While never putting a premium on economic equality, America has always prided itself on being the preeminent land of economic opportunity. If all of this nation’s wealth is captured by a narrow stratum of the very rich, however, that claim is relegated to history’s dustbin. Research by Julia Isaacs of the Brookings Institution, as part of the Economic Mobility Project, has shown that intergenerational mobility in the United States has fallen far below the levels in Germany, Finland, Denmark and other more social democratic nations of Northern Europe. Now, Saez’s analysis of income data provides further evidence that mocks America’s self-image as a land where hard work yields rewards.
How has the top 1 percent been able to decouple itself from the nation beneath it? To begin, much of its income comes from investments in funds and firms that are raking in profits from overseas ventures in economies like China’s, which weathered the downturn better than ours. Much of those firms’ profits also derive from their reduced labor costs — the result of layoffs and paycuts. Finally, as Saez points out, there has been “an explosion of top wages and salaries” since 1970. In that year, 5.1 percent of all wages and salaries paid in the United States went to the wealthiest 1 percent. In 2007, the share going to the wealthiest 1 percent had more than doubled, to 12.4 percent.
The consequences of this concentration of wealth and income extend beyond the purely economic. A middle class enduring prolonged stagnation isn’t likely to fund projects the nation needs to undertake — such as rebuilding our infrastructure or increasing teacher pay — or, ultimately, to retain its faith in the efficacy of democracy. The rise of super PACs, the low rates of taxation on capital gains and hedge fund operators, the ability of the major banks to fend off reform — all testify to the power of a neo-plutocracy beyond democratic control.
Most proposals to restore a modicum of balance to the American economy focus on making the tax code more progressive. Raising the tax on investments to the level of the tax on wages, for instance, and increasing the inheritance tax would help start reconstruction of a more viable economy.
But changes to the tax code, indispensable though they would be, aren’t remotely sufficient to the challenge of restoring the broadly shared prosperity that Americans enjoyed in the mid-20th century. That would require changing some laws to give stockholders and other corporate stakeholders the power to diminish the share of corporate revenue routinely claimed these days by top executives — at the expense of everyone else. It would require revitalizing unions. David Madland and Nick Bunker of the Center for American Progress recently found that in 1968, when 28 percent of the workforce was unionized, 53 percent of the nation’s income went to the middle class. In 2010, when 11.9 percent of the nation’s workers were unionized, the share claimed by the middle class had fallen to 46.5 percent.
Capitalism can create prosperity, but left unfettered it doesn’t create broadly shared prosperity — and never will. If belief and participation in democracy are sustained by people’s conviction that democracy produces good economic outcomes, then the growing concentration of wealth and income in the United States is a long-term threat to everything we profess to stand for. A nation where 93 percent of income growth goes to the top 1 percent is not a nation that will embark on great projects, or long command the allegiance of its people.