Column: Income Inequality Has Been Years in the Making
From 2009 to 2012, the United States experienced a significant economic recovery, in which average real income growth jumped by 6 percent. That’s the good news. The bad news is that almost all of that increase — 95 percent — was enjoyed by those in the top 1 percent of the income distribution.
To appreciate this remarkable finding, set out in an important paper by University of California economist Emmanuel Saez, we need to add some context. From 2007 to 2009, the recession produced a 17.4 percent decline in average real income — the largest drop since the Great Depression. Every income class was hit hard, but in percentage terms, those at the top of the economic ladder suffered the biggest decreases.
During the recovery — from 2009 to 2012 — members of the top 1 percent have enjoyed a big boost in their average income: 31.4 percent. As Saez shows, this figure almost wiped out the loss from the recession, returning the top 1 percent to essentially where it was in 2007.
By contrast, the remaining 99 percent saw measly growth of 0.4 percent, about a 30th of the 11.6 percent loss they experienced in the recession. By the end of 2012, the bottom 99 percent wasn’t close to where it was in 2007.
If we go back to 1993, we can see how extreme these patterns have been. Under Presidents Bill Clinton and George W. Bush, the U.S. enjoyed significant expansions. Both expansions were quite lopsided in favor of the top 1 percent, but at least everyone gained.
In both periods, the top 1 percent did great, enjoying annual income growth of 98.7 percent (under Clinton) and 61.8 percent (under Bush). The bottom 99 percent did well, too, with annual gains of 20.3 percent under Clinton and 6.8 percent under Bush.
It should be plain that during both expansions, the U.S. saw nothing close to the disparities of the first years of the current recovery.
Here’s another way to see the point. From 1993 to 2012, the top 1 percent has enjoyed an increase of 86.1 percent in annual income, with the rest of us getting 6.6 percent. That means the top 1 percent received 68 percent of total income growth over the period — a high figure, but much lower than the whopping 95 percent from 2009 to 2012.
Extreme as that figure is, it can be seen as consistent with the broader pattern of continuing increases in economic inequality since the early 1970s, when the top 10 percent received about 33 percent of total annual income (a figure that had remained pretty much constant since the 1940s). Over the next decades, the share of the top decile grew fairly steadily until 2007, when it ended up with about 50 percent of the whole.
The recession reduced that figure to about 47 percent, but in 2012, it climbed back to more than 50 percent. Focusing on just the top 1 percent, Saez finds a broadly similar pattern, with a generally growing share since the 1970s, to the point where its members could claim about 22 percent of total income in 2012.
Are these patterns a reason for concern? Americans certainly don’t believe in equal results, but they do believe that whether or not your parents are rich, you should have a fair chance to get ahead.
The troubling fact is that in the top and bottom 10 percent, U.S. families show a degree of economic “stickiness.” If a child has rich parents, there is a good chance he will stay in the economic elite, but if his parents are poor, he has a decent chance of remaining poor.
A disturbing implication is that if the top earners experience big income growth while everyone else gets stuck, there will be growing disparities in the opportunities of rich children and poor children.
A lot of work needs to be done to specify the reasons for the post-1970s increases in economic inequality. But one point is clear: Through 2012, the gains from the current recovery were concentrated among the top 1 percent, and that pattern, extreme though it is, fits with a general surge in economic inequality over the last 40 years.
Cass R. Sunstein, the Robert Walmsley University professor at Harvard Law School, is a Bloomberg View columnist. He is a former administrator of the White House Office of Information and Regulatory Affairs, the co-author of Nudge and author of Conspiracy Theories and Other Dangerous Ideas, coming in March 2014.