A Rising Tide?

Sunday, March 12, 2006

THIS NATION prefers not to discuss inequality. Lacking a unifying religion, ethnicity or even language, it is held together by an appealing faith: that anyone who works hard and plays by the rules can attain the American dream, sharing the fruits of economic progress. But the trends of the past quarter-century compel a reexamination of this creed. When President Kennedy promised that "a rising tide lifts all boats," he was correct. Today that claim could be disputed.

A few numbers show why. In the 25 years from 1980 to 2004, a period during which U.S. gross domestic product per person grew by almost two-thirds, the wages of the typical worker actually fell slightly after accounting for inflation. So, too, did wages for the 50 percent of the work force that earned less than the typical, or median, employee. The rising tide helped only workers at the top. Wages for workers in the 90th percentile -- that is, workers who earned more than 90 percent of their peers -- jumped by more than a quarter.

Other measures tell variants on this story. More women are working, so household income, as distinct from individual wages, has risen. The value of health benefits has increased, so counting these plus other non-wage income from investments also paints a brighter picture. Between 1980 and 2003, total after-tax income for the bottom fifth of households rose 8 percent, and the second-bottom fifth gained 17 percent; in other words, all boats did rise, albeit by less than 1 percent per year. But it's hard to celebrate such modest gains when the top fifth advanced 59 percent over the 24-year period.

Depending on which statistics you choose, the tide is either not lifting most boats or lifting many of them modestly. At times over the past quarter-century, commentators have hoped that this disappointing performance was temporary. Perhaps it was caused by a one-time shock from the arrival of the personal computer, which made junior clerical workers less valuable? Perhaps it reflected a one-time jump in competition from foreign workers following the creation of the World Trade Organization and the North American Free Trade Agreement? Or maybe it reflected social pathologies among the poor that could be changed by welfare reform? All these theories had their day; but after a quarter-century of disappointment, the struggles of Americans in the bottom half of the income distribution cannot be viewed as temporary.

Many argue that, as long as most households are not retreating, inequality shouldn't be a worry. The rich are entitled to the fruits of their labor: These reflect talent, hard work, risk-taking and innovation, and only an economy that rewards such things can be dynamic. This is true up to a point. But when big rewards for high achievers don't produce an economy that helps ordinary folk, the case for big rewards loses some of its appeal.

Moreover, Americans have tolerated divisions between rich and poor because they believed that anyone could get ahead, given enough talent and determination. But the truth is that rags-to-riches stories have never been the norm: One study of people reaching adulthood between 1968 and 1998 found that 42 percent of those born into the poorest fifth ended up there also. As the distance between the top and bottom grows wider, it becomes harder to traverse the gulf. Family background has a larger impact on people's prospects. The talent of people born into poor families goes wasted.

The idea that everyone should start life with decent opportunities helped to inspire the American Revolution and the civil rights movement; it is an idea that this nation forsakes at its peril. But there are other reasons to worry about inequality. Surveys find that if you ask people whether they'd prefer to earn $100,000 in a society in which the average pay is $80,000, or $110,000 in a society in which average pay is $130,000, respondents pick the lower salary in order to feel rich in relative terms.

This isn't just irrational. Riches and poverty are partly relative concepts. The more unequal a society, the more citizens in the bottom half will experience hardship. When people at the top gain more disposable income, they bid up the prices of goods in limited supply -- homes in top school districts, or places at top colleges. Tuitions at four-year colleges have more than doubled since 1980, with the result that gaps in enrollment by class and race, which declined in the 1960s and 1970s, are as wide now as 30 years ago. The wealth of people in the top half also bids up the common understanding of what a middle-class lifestyle entails. People feel obliged to spend more on birthday gifts, children's sneakers or a suit for the next job interview. Since 1980, the median size of a newly built house has increased by a third -- even while the household savings rate has fallen to about zero.

So it's not quite true that the rich can enjoy their riches without harming anyone; their money changes life for people lower down. This might not matter if inequality brought compensating gains: if the growth of relative disadvantage were offset by absolute wage rises or by social mobility. But increases in wages have been small or negative, and the United States has become less socially mobile than nations such as Sweden and Germany.

This editorial marks the start of an occasional series about inequality. We do not believe that reducing it should become the sole priority for economic policy, as the next installment will explain, and we recognize that trends in the global economy may make some rise in inequality inevitable. But the quest for a more equal society should not be smothered by protests of "class warfare." Yes, some popular remedies for inequality would backfire, stifling growth or wasting money. But there are promising policies out there, too: policies that would reduce inequality without damaging growth; in fact, policies that might boost it.

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