The sharp rise in inequality since the 1970s has created two puzzles. The first is an intellectual puzzle concerning the root causes of the widening gap in income and wealth, its social consequences, and its moral significance. The second is a practical and political puzzle, at least for those who are disturbed by increased inequality. What can and should be done about it? Depending on the answer to the first, the second may be more or less difficult. If rising inequality is primarily the result of economic changes brought about with new information technology, returning to a more equal distribution of income poses a daunting, perhaps impossible challenge. The global transformation of contemporary capitalism is not about to be undone. But if the causes of rising inequality lie chiefly in government policy on such matters as taxes, the remedy is at least clear, though certainly not easy.
According to the received wisdom of the mid-twentieth century, the recent increase in inequality was not supposed to happen. In 1955 the economist Simon Kuznets proposed that income inequality rises during the first long phase of industrialization and then falls, a view that corresponded to the evidence at the time. In the United States, after earlier increases, economic inequalities declined significantly during the 1940s (“the great compression,” Claudia Golden and Robert Margo call it). France and other industrialized countries also saw reductions in inequality between 1914 and 1945. Then, for the three decades after World War II, wages rose in line with increased productivity, governments expanded social programs while maintaining progressive tax rates, and a growing majority of people achieved a middle-class standard of living.
This, it seemed, was the destiny of democratic capitalism: disparities in income and wealth would remain, but they would be substantially smaller than in the past and they would be of diminishing moral significance as economic growth lifted incomes for nearly everyone. Poverty, once a mass phenomenon, came to be seen as a problem of minorities in both the arithmetical and ethnic senses of that word. To improve conditions for poor, stigmatized blacks and other minorities was to solve what remained of the old problem of social class. So closely was inequality identified with poverty that the two terms were often used as if they were interchangeable.
That understanding of inequality has now broken down in the United States and to varying degrees in the other economically advanced democracies. Inequality today refers not just to the divergence of the poor from the middle class, but also—indeed, especially—to the outsized gains of the rich in an era when middle-class incomes have stagnated. In the United States, according to the economist Emanuel Saez of the University of California, Berkeley, the richest 10 percent increased their share of total pretax income from about 33 percent in…
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