, that the bottom 90 percent had 69.8 percent of all wages in 1979; so there certainly has been a tremendous growth of wage inequality since 1979 despite whatever drop there’s been in the recession. Clearly, this much ballyhooed reversal of wage inequality hasn’t meant much to the vast majority.

The graph puts this in terms of the actual growth of wages for the top earners (those in the top 0.1 percent and top 1 percent) and for the vast majority, the bottom 90 percent. Between 1979 and 2007, the wages of the top 1 percent grew 156 percent, far better than the 17 percent growth obtained by the bottom 90 percent. Even with the fall in wages for those at the top between 2007 and 2009, their wages were still 116 percent higher than in 1979 while the wages in the bottom 90 percent were just 16 percent greater. In 2010, the top 1 percent had strong real wage gains and ended up 131 percent above 1979 wage levels while those in the bottom 90 percent lost ground and had wages 15 percent ahead of their 1979 levels.

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The idea that income inequality is a thing of the past or has reversed itself is simply not true. Inequality did fall from 2007 to 2009, but remained way above the inequalities that prevailed 30 years ago. Everything we know about trends in 2010 shows inequality is recovering lost ground. I would bet that further ground will be recovered in 2011 and ensuing years and it’s just a matter of how quickly this occurs. You can bet that the income growth at the top will be far stronger than that of the vast majority over the next several years. Of course, these trends in inequality are not dictated by a law of nature or economics, and they won’t be reversed until policies are shifted to make that happen.

Mishel served as a panelist during the session “The backlash: Zuccotti Park and beyond.” He was joined by Jeff Madrick, senior fellow at the Schwartz Center for Economic Policy Analysis at The New School, and Terra Lawson-Remer, fellow at the Council on Foreign Relations and assistant professor of International Affairs at The New School.

Mishel used the forum to lament the lack of urgency being shown by Buttonwood attendees toward the unemployment crisis. Watch Mishel’s full remarks below:

Mishel also recently conducted a virtual teach-in with Occupied Media, where he talked about the need for a more decent and more equal society:

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Just in the past year, we’ve seen violent clashes erupt between protestors and police in London, New York, Rome, and Oakland as a direct result of citizens protesting budget austerity, joblessness and a sputtering economic recovery. And in encampments literally all over the world people are peacefully protesting income inequality and widespread joblessness as part of the Occupy Wall Street movement. Thanks to a 17 percent youth unemployment rate in the U.S., young people in New York, Tulsa, Sacramento, Philadelphia, Minneapolis and elsewhere have plenty of time on their hands to protest and make their voices heard. Even recent college graduates have an unemployment rate that’s almost double what it was before the recession.

But just because they’re peaceful does not mean the OWS protestors are not seething with anger about the way that high level executives in the financial services industry – who are some of the wealthiest people in the world (better known as “part of the 1 percent”), have escaped prosecution or serving any jail time after bringing our economy to the brink of collapse, while the industry as a whole somehow managed to escape serious reform by Congress.

One of the other principal gripes of the peaceful OWS protestors is that Congress has failed to do almost anything to invest in the economy or create jobs since the stimulus package was passed in 2009, despite persistent joblessness and underemployment. Foreign governments in other developed countries have failed at this as well – and the discontent is palpable. Just look at the scale of protests in Spain, spurred in part by the country’s eye-popping 46 percent youth unemployment rate.

From most reports, it appears that the OWS protestors are committed to remaining peaceful – for now. Let’s hope it stays that way, despite this new evidence that things may deteriorate if economic conditions fail to improve.

My colleagues at EPI recently outlined how the grievances of the Occupy Wall Streeters are fact-based and supported by ample evidence. The ILO’s 2011 World of Work report offers a new estimate that should motivate 99 percent of the global population to join together into one massive movement that challenges the financial and political elite to enact policies that will put people back to work around the world. The table below is the ILO’s estimate that by 2013, there will be a global shortage of 40 million jobs – that’s a lot of desperate, hungry people with way too much time on their hands.

