Imagine a giant vacuum cleaner looming over America’s economy, drawing dollars from its bottom to its upper tiers. Using US Census reports, I estimate that since 1985, the lower 60 percent of households have lost $4 trillion, most of which has ascended to the top 5 percent, including a growing tier now taking in $1 million or more each year.1 Some of our founders foresaw this happening. “Society naturally divides itself,” Alexander Hamilton wrote in The Federalist, “into the very few and the many.” His coauthor, James Madison, identified the cause. “Unequal faculties of acquiring property,” he said, inhere in every human grouping. If affluence results from inner aptitudes, it might seem futile to try reining in the rich.
All four of the books under review reject Hamilton and Madison’s premises. All are informative, original, and offer unusual insights. None accepts that social divisions are inevitable or natural, and all make coherent arguments in favor of less inequality, supported by persuasive statistics.
The Spirit Level is a prodigious empirical effort directed to a moral purpose. It ranks the quality of life in twenty-three countries, mainly European, but with Singapore, Israel, and the United States also on the list. To evaluate the well-being of each society, Richard Wilkinson and Kate Pickett use indices ranging from obesity and incarceration rates to teenage births and the feelings people have about their fellow countrymen. They then relate these variables to how income is distributed in each society. Here they deploy the Gini ratio, a three-digit coefficient purporting to measure the extent of income inequality within any grouping for which figures are available. Their national Gini scores range from .230 in egalitarian Sweden to .478 in highly stratified Singapore, with the United States second highest at .450. Linking social indicators to economic disparities, the authors conclude that “reducing inequality is the best way of improving the quality of the social environment.”
As income gaps grow, they write, it’s not only the poor who suffer. Unequal societies not only bear “diseases of poverty,” but also “diseases of affluence.” The latter include cancer and cardiovascular disease as well as the afflictions of well-off people who are “anxiety-ridden,” “prone to depression,” and “seek comfort in overeating, obsessive shopping and spending.” At this point, as elsewhere, the authors tend to get carried away. I’m not sure I’m ready to rank compulsive spending or eating too much as diseases. Even so, Wilkinson and Pickett are blunt in their summary: “inequality is socially corrosive.” What’s missing in their analysis is how far, if at all, income disparities may also degrade the deprived.
The authors don’t go so far as to say that people with above-average incomes would end up better off were they to take home less money, and if greater numbers of their poor compatriots had more. But they do contend that “the benefits of greater equality seem to be shared across the vast majority of the population.” Thus one of their tables shows that those in the middle class in more egalitarian England have lower rates of cancer and diabetes than their counterparts in the United States. American children don’t perform as well academically as their peers in Finland and Belgium, where incomes are not as widely spread.
The broader argument was made by Oliver Wendell Holmes, who reputedly told one of his clerks that taxation is how we “buy civilization.” Lower Gini scores generally tell us that the business and professional classes of such countries as Norway and Denmark consent to higher tax rates because publicly provided higher education and health care and cultural amenities make for a more congenial society, in which everyone shares.
Wilkinson and Pickett teach at Britain’s University of York, and they aim for an international audience. Yet they seem to have America mainly in mind when they remark that “instead of a better society, the only thing almost everyone strives for is to better their own position.” Here too we’re into hyperbole. The United States has a large stratum of professionals who choose public service careers; indeed much, even most, of the middle class doesn’t set its sights on more than routine personal advancement. Still, it’s appropriate to ask how many of the rich care about creating a “better society.” Wealth brings higher-quality health care, private schooling, and personal pension plans, along with shielding from lines, crowds, and captious service.
Like many modern studies, most of the findings in The Spirit Level derive from statistical formulations. I found myself wanting to know more about the actual people represented by indicators and indices. In Belgium, taxes take 42 percent of an average worker’s earnings, compared with 23 percent in the United States; in Denmark, personal income taxes absorb 27 percent of its gross domestic product, against 8 percent in the US. How do their middle-class professionals balance the public and private in their conceptions of the good life? Do they, for example, feel that high take-home pay is needed to bring out people’s best efforts? “We see no indication,” Wilkinson and Pickett say, “that standards of intellectual, artistic or sporting achievement are lower in the more equal societies.” And as a measure of innovation, they show that such countries file more patents per capita. But they don’t consider keenly competitive enterprises—such as Apple and Facebook—from which Forbes 400 fortunes grow. We hear it claimed that innovations such as iPhones and iPads are much encouraged by hopes of inordinate wealth. Is there an egalitarian alternative?
