The Washington PostDemocracy Dies in Darkness

It will take more than faster growth to reverse inequality

Inequality scholar Thomas Piketty, along with two colleagues, is back with important, new inequality research. (Charles Platiau/Reuters)

It’s not the heat growth, it’s the humidity inequality.

There’s a great deal of hand-wringing about growth rates these days, and for good reasons. In the past two expansions, real GDP per person grew 10 percent to 12 percent; in the prior two, income per person grew twice that fast. For those keeping political score, those cycles bridge presidents of both parties, which makes sense, as presidents have a lot less to do with long-term growth than the usual debate maintains. (Okay, it’s true that the economy has done better under Democrats, but I think there’s less there than meets the eye.)

Still, you’ve got Trump advisers and Cabinet designees going on about how their agenda will double the growth rate, from 2 percent to 4 percent. I don’t see how they get there, especially if they’re banking on trickle-down growth effects from their big, regressive tax cut, but my point today is something different.

From the perspective of the living standards of the middle class and the poor, growth is necessary. But it is not sufficient.

The theory of the case is very simple. If GDP, or aggregate income growth, speeds up but the gains mostly go to those at the top of the scale, then there’s less income left for middle- and lower-income households. In a seasonal sports analogy, growth does an end run around the middle class on its way up to a few percentiles at the top of the income scale.

The next two figures give you a sense of the problem. Both are from important new research by inequality scholars, Thomas Piketty (yep, that guy), Emmanuel Saez and Gabriel Zucman, wherein they’ve assigned all of the U.S. national income, including labor, capital, fringe benefits, taxes and government transfers, to adults in the population going back a bunch of years.

The first figure makes the point that, yes, growth has slowed in recent decades (first two bars), but inequality of growth has been a much larger factor in terms of how much, or little, of that reduced growth reached different income classes. Overall growth in the first 34-year period, before taxes, was 95 percent (1946-80), but it slowed by a third in the latter period, a significant downshift.

But the differences across income classes are even more dramatic. Adults’ pretax income in the bottom half doubled in the first period and grew but 1 percent since 1980. Clearly, in the second period, the better off you were, the faster your income grew. That staircase pattern presents an unsettling picture of both inequality and its outcome: income stagnation for large swaths of the population.

By applying those average growth rates to the bottom 50 percent income series, we can get a rough sense of the relative importance of growth and inequality from the perspective of these low-income adults. The bottom line in the next figure shows actual pretax income for adults in the bottom half of the income scale. The top line asks how these folks would have done if their income had grown at the average rate from the earlier, faster-growth period. The middle line asks how they would have done if they experienced the slower, average growth of the post-1980 period.

The difference between the top two lines is the price these bottom-half adults paid because of slower growth. The larger gap between the middle and bottom line shows the price they paid from doing much worse than average, i.e., inequality (aging demographics are also in play, but the researchers show that they do not explain the extent of the slowdown in income growth). That explains about two-thirds of the difference in endpoints. Slower growth hurt these families’ income gains, but inequality hurt them more.

Another important new analysis makes a similar point regarding not income growth, but income mobility: the likelihood that children would surpass their parents’ income when they themselves are adults. These researchers find that 92 percent of kids born in 1940 would out-earn their parents by the time the kids were 30-year-olds. For kids born in 1980s, those odds fell to 50 percent.

When the researchers simulated what would happen had growth not slowed, they found that 62 percent (instead of 50 percent) of kids surpassed their parents. But then they asked: What if growth had, in fact, slowed as it did but inequality did not grow? In that case, the share of 1980 kids who later earned more than their parents jumped to 80 percent (again, from 50 percent). Slower growth lowered their “surpass” probability by 12 points; greater inequality, by 30 points.

I cannot overemphasize the importance of these findings in the current policy debate. The incoming team Trump argues that it can double the growth rate with highly regressive tax cuts that deliver about $300,000 in tax cuts to the top 1 percent and less than $1,000 to the middle fifth. If they’re able to pass this beast, as they may well be, not only will the growth effects fail to materialize, but they will have exacerbated the inequality/immobility problem.

At the same time, the incoming team is likely to go after the safety net programs that Piketty et al show have been extremely important to offset the failure of market incomes to rise much since 1980s for low and middle-income adults. When pretax income was stagnant for the bottom half from 1980 to 2014, after taxes and transfers, bottom-half income grew 21 percent. That is still less than 1 percent per year, but it’s a lot better than nothing, which is what they got pretax.

However, while in the face of all this inequality we absolutely must protect the safety net, it cannot do all the work of supporting the many on the wrong side of the inequality divide. For one, conservatives are trying to dismantle it, so there’s that. But for another, as Piketty et al put it, “Given the massive changes in the pre-tax distribution of national income since 1980, there are clear limits to what redistributive policies can achieve.”

None of this is intended to downplay the importance of faster growth. But we either address the deficits in bargaining power, imbalanced trade, quality education access, labor standards, full employment, opportunity and job quality faced by the majority of American households or the negative trends above will almost certainly persist. To the contrary, I suspect that inequality itself is feeding back into slower growth and immobility.

Worst of all, the people behind those relentless, negative trends will look anywhere for a leader who convincingly claims that he’ll reverse them, even if he’s little more than an empty showman, extremely unlikely to deliver the real goods.