According to the data, they’re fundamentally right. This paper presents 12 figures that demonstrate how skewed economic rewards (in income, wages, capital income, and wealth) have become in the United States. These figures, most of which cover 1979 through 2007 (prior to the recession) generally break out trends for the top 1 percent, the next richest 9 percent, and then the bottom 90 percent of households or earners. While income growth at the very top—the richest 1 percent and above—has been truly staggering, incomes at roughly the 90th percentile and above (the richest 10 percent) have generally at least matched the rate of economy-wide productivity. It is below the 90th percentile where one really sees the potential fruits of economic growth (as measured by economy-wide productivity) failing to reach American households. An economy that fails to cut in 90 percent of American households on a fair share of economic growth is one that needs serious reform. As the figures show:

• The top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share—36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent. The patterns are similar for wages and capital income.
• As they have accrued a large share of income gains, the incomes of the top 1 percent of households have pulled far away from the incomes of typical Americans. In 2007, average annual incomes of the top 1 percent of households were 42 times greater than incomes of the bottom 90 percent (up from 14 times greater in 1979) and incomes of the top 0.1 percent were 220 times greater (up from 47 times greater in 1979).
• The financial sector’s share of the overall economy has roughly doubled in recent decades, and now stands at 7.6 percent of total national income. Relative to this sector’s share in 1979, this translates into an extra $547 billion in compensation and profits claimed by the sector—a trend with questionable social payoff.
• Growth in wealth, not just incomes, has also become greatly skewed in recent decades. Most of the wealth gains of the last generation went to those who already had the most wealth, a group increasingly distant from the vast American middle-class. The wealth of the median household actually declined over this time period. As a result, in 2009, wealth held by the wealthiest 1 percent of households was 225 times greater than that held by the median household.

The effect of policy on income and wealth inequality

No one who has looked at trends in economic inequality in the United States in recent decades could dispute the dramatic increase in the share of all income claimed by the richest subgroups—especially the highest-earning 1 percent referred to by Occupy Wall Street activists when they say they represent the 99 percent of Americans left behind. Mishel, Bernstein, and Shierholz (2009) present a comprehensive review of these trends and Piketty and Saez (2010, updating earlier reports) explore in more depth the gains enjoyed by the top 1 percent.

Quick Facts: The Upside-Down Economy

Download and print half-sheet fliers that provide easy-to-understand information about the widening gap in economic status between the bottom 99 percent and the top 1 percent of Americans. The fronts provide numerical facts about the subject area while the backs contain definitions, explanations, and an elaboration of each issue:

Income

Wages

Wealth

 

 

There is some disagreement around the edges of the debate concerning just how dramatic this income-share increase was or when exactly it happened—was it steady and continuous, or the result of a couple of discrete “jumps”? And there are those who discount the seriousness of the divide, saying that middle-class incomes are managing to grow despite the huge increase in the top earners’ share. But no serious analyst denies that the top 1 percent (of households or tax-units or families) has seen a very large increase in incomes and in share of total income since the late 1970s.

Public policy, either through commission or omission, has played a central role in the increasing concentration of income. For example, Baker (2006), Bivens (2010), and Hacker and Pierson (2010) have all documented the role of various policies in generating greater inequality. The decade-long surge in income inequality occurred in pre-tax incomes, driven by developments in both major kinds of market-based incomes, namely the wage and salary incomes from work, and capital incomes (realized capital gains, interest, dividends) from wealth. And we know that the most obvious way policy can affect incomes—through taxes—has clearly aided the widening of the income gap. The Congressional Budget Office (CBO) shows that even as their share of total incomes more than doubled between 1979 and 2007, the richest 1 percent of household’s effective federal tax rate fell from 37 percent to 29.5 percent.

The clear policy tilt in favor of the highest-income households in the completely visible realm of taxes suggests that this group receives preferential treatment in the much more opaque policy decisions that get made in Washington every day. For example, Bartels (2007) shows how policymakers give much larger weight to the preferences of richer constituents.

What the Occupy Wall Street movement has done with its “We are the 99 percent” campaign is to remind Americans that economic outcomes are not just like the weather, something that must simply be endured and adapted to rather than forced to change. Instead, economic outcomes are shaped by political decisions. This insight is valuable because it confers the power to challenge the status quo, which is often preserved by claims that economic rewards are doled out through simple meritocracy and that any interference with market outcomes will wreck the economy. It’s not so. Markets are always shaped by policy, and policies in the United States have been shaped to benefit the already well-off. Changing the rules to ensure that rewards are more broadly shared can lead to an economy that is both more efficient and more fair.

