Roosevelt Institute | Cornell University

The Problem of Our TimesEconomic Inequality

By Brad DeSanctisPublished May 6, 2018

null
American political discourse is saturated with policy issues, from gun policy to abortion, tax reform to healthcare, immigration to foreign policy. But one realm of policy stands out from the rest. Left unaddressed, it is slowly killing the core ethos of America: the American dream. The problem is economic inequality.
American political discourse is saturated with policy issues, from gun policy to abortion, tax reform to healthcare, immigration to foreign policy. But one realm of policy stands out from the rest. Left unaddressed, it is slowly killing the core ethos of America: the American dream. The problem is economic inequality.

 The United States and the rest of the world have reached historic levels of inequality. While the top 1 percent of income earners global captures 27 percent of the income, the bottom 50 percent captures only 12 percent, according to data published by Thomas Piketty and other well-known economists in the World Inequality Report. The United States, however, stands out among other developed nations for particularly high levels of inequality. Among OECD nations, the United States has the fifth highest Gini coefficient, a statistical measure of inequality based on disparities in a country’s income distribution. This is in part due to the very slow wage growth of working-class Americans. Over the last 40 years, the average pre-tax income of the bottom 50 percent of American earners has stagnated at around $16,000, increasing only 2.6 percent over that time period. The top 10 percent of earners, on the other hand, saw their pre-tax incomes grow by 231 percent. Other parts of the world are less (but still) unequal. In Europe, 19.9 percent of income goes to the bottom 50 percent of earners, while 12.5 percent of income goes to the richest 1 percent of citizens. When compared to European nations, the United States falls short in many ways that have implications for economic inequality. The US, for one, has unequal access to education even before post-secondary education. The US also has a wide skills premium, a low minimum wage, and weak unions.

All of these factors contribute to the large and growing gap between the middle class’ standard of living and that of America’s economic elite. This can pose an economic threat given the U.S.’ history of a thriving middle class that contributes the bulk of its economic activity. But more importantly, this growing economic inequality violates a central tenet of the American experience: the idea that any person, through hard work and determination, can achieve wealth and success. As income increasingly concentrates in the hands of the few, there are fewer opportunities for Americans to climb the socioeconomic ladder and achieve the American dream. Thus, addressing this slow-moving crisis should be a top priority for policymakers.

There are many types of policies that can address economic inequality, and these vary in their political feasibility. One common platform pushed by social liberals is increasing federal social spending. If the federal government spent more towards Americans’ health care, drug costs, college education, etc., the average American would have more disposable income (thanks to progressive taxation). Fifty-one percent of Americans support a federal mandate for paid leave, and 82 percent agree with paid maternity leave, cheaper policies that would similarly help lower-income Americans keep more money in their pockets and stay in their jobs.

The federal government can also act to directly boost working and middle class incomes. The most obvious among these policies is boosting the minimum wage, which is more than 30 percent lower in real terms than it was in 1968. Another idea is to expand the Earned Income Tax Credit, which benefits working low-income households. More indirectly, Congress can pass labor market reform intended to boost wage growth. Restricting non-compete clauses, banning anti-poaching agreements, and blocking mergers that harm labor-market competition would all lead to higher working and middle-class wage growth and thereby reduce economic inequality. The federal government can also overhaul and expand its job retraining programs, which would allow Americans to prepare for high-paying skilled jobs that will make up a larger and larger share of American jobs as employers automate low-skill tasks.

Finally, a politically challenging but effective way to address economic inequality would be to increase the progressivity of the American tax system. Research suggests American tax rates can be raised without drastically harming economic output. Over 80 percent of federal tax revenue comes from personal income and payroll taxes. Forty-eight percent of the federal budget is then spent on Social Security, Medicare, and Medicaid, with a larger 63 percent spent on all non-discretionary spending, which includes other social benefits such as unemployment insurance and food stamps. A more progressive tax system that shifts more of the burden to America’s wealthy could raise new revenues to fund social programs that disproportionately benefit the middle class while asking those beneficiaries to contribute less themselves. Action this strong can be seen as income redistribution, which is rightfully unpopular in a country with a strong national ethos that says those who work hard will be rewarded with financial success. But by narrowing the income gap between the middle class and the wealthy, there will be more such opportunities for hard-working Americans to pursue.

The American dream is under threat. Without policy action, America’s wealth gap will continue to grow, further shrinking the middle class and reducing the economic mobility that we as Americans hold sacred.