Ed Wolff and Jared Bernstein
Multinational MonitorJune 2003
The last 30 years has seen a tremendous rise in income and wealth disparity in the United States, and around the world. This issue of Multinational Monitor is devoted to exploring the measures and causes of income and wealth inequality in the United States. In our July/August issue, we will focus on international inequality.
As Ed Wolff describes in these pages, the share of national wealth owned by the richest 1 percent has doubled during the past three decades. And as Jared Bernstein explains, income inequality has skyrocketed nearly as fast.
These are startling changes in the relative affluence of the country's population over a very short period. They leave the country more class bound, less democratic, less just and more riven by wealth and inequality gaps that mean people's basic life opportunities are unequal.
Most of the increased wealth created over the last three decades has been captured by a small sliver of the population. While the well off have become better off and the rich have become opulently so, the middle and lower groups have struggled to stay in place. It took until the late 1990s for the inflation-adjusted average wage of the bottom 80 percent of the population to catch up with the levels of the early 1970s. Wealth of the richest 1 percent has skyrocketed, while personal and consumer debt has ballooned for those in the middle and bottom.
There was nothing inevitable about these trends, and no forces of nature prevent them from being reversed. Rather, the rise in wealth and income inequality is due to shifting power relationships and policy choices favoring the rich, each of which reinforce each other. Capital has grabbed power from labor, and corporations have taken power from citizens. The federal government, as well as state and local governments, have pursued policies -- from trade to labor law -- that have strengthened corporate power and weakened workers.
A vicious cycle has ensued, with corporations then better positioned to lobby and advocate for still more policy changes to shift income, wealth and power. There are too many intertwined factors driving the growth in inequality to identify them all, or to separate out the relative contribution of each, but it is important to pinpoint specific contributing causes. Identifying these factors is a prerequisite to remedying or addressing each, and ultimately to reversing the trends of rising inequality. Focusing on the policies and trends driving inequality is important in order to dispense with the myth that growing inequality is inevitable (to this, it should be enough to cite Edward Wolff's point that wealth inequality in the United States actually fell steadily from the period of the Great Depression until the early or mid-1970s), or simply the outgrowth of new technologies. Detailing the causes of inequality is also important because it makes clear the many ways in which the recent era of enhanced corporate rule and corporate globalization has not led to broadly shared benefits, but to modest gains in wealth that have been appropriated by a relative few.
With that in mind, here are 10 of the more important contributing factors to surging inequality in the United States.
1. Falling Levels of Unionization
Unions now represent less than 10 percent of the workforce in the private sector in the United States. Yet they still represent the single best means for workers to improve their economic conditions. There is a more than 28 percent wage premium for union membership in the United States -- meaning the single fact of belonging to a union raises the average worker's wage more than 28 percent -- and it is far higher in the area of benefits.
But even reference to the dramatic wage premium understates the importance of unions. Union power is collective power. When unions represent a higher proportion of the workforce -- when there is greater "union density" -- in a particular industry, unions can raise the overall industry wage rate, including for non-union workers. When unions represent a higher proportion of the national workforce, they can raise the national wage rate.
Even more importantly, when there is greater national union density, unions can exert more political power, to ensure the benefits and pain in the national economy is more equally shared. As Kate Bronfenbrenner describes, the erosion of the U.S. manufacturing base, vicious anti-union campaigns by employers and inadequate organizing efforts by labor has led to the drop-off in union representation in the United States.
2. Corporate Globalization
The corporate globalization trade regime -- manifested in the rules of the World Trade Organization and other trade agreements -- has freed corporations to locate production anywhere in the world for sale anywhere in the world. As Jared Bernstein recounts, millions of high-paying manufacturing jobs have been lost in the United States as a result.
Workers who remain in the manufacturing sector are forced to compete in the race to the bottom, with union demands for wage gains replaced by employer demands for wage givebacks. Sometimes the employers really are unable to compete with lower-wage producers in other countries (sometimes they are those lower-wage producers). Sometimes the employers simply use the threat to threat to enhance profitability. Either way, workers bargaining leverage is dramatically lessened. Workers lose. Owners win.
Moreover, the exact same threats are among the most effective at deterring workers from joining unions. Join a union, employers tell workers in the majority of organizing campaigns, and we'll have to close. We just can't compete if we are burdened by union wages and union bureacracy (read: protection for worker rights).
Nowhere is the intertwined nature of the causes of inequality made more clear: Corporate globalization diminishes the union base and worker power. Weaker unions are less able to defend their jobs, either in direct negotiations with companies or in policy-making disputes in Congress. And on and on.
