Economic inequality and the end of the American Dream


On December 4, President Obama declared that “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream.” So what is the state of inequality in America? It’s not good.

Alexis deTocqueville’s 1835 Democracy in America described the United States as a country pervaded by a general equality of conditions. Equality was not talked of in terms of political and legal rights but also in terms of economics. While economic inequalities existed, along with slavery, conditions in America were generally more egalitarian when compared to the European monarchies. But that equality was undone during the robber baron era of the late nineteenth and early twentieth centuries as the Rockefellers, Vanderbilts, Morgans, and Hills amassed major fortunes, culminating levels of economic inequality unmatched…until now.

While from the New Deal until the late 1970s social policy in America was directed toward mitigating economic inequality, those policies have been undone. More than a generation ago Kevin Phillips in The Politics of Rich and Poor and Bennett Harrison and Barry Bluestone in The Great U-Turn noted how the Reagan Era was ushering in an abandonment of economic egalitarianism, it is not clear what 30 years of those policies have wrought.

A 2011 Congressional Budget Office found that the after-tax income gap (and this includes after calculating in transfers payments and welfare) between the top one-percent of the population and everyone else more than tripled since 1979. After-tax income for the top one-percent increased by 275% between 1973 and 2007, for the bottom quintile it was merely 18% while for middle class or middle three quintiles it increased by not quite 40%, According to the census Bureau, the median family income fell in 2012 from $51,100 to $51,017, with average Americans earning less now than they did in real dollars in 1989. However, there is some good news–since 2009 the income of the wealthiest 1% has increased by 31%.

But income only tells part of the story. Maldistributions in wealth also exacerbating and growing. According to the Institute for Policy Studies, in 2007 the top one-percent controls almost 34% of the wealth in the country, with half of the population possessing less than 3%. The racial disparities for wealth mirror those of income. Since 2007 the wealth gap has increased as the value of American homes–the single largest source of wealth for most Americans– has eroded. Studies such as the Survey of Consumer Finances by the Federal Reserve Board have similarly concluded that the wealth gap has increased since the 1980s.

An April 2013 Pew Research Center report documents how since the crash of 2008 that the “mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%.” The richest have recovered nicely from the Great Recession, the rest of us have not done so well. Moreover, the income gap has a racial component, with the a recent Census Bureau report documents in 2012 that the median household income for Whites was $57,009, for Hispanics it was $39,005, and for Blacks it was $33,321. The wealth disparities across race were even worse. A February 2013 Brandeis University study by the Institute on Assets and Social Policy found that over the last 25 years, the wealth gap between African-Americans and Whites tripled from $85,000 in 1984 to $236,500 in 2009. For the few African-Americans and Whites at the same income level, the latter had wealth at least three if not more times that of the former.

Finally, the gender gap in income persists. According to the Census Bureau, women still only make 77 cents on the dollar compared to males, with this percentage having remained frozen for years. The median income of a female household in 2001 was $34,340, falling to $34,002 in 2012. While for male households it was $50,602 in 2011, falling to $48,634 in 2011.

No matter how you slice it, the rich are getting richer and the rest of us are getting not just relatively poorer, but absolutely poorer, with women and people of color taking even a harder hit. But why? The Census Bureau notes several factors. First, real incomes have actually gone up for those at the highest income levels. We live in an era when we now pay disproportionally high salaries to business leaders and CEOs, thinking that they deserve it. According to an April 2013 Bloomberg News study, the ratio of the average compensation of a CEO compared to its average worker is 204 to one, increasing by 20% since 2009. In the case of JC Penny, a company that laid off 43,000 workers in 2013, when it fired its CEO he got a compensation package that was nearly 1,800 times the average wages and benefits of those dismissed.

Second, inequality has increased because of the package of types of income earned now compared to 1979. Far less income now is earned from wages and salary now than 30 years ago. More money now is earned from equities, stocks, and capital gains. Third, and perhaps most importantly, the federal tax structure is less progressive and more regressive now than 30 years ago. Capital gains taxes are lower, as are taxes on the rich. More taxes come from regressive federal payroll taxes than before. Overall, the tax structure does little to rectify inequalities in income, instead it extenuates and exacerbates the growing inequalities already occurring in the economy. In effect, the supply side revolution has helped to redistribute income up and not down.

These policies have continued across Republican administrations and into the Obama era. Obama more or less continued the inequalities from the Bush era. Yes many of the Bush era taxes expired but payroll taxes went up, leaving most of us worst off than before. Obama carried on the Bush policies of bailing out the banks but not homeowners, and even before Republican resistance effectively ended his second presidential term, Obama showed little appetite for addressing economic inequality in America.

So what does all this inequality mean for the United States? In a country where economic wealth can be converted into political power, the rich can use their resources to prevent political change or reform and entrench themselves. Wall Street and the Koch brothers are examples of this. Additionally, income is a great predictor of civic engagement and voting and there is not question that there is a class bias in our elections. Thus the economic inequalities reproduce and mirror themselves in the American political system.

Class is an America reality. The evidence is clear but facts seldom sway many individuals or affect public policy. Moreover, few want to acknowledge the reality of class in America, even fewer want to do anything about it, even though polls suggest that an overwhelming percentage of Americans think the government does not do enough to help the poor in our society. There is no indication in the foreseeable future that tax policy or any redistributive policies will be enacted to address inequality, leaving the American dream just that, a dream, for so many.