The rich are the big gainers in America's new prosperity
Americans do not go in for envy. The gap between rich and poor is bigger than
in any other advanced country, but most people are unconcerned. Whereas Europeans
fret about the way the economic pie is divided, Americans want to join the rich,
not soak them. Eight out of ten, more than anywhere else, believe that though
you may start poor, if you work hard, you can make pots of money. It is a central
part of the American Dream.
The political consensus, therefore, has sought to pursue economic growth rather
than the redistribution of income, in keeping with John Kennedy's adage that
“a rising tide lifts all boats.” The tide has been rising fast recently.
Thanks to a jump in productivity growth after 1995, America's economy has outpaced
other rich countries' for a decade. Its workers now produce over 30% more each
hour they work than ten years ago. In the late 1990s everybody shared in this
boom. Though incomes were rising fastest at the top, all workers' wages far
But after 2000 something changed. The pace of productivity growth has been rising
again, but now it seems to be lifting fewer boats. After you adjust for inflation,
the wages of the typical American worker—the one at the very middle of the
income distribution—have risen less than 1% since 2000. In the previous
five years, they rose over 6%. If you take into account the value of employee
benefits, such as health care, the contrast is a little less stark. But, whatever
the measure, it seems clear that only the most skilled workers have seen their
pay packets swell much in the current economic expansion. The fruits of productivity
gains have been skewed towards the highest earners, and towards companies, whose
profits have reached record levels as a share of GDP.
Even in a country that tolerates inequality, political consequences follow
when the rising tide raises too few boats. The impact of stagnant wages has
been dulled by rising house prices, but still most Americans are unhappy about
the economy. According to the latest Gallup survey, fewer than four out of ten
think it is in “excellent” or “good” shape, compared
with almost seven out of ten when George Bush took office.
The White House professes to be untroubled. Average after-tax income per person,
Mr Bush often points out, has risen by more than 8% on his watch, once inflation
is taken into account. He is right, but his claim is misleading, since the median
worker—the one in the middle of the income range—has done less well
than the average, whose gains are pulled up by the big increases of those at
Privately, some policymakers admit that the recent trends have them worried,
and not just because of the congressional elections in November. The statistics
suggest that the economic boom may fade. Americans still head to the shops with
gusto, but it is falling savings rates and rising debts (made possible by high
house prices), not real income growth, that keep their wallets open. A bust
of some kind could lead to widespread political disaffection. Eventually, the
country's social fabric could stretch. “If things carry on like this for
long enough,” muses one insider, “we are going to end up like Brazil”—a
country notorious for the concentration of its income and wealth.
America is nowhere near Brazil yet (see chart 1). Despite a quarter century during
which incomes have drifted ever farther apart, the distribution of wealth has
remained remarkably stable. The richest Americans now earn as big a share of overall
income as they did a century ago (see chart 2), but their share of overall wealth
is much lower. Indeed, it has barely budged in the few past decades.
The elites in the early years of the 20th century were living off the income
generated by their accumulated fortunes. Today's rich, by and large, are earning
their money. In 1916 the richest 1% got only a fifth of their income from paid
work, whereas the figure in 2004 was over 60%.
The not-so-idle rich
The rise of the working rich reinforces America's self-image as the land of
opportunity. But, by some measures, that image is an illusion. Several new studies*
show parental income to be a better predictor of whether someone will be rich
or poor in America than in Canada or much of Europe. In America about half of
the income disparities in one generation are reflected in the next. In Canada
and the Nordic countries that proportion is about a fifth.
It is not clear whether this sclerosis is increasing: the evidence is mixed. Many
studies suggest that mobility between generations has stayed roughly the same
in recent decades, and some suggest it is decreasing. Even so, ordinary Americans
seem to believe that theirs is still a land of opportunity. The proportion who
think you can start poor and end up rich has risen 20 percentage points since
That helps explain why voters who grumble about the economy have nonetheless
failed to respond to class politics. John Edwards, the Democrats' vice-presidential
candidate in 2004, made little headway with his tale of “Two Americas”,
one for the rich and one for the rest. Over 70% of Americans support the abolition
of the estate tax (inheritance tax), even though only one household in 100 pays
Americans tend to blame their woes not on rich compatriots but on poor foreigners.
More than six out of ten are sceptical of free trade. A new poll in Foreign
Affairs suggests that almost nine out of ten worry about their jobs going offshore.
Congressmen reflect their concerns. Though the economy grows, many have become
Other rich countries are watching America's experience closely. For many Europeans,
America's brand of capitalism is already far too unequal. Such sceptics will
be sure to make much of any sign that the broad middle-class reaps scant benefit
from the current productivity boom, setting back the course of European reform
The conventional tale is that the changes of the past few years are simply
more steps along paths that began to diverge for rich and poor in the Reagan
era. During the 1950s and 1960s, the halcyon days for America's middle class,
productivity boomed and its benefits were broadly shared. The gap between the
lowest and highest earners narrowed. After the 1973 oil shocks, productivity
growth suddenly slowed. A few years later, at the start of the 1980s, the gap
between rich and poor began to widen.