3. Declining Minimum Wage
One way to place a floor on the downward push on wages is to maintain a respectable minimum wage. Because the minimum wage in the United States is set periodically, and not pegged to inflation, it is forever losing value, though periodically bumped up a bit when the drop gets severe and the political moment makes it hard for Republicans to defeat a minimum wage rise. There has been no progress whatsoever in the obvious solution to this problem, which is to raise the minimum wage and then peg it to the inflation rate, so that it rises along with the cost of living. Low-wage industries -- led by the restaurant association -- have led the Chamber of Commerce and the major national business lobbies to oppose minimum wage hikes.
Today's minimum wage of $5.15 has been stuck since 1997. In inflation-adjusted terms, its current value is almost a quarter less than at its peak in the late 1960s. In one of the most vibrant economic justice campaigns in the United States today, many communities have passed living wage laws, requiring employers to pay not just a minimum wage, but a minimum wage sufficient to enable a family to survive. Unfortunately, these laws typically apply only to government contractors, or sometimes to recipients of government benefits, but not to the overall community. They are an important step forward, and provide some hope for the future; but for now have not managed to have broad nationally felt impacts on wage rates.
4. The Soaring Stock Market
Although the market has come back down to earth to more reasonable levels in the last couple years, it has grown dramatically over the last three decades. The "sustainable" part of this stock market rise -- meaning stock prices justifiable in relationship to earnings, or profits, and the prospect for future profits -- reflects spikes of very high profits, including in the mid-1990s. Those high profits themselves were due to a variety of factors, but among them were the increased reliance on overseas manufacturing and monopolistic markets enabling corporations to impose excessive prices on consumers.
Popular myth to the contrary, the stock market gains accrued overwhelmingly to the rich. Edward Wolff explains that stock holdings are as concentrated now as they have been historically.
5. Tax Cuts for the Rich
Although the federal tax code remains somewhat progressive -- meaning higher income earners pay a higher proportion of their income in taxes than lower earners -- it is less so than it has been historically. The Reagan and Bush II tax cuts have massively reduced the tax take from the rich, and the currently proposed Bush tax cut would reduce the level still further. More than a third of the value of the current Bush proposal would accrue to the richest 1 percent of taxpayers, according to Robert McIntyre of Citizens for Tax Justice. Nearly half of the benefit would go to the richest 5 percent of taxpayers.
State taxes, heavily reliant on sales tax, remain regressive; and the current state funding deficit is likely to lead states to increase regressive taxes. The one very important offset in the gloomy tax story has been the Earned Income Tax Credit, a federal tax rebate for the lowest income earners, which has meaningfully raised the income level of the poorest.
6. Reduced Taxes on Corporations
As Robert McIntyre explains, thanks to tax code revisions and fancy tax sheltering, the corporate share of paid federal taxes is down to approximately 7 percent -- compared to 22 percent level in the 1960s.
7. Declining Welfare Payments to the Poor, Increased Payments to the Rich The last three decades have seen a steady decline in traditional welfare payments to the poor, leaving them considerably worse off -- though again, this condition has been considerably offset by the Earned Income Tax Credit. At the same time as they have cut welfare for the poor, local, state and federal governments have become far more generous in making gifts to the corporate welfare kings. To take two indicators: in just the period from the 1970s to the 1990s, corporate bailouts have grown from the level of hundreds of millions of dollars to hundreds of billions of dollars. The defense budget, which serves corporate welfare as much as any other purpose, has soared under the Reagan and Bush II administrations -- a simple transfer from taxpayers to Lockheed, Boeing, Raytheon andtheir shareholders.
8. An Out-of-Whack Financial System
The banking system systematically deprives lower-income and minority communities of the credit they need to build up investments and wealth. The services that are provided come increasingly from shady and price-gouging check-cashing operations and payday lenders. Meanwhile, the super-aggressive marketing of credit cards to middle-income people has led many to fall deep into debt, and forced to pay off huge accumulated debts at usurious interest rates.
9. Tight Money from the Federal Reserve
Although it has loosened its grip on the money supply in recent years, at crucial periods over the last three decades the Fed has driven up interest rates and plunged the economy in recession. The resultant high unemployment rates diminished worker power and pushed down wages.
10. A Culture of Overcompensation and Acceptance of the Wealth Divide
Although the routinization of obscenely high executive pay directly affects too few people to meaningfully impact overall income inequality, it has created a culture in which professionals and people in upper-income groups expect to be paid very generously. New class-based social norms have emerged about what constitutes a reasonable salary, and how a much a person "needs" to get by -- what upper-income groups view as necessity is of course unavailable to most people in the country.
This culture, nurtured by new marketing campaigns advertising luxurious lifestyles and a media that more and more narrowly targets upper-income groups, has helped push up salaries broadly at the top.
But these riches are not available to all. Part of the culture has been the normalization and acceptance of a persistent and deepening income and wealth inequality, with the situation of middle and lower income groups largely absent from the news or popular culture.
More Information on Global Injustice and Inequality
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