The widening income gap

Figures A–C display trends in growth of overall market incomes, including wages and salaries as well as interest, dividend, and capital income generated by holding wealth. In the long period before the current recession, from 1979 to 2007, inflation-adjusted average annual incomes of the highest-income 1 percent of households grew by 224 percent, as shown in Figure A. Those even better off, the top 0.1 percent (the highest-income one one-thousandth of households), saw their incomes grow by 390 percent. In contrast, incomes of the bottom 90 percent grew just 5 percent between 1979 and 2007—and all of that growth occurred in the unusually strong income growth that occurred from 1997 to 2000, a period followed by declining income from 2000 to 2007.¹ These data include all sources of market-based incomes such as wages and salaries, dividend and interest income, and realized capital gains, but do not include government transfer income (such as Social Security income or unemployment benefits).

Figure A

Because of their vastly greater income growth, the highest-earning 1 percent of households have rapidly distanced themselves from the vast majority (the bottom 90 percent). As Figure B shows, average annual incomes of the top 1 percent of households in 1979 were 14 times greater than incomes of the bottom 90 percent; by 2007 incomes of the top 1 percent were 42 times greater. The income gap between the upper 0.1 percent of households and the bottom 90 percent grew even more, from a top-to-bottom ratio of 47-to-1 in 1979 to 220-to-1 in 2007.

Figure B

The vastly greater income growth of the top highest-income 1 percent of households also obtained a much larger share of income growth than the vast majority (the bottom 90 percent). As shown in Figure C, the top 1 percent gained 59.9 percent of all the income growth generated between 1979 and 2007. In contrast, the bottom 90 percent received just 8.6 percent of all the income generated over the same period. It’s illuminating to note that the bottom 90 percent were able to claim just one-fourth of what the top one one-thousandth of households claimed from the growth of that period (36 percent).

Figure C

Rising inequality in income from work

Figures D–F examine the rising inequality of wage and salary income—in other words, income from work. Labor earnings are by far the most evenly distributed sources of overall income because, after all, the vast majority of non-retired households have members that work. Yet labor earnings have become much more unequally distributed in recent decades. Figure D shows that the top 1 percent of wage and salary earners increased their inflation-adjusted average annual salaries by 144% from 1979 to 2006. The top one one-thousandth (0.1 percent) of earners enjoyed annual wages growth of 324 percent over that same period.

Figure D

In contrast, the bottom 90 percent of wage earners increased their annual salaries by about 15 percent from 1979 to 2006. Most of this growth occurred during the relatively brief period of tight labor markets that accompanied the late 1990s boom. Between 1979 and 1995, average annual wages for the lowest-earning 90 percent grew just 2.8 percent. And from 2000 and 2006, wages did not improve at all. Thus, nearly all of the wage and salary growth of the bottom 90 percent from 1979 to 2006 occurred from 1995 to 2000 when unemployment was falling and then remained low.²

As with overall incomes, the disparity in wage growth has significantly widened the gap in salary levels between the top earners and everyone else, as shown in Figure E. In 1979 average annual salaries of the top 1 percent of wage earners were 9.4 times that of those in the bottom 90 percent, but by 2000 the gap had more than doubled to 20-to-1, a level that was maintained until 2006.

Figure E

The very highest-wage earners—those in the upper 0.1 percent (the top one one-thousandth)—increased their distance from the earners in the bottom 90 percent even more rapidly; the ratio of their earnings to those in the bottom 90 percent rose from 21-to-1 in 1979 to 80-to-1 in 2000. This gap shrank after the stock market bubble burst in the late 1990s (wage data include the “realized stock options” that top corporate officers receive) but had nearly recovered its former size by 2006.

Figure F looks directly at the ratio of average compensation earned by the chief executive officers of large firms relative to the compensation of typical workers. In 1978, CEO compensation was 35 times greater than that of the typical worker, up from 24 times as great in 1965. After 1979 the pay of CEOs skyrocketed; by 2000 their pay was 299 times that the pay of a typical worker.

