The lopsided nature of American prosperity

It was the year of inequality. The economic debate took a dramatic turn in 2019. To be sure, much attention was paid to the familiar standbys: jobs, interest rates, inflation and trade. But superseding these well-worn subjects was a growing fixation on the lopsided nature of American prosperity.
It’s become fashionable to denounce billionaires. Bernie Sanders thinks they should be wiped off the face of the earth. Elizabeth Warren says government only works for the ultra-rich and giant corporations.
True, a lot of this is overwrought, election-year scapegoating. By making the “top 1%” responsible for many of our problems, we exonerate almost everyone and everything else. Still, something momentous is clearly occurring. We need to separate fact from fiction.
Glance at the table below; it’s derived from a new report by the Congressional Budget Office (CBO). The report shows the income gains for the top 1% of Americans, the next 19% of households and the bottom 80%. (Note: a quintile represents one-fifth of households.)
For example, in 2016, the richest 1% had an average income of $1,193,900. For 2021, CBO estimates its income will be $1,393,000, a gain of $199,900, or 16%. Meanwhile, the poorest quintile (or fifth) had a 2016 income of $35,000 and an estimated 2021 income of $36,700. The increase would be $1,700 or 4.8%.
The below table contains valuable lessons. First, some good news. Most US households are experiencing income gains. Even those in the poorest 40% of the population achieve inflation-adjusted income increases of about 1% a year. These may be so small that recipients don’t feel or see them, but gains mount up after a few years.
Government transfers, such as food stamps (Supplemental Nutrition Assistance Program, or SNAP), Medicaid and favorable tax provisions, are crucial in supporting those at the bottom. These programs now typically increase the income of the poorest fifth by about 70%, says CBO.
The notion that most households outside the richest 10% or so have stagnating incomes is at best an exaggeration. Significantly, the statistics used by the CBO include transfer programs (SNAP and others) and beneficial tax breaks. Some other studies, including the government’s official poverty estimates, have been criticised for omitting these transfers and, thereby, overstating poverty.
Now, the bad news. As the table confirms, economic inequality continues to rise at a steady pace; the further you go up the income scale, the larger the income gains, both relatively and absolutely. What’s also discouraging is that economists don’t fully agree on the causes.
“Research has not yet led to a consensus,” says the CBO. Globalization — the off-shoring of production — is often blamed. The CBO mentions high executive pay, well-paid financial advisers, and well-compensated “superstars,” such as actors, athletes and musicians.
It seems inevitable that the very rich and, possibly, the upper middle-class will pay more in taxes — if there is ever another tax increase — because the concentration of income also means the concentration of taxes. Already, the top 1% pays about 25% of all federal taxes.
No one should sugarcoat the very wealthy. Greed has not gone out of style, and there are certainly many instances of unethical behaviour. But lapses in behaviour are hardly confined to the rich.
It does not follow that America’s billionaires have enfeebled the economy. Punitive taxes are likely to do more harm than good.
The great danger here is social and political. It is the creation, or the expansion, of a multi-tiered society where the largest income gains are enjoyed by relatively small groups of people near the top of the economic distribution.
The rich and the near-rich feel stigmatized unfairly for their success, while many Americans below the top tier resent that their hard work hasn’t given them the security and stability to which they feel entitled. President Trump has already exploited this mood and, by all indications, will do so again in 2020.
It’s not a happy prospect.

— Bloomberg

Robert Jacob Samuelson is a journalist for The Washington Post, where he has written about business and economic issues since 1977. He was a columnist for Newsweek magazine from 1984 to 2011