The exact size of that gap depends on how you measure it. Look at wages, the
main source of income for most people, and you understate the importance of
health care and other benefits. Look at household income and you need to take
into account that the typical household has fallen in size in recent decades,
thanks to the growth in single-parent families. Look at statistics on spending
and you find that the gaps between top and bottom have widened less than for
income. But every measure shows that, over the past quarter century, those at
the top have done better than those in the middle, who in turn have outpaced
those at the bottom. The gains of productivity growth have become increasingly
If all Americans were set on a ladder with ten rungs, the gap between the wages
of those on the ninth rung and those on the first has risen by a third since
1980. Put another way, the typical worker earns only 10% more in real terms
than his counterpart 25 years ago, even though overall productivity has risen
much faster. Economists have long debated why America's income disparities suddenly
widened after 1980. The consensus is that the main cause was technology, which
increased the demand for skilled workers relative to their supply, with freer
trade reinforcing the effect. Some evidence suggests that institutional changes,
particularly the weakening of unions, made the going harder for people at the
Whether these shifts were good or bad depends on your political persuasion.
Those on the left lament the gaps, often forgetting that the greater income
disparities have created bigger incentives to get an education, which has led
to a better trained, more productive workforce. The share of American workers
with a college degree, 20% in 1980, is over 30% today.
The excluded middle
In their haste to applaud or lament this tale, both sides of the debate tend
to overlook some nuances. First, America's rising inequality has not, in fact,
been continuous. The gap between the bottom and the middle—whether in
terms of skills, age, job experience or income—did widen sharply in the
1980s. High-school dropouts earned 12% less in an average week in 1990 than
in 1980; those with only a high-school education earned 6% less. But during
the 1990s, particularly towards the end of the decade, that gap stabilised and,
by some measures, even narrowed. Real wages rose faster for the bottom quarter
of workers than for those in the middle.
After 2000 most people lost ground, but, by many measures, those in the middle
of the skills and education ladder have been hit relatively harder than those
at the bottom. People who had some college experience, but no degree, fared
worse than high-school dropouts. Some statistics suggest that the annual income
of Americans with a college degree has fallen relative to that of high-school
graduates for the first time in decades. So, whereas the 1980s were hardest
on the lowest skilled, the 1990s and this decade have squeezed people in the
First, pick your parents(Getty Images)
The one truly continuous trend over the past 25 years has been towards greater
concentration of income at the very top. The scale of this shift is not visible
from most popular measures of income or wages, as they do not break the distribution
down finely enough. But several recent studies have dissected tax records to investigate
what goes on at the very top.
The figures are startling. According to Emmanuel Saez of the University of
California, Berkeley, and Thomas Piketty of the Ecole Normale Supérieure
in Paris, the share of aggregate income going to the highest-earning 1% of Americans
has doubled from 8% in 1980 to over 16% in 2004. That going to the top tenth
of 1% has tripled from 2% in 1980 to 7% today. And that going to the top one-hundredth
of 1%—the 14,000 taxpayers at the very top of the income ladder—has
quadrupled from 0.65% in 1980 to 2.87% in 2004.
Put these pieces together and you do not have a picture of ever-widening inequality
but of what Lawrence Katz of Harvard University, David Autor of the Massachusetts
Institute of Technology and Melissa Kearney of the Brookings Institution call
a polarisation of the labour market. The bottom is no longer falling behind,
the top is soaring ahead and the middle is under pressure.
Superstars and super-squeezed
Can changes in technology explain this revised picture? Up to a point. Computers
and the internet have reduced the demand for routine jobs that demand only moderate
skills, such as the work of bank clerks, while increasing the productivity of
the highest-skilled. Studies in Britain and Germany as well as America show
that the pace of job growth since the early 1990s has been slower in occupations
that are easy to computerise.
For the most talented and skilled, technology has increased the potential market
and thus their productivity. Top entertainers or sportsmen, for instance, now
perform for a global audience. Some economists believe that technology also
explains the soaring pay of chief executives. One argument is that information
technology has made top managers more mobile, since it no longer takes years
to master the intricacies of any one industry. As a result, the market for chief
executives is bigger and their pay is bid up. Global firms plainly do compete
globally for talent: Alcoa's boss is a Brazilian, Sony's chief executive is
American (and Welsh).