Figure F

That level of CEO pay was admittedly somewhat inflated by the stock market boom in the late 1990s, and retreated significantly after the tech bubble burst. However, by 2007, CEO pay had nearly restored itself, attaining a ratio of 277-to-1 relative to pay of a typical worker. CEO pay fell again relative to typical workers in the Great Recession but is again reestablishing itself in the recovery. In 2010, the ratio of 243-to-1 was the fifth highest of any year since 1965. At this rate, it will likely not take long for the gap to reach its prior peak.³

Increasing concentration of income from wealth-holding

Figures G–H show that the trend of rapidly growing concentration in overall income and labor earnings is also apparent in the growth of income earned from wealth-holding, often labeled either “unearned” or “capital” income. Essentially, capital incomes are always and everywhere less equally distributed than wage income. As shown in Figure G, in 1979 the top 1 percent of households on the income scale already claimed 38 percent of all capital income generated in the economy. By 2007 this share had ballooned to 57 percent. The next richest 9 percent saw their share of capital incomes shrink from 29 percent in 1979 to 23 percent in 2007. And the bottom 90 percent, which collected 33 percent of capital incomes in 1979, claimed only 20 percent by 2007. This startling concentration of already unequally distributed capital incomes defies the logic of claims that there is a natural limit to how much of the fruits of economic growth can go to any one group.

Figure G

The very large rise in the share of all capital incomes collected by the highest-income 1 percent since 1979 means that this group has also collected a disproportionate share of the growth in these incomes over the same period. Basically, if the top 1 percent’s share of all capital incomes had remained constant between 1979 and 2007, they would have claimed 37 percent of capital income growth in the economy in those years. Instead, as Figure H shows, the top 1 percent alone collected a whopping 86.5 percent of growth in capital incomes during this period.⁴ The next highest-income 4 percent claimed 10.7 percent of all capital income growth while the bottom 95 percent claimed just 2.8 percent of the growth in these incomes. This figure departs from the convention of the other charts in not isolating the bottom 90 percent because their average capital incomes fell between 1979 and 2007, registering as negative capital income growth, which is hard to depict in a pie chart.

Figure H

The financial sector’s increasing claim on growth

Much of the rising share of total income claimed by the top-earning 1 percent is associated with the rise of the financial sector, which is a dominant employer at the top. Figure I shows the share of total gross domestic product, or national income, attributable to compensation and profits in the corporate financial sector. Between 1929—just before the Great Depression ended the first Gilded Age—and 1973, this share fell from 3.7 percent to 3.2 percent. But between 1973 and 2007, this share more than doubled, to nearly 7 percent.

Figure I

And financial sector compensation and profits’ share of GDP rebounded quickly from the dip of the Great Recession and actually passed its pre-recession peak. By 2010, in fact, the rising share of finance translates into an extra $547 billion claimed by this sector relative to the case where its share had remained at its 1979 level (3.8 percent). This is serious money. The payoff to these larger claims made by the financial sector are dubious. For example, business investment in plant and equipment (i.e., the productivity-generating investment that financial firms are supposed to make cheaper and safer) did not rise between 1973 and 2007. Residential investment, outside of the bubble-inflated mid-2000s, has also failed to show any persistent upward climb during the time that the financial sector has claimed an ever-larger piece of the pie. It is, in short, not off-base to wonder whether there is any return to forking over a much larger share of economic activity to the financial sector.

The concentration of wealth

The concentration of wealth has mirrored trends in the concentration of income. Wealth is a measure of a household’s assets (such as real estate, stocks, bonds, and cash) minus their liabilities (such as home mortgages and other personal debt). The only available data covering recent decades dates back to 1983 and shows that the wealth held by the wealthiest 1% of households grew far more than the wealth of the median household, whose wealth was actually lower in 2009 than in 1983. Figure J shows that the wealth of the top 1 percent grew over the 1980s and ‘90s and by 2007 was 103 percent greater than in 1983. The financial crisis in 2008 reduced the wealth of those at the top but by 2009 their wealth remained 48 percent greater than in 1983. The median household’s wealth fared far worse. After falling in the early 1990s the median household’s wealth rose and was 48 percent greater in 2007 than in 1983. But the fall of wealth in the financial crisis was sharper for those in the middle than at the top because those in the middle have much of their wealth in housing, values of which fell dramatically after the housing bubble burst. By 2009 the median household’s wealth had fallen so much that their wealth was 13.5 percent less than what it was in 1983.⁵

Figure J

Not surprisingly, the gap between the wealth of those at the top and those in the middle substantially grew over the last few decades, as Figure K shows. In 1983 the wealthiest 1 percent of households had wealth that was 131 times greater than wealth of the median household. This gap grew until the early 1990s and again in the 2000s, and by 2009 the top 1 percent had 225 times as much wealth as the median household.⁶

Figure K

Perhaps more startlingly, more than 94 percent of the gains in wealth from 1983 to 2009 accrued to the top fifth of wealthiest households, with 40.2 percent of the gains going to the wealthiest 1 percent and 41.5 percent going to the next wealthiest 4 percent of households (Figure L). This translated to gains among the wealthiest 1 percent of $4.5 million per household and gains among the next wealthiest 4 percent of roughly $1.2 million per household.⁷

Figure L

In other words, the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009. The bottom 60 percent of households actually had less wealth in 2009 than in 1983, meaning they did not participate at all in the growth of wealth over this period.

