Economic inequality is a complex topic. The great desire for a “scoreboard number” is in this area (as in much economics) a temptation to be resisted. Single measures can’t quite capture it. So I was very pleased with a recent New York Times feature, which charted incomes across countries by income deciles over the last thirty years. The headline – “The American Middle Class is No Longer the World’s Richest” – doesn’t tell the whole story. At the 80th percentile (about $101,000 household income in 2011)? You’re still the richest by far. At the 20th percentile? You’ve been worse off than Canada, Germany, Norway, and the Netherlands nearly the entire period, AND the study does not take into account non-cash government benefits!
This is the kind of detailed data that accurately and powerfully tells us a great deal about who we are as a society. What moral lessons does it display? I would cite 5 things. First and foremost, it suggests that we are not in general interested in the poor as a measure of our society’s success. If the test of an economy is how it treats the poorest workers, the U.S. economy is neither just nor charitable. While the lowest decile of economic data can be tricky to interpret, due to many non-standard cases of people not making money (e.g. students, business losses), the 2nd and 3rd decile are most certainly what we would term “the working poor.” These are people making $15,000 to $30,000 a year. These are the folks who are washing the dishes, doing overnight inventory, and the like. How do we treat them? Not very well.
Secondly, one of the most consistent findings of studies of “happiness” is that, past poverty levels, absolute income does not correlate with happiness. However, relative income does. These are, Robert Frank writes, the “two important empirical findings on the relationship between money and happiness” (p. 20). That is, simply having more money beyond basic needs doesn’t correlate with happiness, but one’s relative position to others in the same “pond” makes a big difference. What makes people happy is not having more per se, but having more than others. Frank insists this is reasonable, and not simply a matter of envy – human judgment in inherently contextual. But notice one important consequence: if you sheer off a bit of everyone’s income at upper income levels, they still are “satisified” because they are still at the same point relative to others. Even better, if you do the shaving job right, the magnitude of the relative differences is smaller, which makes everyone happier overall, since unhappiness comes from the feeling of falling further behind.
Thirdly, the article mentions a surprising, often-forgotten fact: Americans used to be the best-educated workforce in the world, but this is now far from the case.
Americans between the ages of 55 and 65 have literacy, numeracy and technology skills that are above average relative to 55- to 65-year-olds in rest of the industrialized world, according to a recent study by the Organization for Economic Cooperation and Development, an international group. Younger Americans, though, are not keeping pace: Those between 16 and 24 rank near the bottom among rich countries, well behind their counterparts in Canada, Australia, Japan and Scandinavia and close to those in Italy and Spain.
Large, macro-trends like the one depicted in this study have to take into account other large macro-trends. And this is a key one. Even in manufacturing, there is demand for workers who have developed their skills and sharpened their abilities. I find it mightily frustrating that complaints about inequality often neglect the cultural hostility to education, the excessive celebration of school sports, the ubiquitous attachment to media at younger and younger ages, and other issues that have led to our falling behind in this way.
Fourth, the article neglects to mention the phenomenon of the “winner-take-all” economy – a phenomenon paradoxically magnified when a market is large. That is, in Sweden or Canada, there’s less “all” for the winner to take. The huge domestic market paradoxically can lead to concentration, and concentration inevitably increases the reward for achieving high status. The supposed “decentralization” of the Internet is an epiphenomenon. As this report notes, advertising revenue on the web is far MORE concentrated than it ever was in print media: the five top companies get over half the ad dollars, and over three-quarters of the mobile device segment. Busting up concentrated companies will always create more jobs in the middle.
Finally, and to me most importantly, we should notice the incomes at the 70th, 80th, and 90th percentile. These are still the world’s largest… and there are an awful lot of people in this group who can’t imagine being part of an upper-income “shave.” Strategically, the 1% now knows it will be insulated from any significant attack, because the 70-90% have large mortgages, their retirement in the stock market, etc. – in short, the interests of the 70-90% end up aligned with those of the 1%. We can rage on about the 1% all we want, but a crucial part of what will solve this problem is that the 70th to 90th percentile – a very significant portion of the population – might have to accept less. This is tough going in a society where we get a front-page sob story about a couple making $90,000 a year, and claiming that they would be able to “make ends meet” if only they had “about $150,000.” Give me a break. As long as a lot of people at the 70th percentile are absolutely attached to all of their privileges, their boats will continue to rise (a bit) while the rest of the ship slowly sinks.