But the scale of America's income concentration at the top, and the fact that
no other country has seen such extreme shifts, has sent people searching for
other causes. The typical American chief executive now earns 300 times the average
wage, up tenfold from the 1970s. Continental Europe's bosses have seen nothing
similar. This discrepancy has fostered the “fat cat” theory of inequality:
greedy businessmen sanction huge salaries for each other at the expense of shareholders.
Whichever explanation you choose for the signs of growing inequality, none
of the changes seems transitory. The middle rungs of America's labour market
are likely to become ever more squeezed. And that squeeze feels worse thanks
to another change that has hit the middle class most: greater fluctuations in
The overall economy has become more stable over the past quarter century. America
has had only two recessions in the past 20 years, in 1990-91 and 2001, both
of which were mild by historical standards. But life has become more turbulent
for firms and people's income now fluctuates much more from one year to the
next than it did a generation ago. Some evidence suggests that the trends in
short-term income volatility mirror the underlying wage shifts and may now be
hitting the middle class most.
What of the future? It is possible that the benign pattern of the late 1990s
will return. The disappointing performance of the Bush era may simply reflect
a job market that is weaker than it appears. Although unemployment is low, at
4.6%, other signals, such as the proportion of people working, seem inconsistent
with a booming economy.
More likely, the structural changes in America's job market that began in the
1990s are now being reinforced by big changes in the global economy. The integration
of China's low-skilled millions and the increased offshoring of services to
India and other countries has expanded the global supply of workers. This has
reduced the relative price of labour and raised the returns to capital. That
reinforces the income concentration at the top, since most stocks and shares
are held by richer people. More important, globalisation may further fracture
the traditional link between skills and wages.
As Frank Levy of MIT points out, offshoring and technology work in tandem,
since both dampen the demand for jobs that can be reduced to a set of rules
or scripts, whether those jobs are for book-keepers or call-centre workers.
Alan Blinder of Princeton, by contrast, says that the demand for skills depends
on whether they must be used in person: X-rays taken in Boston may be read by
Indians in Bangalore, but offices cannot be cleaned at long distance. So who
will be squeezed and who will not is hard to predict.
The number of American service jobs that have shifted offshore is small, some
1m at the most. And most of those demand few skills, such as operating telephones.
Mr Levy points out that only 15 radiologists in India are now reading American
X-rays. But nine out of ten Americans worry about offshoring. That fear may
be enough to hold down the wages of college graduates in service industries.
All in all, America's income distribution is likely to continue the trends
of the recent past. While those at the top will go on drawing huge salaries,
those in the broad middle of the middle class will see their incomes churned.
The political consequences will depend on the pace of change and the economy's
general health. With luck, the offshoring of services will happen gradually,
allowing time for workers to adapt their skills while strong growth will keep
employment high. But if the economy slows, Americans' scepticism of globalisation
is sure to rise. And even their famous tolerance of inequality may reach a limit.
U.S. Losing Its Middle-Class Neighborhoods
From 1970 to 2000, Metro Areas Showed Widening Gap Between Rich, Poor
By Blaine Harden
Middle-class neighborhoods, long regarded as incubators for the American dream,
are losing ground in cities across the country, shrinking at more than twice
the rate of the middle class itself.
Jim and Lynn Russell and son Adam moved from a middle-income Indianapolis neighborhood to an outer suburb. (Photos By Blaine Harden -- The Washington Post)
In their place, poor and rich neighborhoods are both on the rise, as cities
and suburbs have become increasingly segregated by income, according to a Brookings
Institution study released Thursday. It found that as a share of all urban and
suburban neighborhoods, middle-income neighborhoods in the nation's 100 largest
metro areas have declined from 58 percent in 1970 to 41 percent in 2000.
Widening income inequality in the United States has been well documented in
recent years, but the Brookings analysis of census data uncovered a much more
accelerated decline in communities that house the middle class. It far outpaced
the decline of seven percentage points between 1970 and 2000 in the proportion
of middle-income families living in and around cities.
Middle-income neighborhoods -- where families earn 80 to 120 percent of the
local median income -- have plunged by more than 20 percent as a share of all
neighborhoods in Baltimore, Chicago, Los Angeles and Philadelphia. They are
down 10 percent in the Washington area.
It's happening, too, in this prosperous, mostly white middle-income Midwestern
city where unemployment is low and a vibrant downtown has been preserved. As
poor and rich neighborhoods proliferate, the share of middle-income neighborhoods
in greater Indianapolis has dropped by 21 percent since 1970.
"No city in America has gotten more integrated by income in the last 30
years," said Alan Berube, an urban demographer at Brookings who worked
on the report.
"It means that if you are not living in one of the well-off areas, you
are not going to have access to the same amenities -- good schools and safe
environment -- that you could find 30 years ago," he said.
The decline of middle-income neighborhoods may also be a consequence of increased
economic opportunity and residential mobility, especially for upper-income minorities,
said Joel Kotkin, an urban historian and senior fellow at the New America Foundation.