There’s a limitation to the Gini ratio that the authors don’t mention. Because Spain (.320) and Canada (.321) are so close in Gini ratio, The Spirit Level would have us conclude they have comparable levels of income. But similar scores can conceal quite different distributions of income. Unfortunately, Wilkinson and Pickett don’t explain why. For example, the Gini ratios for New Hampshire (.425) and Iowa (.427) make them relatively egalitarian on the American spectrum. However, New Hampshire gets there by having the same number of high- and low-income households: 26 percent have annual income over $100,000 with 26 percent under $35,000. Iowa has almost the same ratio, but only 15 percent of its households make above $100,000 and 36 percent fall below $35,000. The Spirit Level‘s message is that if countries want a more equable and equitable society, they should move toward closing their income gaps. But what can we say about Iowa’s equality if it still has a substantial low-income segment? Reducing the proportion of the rich may be a pyrrhic victory if poverty persists.
To say that America’s rich are getting richer, which is true, is only part of the story. Also important is that considerably more Americans are now enjoying an affluence that was once the preserve of only a very small stratum. Despite Occupy Wall Street’s focus on the wealthiest one percent, the rise of two other groups tells us more about recent redistributions. The first consists of households having annual incomes of $1 million or more, a passable definition of “rich.” (Entry to the top 1 percent now comes with $347,421, which I’d simply call comfortably off.)
As can be seen in Table A, in 1972, altogether 22,887 tax returns were filed with today’s equivalent of $1 million in income. By 1985, the number had expanded to 58,603. And in 2009, the most recent year for figures, this bracket had multiplied to 236,893. In 1972, for every $1 million household there were 3,393 earning less. Now for every $1 million household there are only 591 with less. True, the population has grown since 1972, as has the overall income pool. But not nearly enough to explain the expansion at the top.
Moreover, the $1 million (and up) in the three illustrative years was the amount these taxpayers declared as gross income; that is, before they paid taxes to the IRS. As is also shown in Table A, the share of income paid in taxes by this group has declined markedly. In 1972, households in the $1 million bracket kept 53 percent of what they declared. Today, they retain 75 percent for personal purchases and pleasures. There would still be more rich Americans if their taxes hadn’t been reduced, due to the rise in salaries and other sources of wealth at the top. But those abatements have allowed the kind of gilded lives not known for over a century.
Where did all these earners of $1 million incomes come from? Many are owners of small but prosperous businesses. But even with high-tech start-ups, we don’t have more fledgling enterprises than in the past. In fact, the greatest growth in high incomes has been in “financial services.” Here what’s bought and sold largely amounts to advice, about when people should buy and sell financial holdings, or have holdings bought and sold for them, as with public offerings and investing pension funds.
Financial services also includes devising algorithms for complex securities, like credit default swaps and collateralized debt obligations. In either case, what’s being created often seems so arcane that clients don’t object to eight-digit fees, which are in turn bestowed as seven-figure bonuses. Or they don’t cavil at such payments because they intend to do well themselves. According to Adam Smith, we should expect competitors to emerge, offering the same services at palpably lower fees. While this sometimes happens, customers tend to feel safer with well-known names, including Bear Stearns and Lehman Brothers, until their days of reckoning.
The wish to focus on millionaires is understandable. But the upward movement of money has in fact benefited a second and considerably larger group, the best-paid 5 percent, which includes some four million families. As Table A shows, this group’s real earnings have more than doubled since 1972, while its share of aggregate income has grown by almost a quarter. As Table A also notes, it now takes about $200,000 a year to join this tier. In my view, this stratum warrants at least as much attention as the superrich, not just because there are more of them, but because their paychecks tell us a lot about an emerging pattern of rewards.
Robert Frank’s The Darwin Economy and Thomas Edsall’s The Age of Austerity provide much-needed information and analysis to explain why so much of the nation’s money is flowing upward. Frank, an economist at Cornell, draws on social psychology to shatter many myths about competition and compensation. While he doesn’t explicitly cite the classical French economist Jean-Baptiste Say, much in his exposition echoes Say’s axiom that “supply creates demand.” This doesn’t mean that if items are put on display, people will automatically buy them. Consumers decide what or if they’ll purchase, and clearly can only do so if they have the credit or money. Even so, the items they decide they want have been created by the suppliers, who put things on the shelves.
1 See www.census.gov/hhes/www/income/data/historical/household, Tables H-1 and H-17. All 1985–2010 amounts are in 2010-value dollars. ↩
See www.census.gov/hhes/www/income/data/historical/household, Tables H-1 and H-17. All 1985–2010 amounts are in 2010-value dollars. ↩