Why Should We Care About Economic Inequality?

Chart of the Top Ten Percent Income Share, 1917 - 2008.

In the last 40 years, living standards have flat-lined for the poor and middle class, and wealth has skyrocketed for the rich. Some stats to make the case, briefly. In 1979, the pool of income in the top fifth was 8-times the bottom fifth. By 2007, the top quintile out-earned the bottom by a factor of 14. The top one percent of earners today take home a fourth of all the cash earned in America.

Few are seriously questioning that this phenomenon --  Tim Noah calls it the Great Divergence -- is happening. But I have a question about the phenomenon: Why should we care?

I'm not trying to be glib or senseless. Of course we should care that low- and median- income Americans are struggling to get by, or that poverty is rising. I'm asking why should we care that the rich are getting so much richer than the rest of the country.

Wages for the rich and poorer aren't in some sort of eternal tug-of-war. It's not as though when the rich get richer, the poor get poorer. Instead, when the rich get richer during economic expansions, median wages rise, too. When the rich get poorer during economic contractions, median wages suffer, too.

In the next few days, I'm going to be looking for answers to the question why should we care about economic inequality. What I'm looking for is evidence that income inequality really does lead to unproductive investment (as Steven Pearlstein charges), or senseless government policy (as Raghuram Rajan suggests), or financial bubbles, as many writers, including Robert Reich, have said.

Yesterday, I spoke to Lawrence Mishel, the president of the Economic Policy Institute. It's not that wealth at the top suppresses wealth at the bottom, he said. It's that government policies in the last few generations have emphasized lower regulation and lower taxes at the top to reduce prices at the bottom -- and that these very policies are suppressing standards of living for the vast majority of Americans.

"I believe that there was a change in the economic policy regime that was framed as making us all better off through cheaper prices, starting in the 1970s," he told me. "It's the laissez-faire policies: increasing globalization, deregulating industries, privatizing government, lowering of social protections including unions and minimum wage, weakening safety net like [wage left laws] and allowing tens of thousands of graduates to work for free, illegally, at internships.

"Consumption has grown, but incomes didn't," he concluded. "All of these different things make us better off as consumers, but they make it harder to make a good living."

I can sympathize with the claim that evolving labor standards have hurt the lower class. The real minimum wage has declined. Off-shore outsourcing trends that accelerated in the 1990s and 2000s have sent millions of jobs overseas and likely pulled down wages at home, where technology has replaced many more positions.

We are, as Mishel notes, a country interested in finding the shortest route to a cheap product. But I wonder how much the federal government is to blame for the sorry state of the median-salaried worker. Effective federal tax rates (that's an estimate for what you pay in overall federal taxes, including income, payroll, corporate and excise taxes) have fallen dramatically for the top one percent, but they also fell considerably for the bottom fifth. Wages are stagnating, but taxes on those wages have declined, as well.

Perhaps the most compelling answer I've found yet came from Tim Noah's wonderful series on income inequality. "The Great Divergence helped cause the recession by pushing middle-income Americans into debt," he said, and "the growth of household debt has followed a pattern strikingly similar to the growth in income inequality." OK, fine. And true. Middle income Americans sleepwalked into a debt avalanche before the recession. But did Bill Gates force them to do that? Did Wall Street? Did Washington?

Income inequality exists, and it is getting worse. But how much should I care? What is the danger, exactly? I'm still looking for answers.