Basing policy in the true picture of income and wealth

The insights offered by the data on income, wealth, and inequality should shape the economic policy debate going forward. Most immediately, they should inform budget deficit debates about what the United States can “afford.” The nation can easily afford more federal government support aimed at reducing today’s historically high and persistent rates of joblessness. In fact it is the cheapest option in all major economic respects (Mishel 2011).

Once the current crisis of joblessness has passed and smaller imbalances between federal investment and revenues are appropriately targeted, attention should turn to supporting the same level of economic security and dignity that we have provided for generations. This would mean ending the unnecessary calls to close budget deficits by cutting the benefits provided by Social Security, Medicare, and Medicaid.

Thirty years of economic data show that the U.S. economy has generated significant levels of income and should continue to do so into the future; in other words, there is no economic constraint that mandates that we scale back expectations for living standards growth in coming years (Mishel 2011). But this vast income that has been generated has been distributed in an extremely skewed fashion; typical American families have not benefitted from it nearly as much as they could have. This is a political problem that, if solved, has the potential to make our country more fair and the vast majority of its citizens more prosperous.

The politics of economic policymaking may be broken, but the U.S. economy is not broke, the data show. The country does have the economic wherewithal to provide a decent standard of living for all.

Endnotes

1. Economic Policy Institute analysis of “Table A6: Top fractiles income levels (including capital gains) in the United States” from “Income Inequality in the United States, 1913-1998” with Thomas Piketty, Quarterly Journal of Economics, 118(1), 2003, 1-39 (Longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007) (Tables and Figures updated to 2008 in Excel format, July 2010).

2. Based on Table 3.10 in Mishel, Bernstein, and Shierholz (2009), which uses data from Kopczuk, Saez and Song (2007), Table A-3. Data in Table 3.10 for 2006 was extrapolated from 2004 data using growth rates from Social Security Administration wage statistics (http://www.ssa.gov/OACT/COLA/awidevelop.html). SSA provides data on share of total wages and employment in annual wage brackets such as for those earning between $95,000.00 and $99,999.99. We employ the midpoint of the bracket to compute total wage income in each bracket and sum all brackets. Our estimate of total wage income was 99.1 percent of the actual. We used interpolation to derive cutoffs building from the bottom up to obtain the 0–90 percent bracket and then estimating the remaining categories. This allowed us to estimate the wage shares for upper wage groups. To obtain absolute wage trends we used the SSA data on the total wage pool and employment and computed the real wage per worker (based on their share of wages and employment) in the different groups.

3. The CEO pay data are described in the table note for table 3.41 in Mishel, Bernstein, and Shierholz (2009).The compensation data for typical workers comes from the Bureau of Labor Statistics’ series on average hourly earnings of production, non-supervisory workers inflated to compensation using the ratio of compensation to wages in the Bureau of Economic Analysis National Income and Product Accounts.

4. The data in Figure G comes directly from the Congressional Budget Office, which calculates the share of all capital income going to various income groupings. Figure H is calculated by EPI with slightly different data, specifically the CBO estimates of average incomes’ sources of incomes by income groupings. What are being labeled as growth in capital incomes between 1979 and 2007 in Figure H are dividends, interest payments, capital gains, and “other business income,” which includes partnership income, income from S corporations, and rental income.

5. The data on wealth are based on Wolff’s analysis of the Federal Reserve Board’s Survey of Consumer Finances presented in Table 3 of Allegretto (2010)

6. Ibid.

7. Ibid.

References

Allegretto, Sylvia. 2009. The State of Working America’s Wealth, 2011: Through Volatility and Turmoil the Gap Widens. Economic Policy Institute Briefing Paper #292. Washington, D.C.: EPI.

Bartels, Larry M. 2008. Unequal Democracy: The Political Economy of the New Gilded Age. Princeton, N.J.: Princeton University Press.

Bivens, Josh. 2011. Failure by Design: The Story behind America’s Broken Economy. An Economic Policy Institute Book. Ithaca, N.Y.: ILR Press, an imprint of Cornell University Press.

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