"This is about upward mobility and class. Until the 1970s, middle-class
blacks and other minorities often had little choice about where they could live,"
said Kotkin, the author of "The City: A Global History." He added:
"They usually had to live close to lower-income people of their own race.
Now, if they can afford it, they can move to higher-income neighborhoods. Dollars
trump race. Many choose not to live around poor people."
The Brookings study says that much more research is needed to better understand
why middle-income neighborhoods are vanishing faster than middle-income families.
But it speculates that a sorting-out process is underway in the nation's suburbs
and inner cities, with many previously middle-income neighborhoods now tipping
rich or poor.
Several urban scholars who had no role in the Brookings study said that its
findings are consistent with what they have seen in cities from Los Angeles
to Cleveland, as the middle class hollows out and as an economic chasm widens
between rich and poor neighborhoods.
"We are increasingly being bifurcated on an economic basis," said
Paul Ong, a professor of public affairs at the University of California at Los
Angeles. "It has taken a big chunk out of the middle."
In Los Angeles -- the most hollowed-out metropolitan area in the country over
the past three decades -- the share of poor neighborhoods is up 10 percent,
rich neighborhoods are up 14 percent and middle-income areas are down by 24
The Brookings study says that increased residential segregation by income can
remove a fundamental rung from the nation's ladder for social mobility: moderate-income
neighborhoods with decent schools, nearby jobs, low crime and reliable services.
Alice McCray used to live in just that kind of neighborhood, a postwar suburb
on the far east side of Indianapolis. She has not moved since 1971. It's the
middle-class character of her neighborhood that has moved away and left her
three-bedroom ranch house behind. With higher-income residents gone, McCray's
neighborhood has tipped poor in the past decade. A third of the incoming population
lives below the poverty line. Crime is up, and schools have deteriorated.
"I had nine block captains on our neighborhood watch group, and seven
of them have moved, said McCray, 61, who owns a cleaning business. "They
said they were not going to put up with this."
For people who do not want to put up with aging, troubled neighborhoods and
have the means to do something about it, escape is remarkably easy -- in Indianapolis
and across much of the country.
The housing industry in the Midwest and the Northeast routinely floods local
markets with new, ever-larger houses. In greater Indianapolis, more than 27,500
houses were constructed between 2000 and 2004, even though the population grew
by only 3,000.
In the process, older houses and many older neighborhoods -- such as McCray's
-- have become as disposable as used cars.
Such overbuilding is rampant across the Midwest and Northeast, where the number
of new houses -- almost always at the edge of metro areas -- swamped the number
of new households by more than 30 percent between 1980 and 2000, according to
a study co-written by Thomas Bier, executive in residence at the Center for
Housing Research and Policy at Cleveland State University.
"As upper-income Americans are drawn to the new houses, neighborhoods
become more homogenous," he said. Echoing the Brookings study, he said:
"The zoning is such that it prevents anything other than a certain income
range from living there. It is our latest method of discrimination."
In a pattern that is the mirror opposite of what is happening in the Midwest
and Northeast, there is a chronic undersupply of housing in many cities on the
West Coast. But it, too, has contributed to a decline of middle-income neighborhoods,
said Berube, the Brookings demographer.
He said rapid population growth in cities such as Los Angeles and Seattle combines
with rigid geographic and legal restraints on construction to limit housing
supply. In Los Angeles, for example, the population grew by 11 percent between
1990 and 2002, but the number of housing units increased by just 5 percent.
That has pushed up the price of housing in mixed-income neighborhoods. Gentrification
often pushes the poor away to less-desirable suburbs.
In Indianapolis, it is an abundance of housing that lures the middle class
out of established neighborhoods.
Until last month, Jim and Lynn Russell lived with their 1-year-old son, Adam,
in a middle-income neighborhood called Irvington on the city's near east side.
The area of restored historic houses is 20 minutes by car from downtown, where
they both work as bank executives.
But the Russells, who have another baby due in the fall, were worried about
mediocre test scores at nearby public schools. They were also concerned about
safety. A mass killing -- seven people shot in their home -- took place this
month not far from their former house.
"Things like that don't happen in Carmel," said Lynn Russell, 31,
who grew up in Indianapolis, as did her husband.
Carmel, where the Russells just bought a house, is not a close-in suburb. About
45 minutes north of downtown at rush hour, it is one of the fastest-growing
communities in greater Indianapolis. Schools are among the best in Indiana,
and housing is abundant and, by national standards, extremely affordable for
professional couples. The Russells bought their four-bedroom house on half an
acre for $230,000.
Urban planners complain that exurbs such as Carmel are bleeding cities of the
middle class. But Jim Russell said he and his wife have made "the logical
choice" by moving to a upper-income neighborhood that is safe, comfortable
and better for their growing family.
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