During the late 1920s, as the American stock market was growing rapidly, prospects for economic growth could hardly have seemed brighter. President Hoover remarked in August 1928 that “in America [we] are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us.” Hoover and his contemporaries were ultimately mistaken, however. Today, many historians fault the stratification of wealth during the 1920s for the depth and duration of the subsequent crash.
According to the Institute for Policy Studies, in 1928 the top 0.01 percent of U.S. families averaged 892 times more income than families in the bottom 90 percent. Yet, striking as that may seem, by 2006 the U.S. had already long surpassed the level of income inequality in 1928. While changes in tax policies have often been blamed for the steady rise in income inequality over the past three decades, public opinion of inequality and the feedback cycles generated by political ideology are of greater significance than previously believed.
THE PIVOTAL YEARS
While often blamed on current economic difficulties, income inequality was on the rise in America well before the current recession began. Indeed, the divergence between rich and poor has increased substantially since the 1970s. “When you graph it, 1970-1973 marks the low point in income [inequality],” says William Beach, director of the Heritage Foundation’s Center for Data Analysis. “There’s been a huge debate among professional economists to try to explain this phenomenon.” Many scholars label the era from the end of the Second World War to the 1970s as the “Great Compression,” a time when the wage gap narrowed. Nonetheless, economists continue to debate the extent to which the era represents any repeatable outcome.
Whatever the causes of the postwar compression, however, facts show that income inequality has steadily risen since. A 2007 MIT study pointed out that between 1980 and 2005 more than 80 percent of the total income increase in America was attributed to the top one percent of Americans. Similarly, according to the Institute for Policy Studies, the percentage of U.S. total income that went to the top one percent of American households in 1976 was 8.9 percent. By 2007, that same figure had ballooned to 23.5 percent. As a consequence, the Gini coefficient for the United States, an economic index used to calculate income inequality, stands at about 47, among the highest in the developed world.
POLITICAL FORCE BEHIND INEQUALITY
Despite its economic implications, inequality may spring from political choices. According to Nathan Kelly, professor of political science at the University of Tennessee, inequality may owe in part to a political feedback cycle driven by public opinion. Kelly argues, “When public opinion shifts in a liberal direction, we’re more likely to see Democrats elected to office and we’re more likely to see liberal policies enacted. When [this happens], we’re more likely to see declines in inequality,” due to liberal support for wealth redistribution through social policies. However, when inequality rises, public support for socially driven policies does not increase. In fact, Kelly’s research shows just the opposite: “We found… that as inequality increases, the public actually becomes more conservative. It’s actually the case that the rich, those with middle incomes, and the poor all become more conservative at the same time.” Kelly describes his process as a self-reinforcing linkage between inequality and public opinion.
Similarly, back in 2007, New York Times columnist Paul Krugman noted the paradox that has existed throughout the Great Divergence, the name given to the period since the early 1970s when inequality has consistently risen. “You might have expected rising inequality to produce a populist backlash,” Krugman wrote on his blog. “Instead, however, the era of rising inequality has also been the era of ‘movement conservatism.’” Krugman faults American fiscal policy for exacerbating wage inequality and argues for measures to arrest the decline.
FIGHTING INEQUALITY TODAY
In particular, Krugman argues for an expansion of government welfare programs, asserting that expanding the social safety net reduces inequality. Nonetheless, as concerns about America’s expanding deficit take a more prominent role in political debates, it is likely that few sectors of the federal budget will escape untouched. For low-income families who rely on government assistance, there remains real worry about how political decisions may worsen their situation if entitlement programs are cut.
“Everyone acknowledges that we need to do something about our long-term deficits,” commented Melissa Boteach, manager of the Center for American Progress Action Fund’s Campaign to Cut Poverty in Half in Ten Years. “One of our biggest concerns,” Boteach continued, “is that this isn’t done on the backs of low-income families and in a way that exacerbates poverty and inequality.” According to Boteach, Congress is trying “to accomplish large amounts of deficit reductions in a very small amount of the budget, domestic discretionary spending, which is about one-eighth of our total federal spending.” This inflicts “enormous pain for [relatively] little deficit reduction and really harms low-income families in the process.”
However, as American University professor Robert Lerman suggests, legislators may need to focus their attention on reigning in the costs of the largest entitlement programs in order to save the smallest. He added, “The proposed budget cuts…to programs like the Home Energy Assistance Program illustrate the U.S.’s failure to deal with Medicare and Social Security, which are crowding out lots of other programs—a big portion of [which] assist low income people.” Ultimately, a period of reduced social spending may well exacerbate current increase of income inequality.
WHAT ’S NEXT?
While the debate over the causes of increased income inequality will continue, a major aspect of the discussion, the significance of public opinion, remains more concrete. The future of income disparity will largely depend on how Americans view that inequity and whether they view society as fundamentally fair. The failure of the presidential campaign of John Edwards in 2008, which focused extensively on issues of poverty and inequality, may illustrate that the American public proves entirely unreceptive to such discussion.
However, frequent media coverage of the lavish expenditures of the very top tier of Americans may suggest otherwise. Though stories concerning the working poor are not common, the fact that Americans stay tuned-in to the relative contrasts between super-rich and average families shows that Americans are more aware of inequality than ever before. Indeed, Kelly concludes, “The discussion about the super rich getting so far ahead actually suggests that [we’re] concerned more than ever about inequality. The question is, though, What are we willing to do about it?” The federal budget and future political battles that will be fought over it might just provide those answers.
Beatrice Walton ‘14 is the World Blog Editor