Actually, there was a stretch after World War II when Americans enjoyed a much larger share of the nation’s income.
President Trump is fond of harkening back to simpler, better times. His political opponents often dismiss this as mere nostalgia, or worse. After all, discrimination in the labor market remains pervasive for women and people of color. But in terms of wages, it turns out there was a 35-year period following WWII when the average American enjoyed a much larger slice of America’s economic pie.
Between 1945 and 1980, the wealthiest 10 percent of our society received only around a third of national income. Since 1980, income distribution has returned to levels of inequity not seen since the Gilded Age at the turn of the last century. This was a period when our economy was dominated by robber barons like the Rockefellers. Now, as then, the top 10 percent capture about half of all national income generated in the United States.1
For most Americans, this pattern means less pay for a hard day’s work. And given that local government services depend on taxes derived directly or indirectly to income, this has knock-on consequences for working-class communities. Declining income, sales, and property taxes hinder the ability of government to provide basic services like roads, schools, or emergency first response in declining regions. At the national level, rising inequality puts greater strain on federal programs that provide our society with safety nets like Medicaid, TANF (welfare), or SNAP (food stamp) benefits.
What caused this shift in economic fortunes?
Some, including the current administration, blame globalization—the movement of manufacturing to places like China or Mexico. Unfair trade deficits, they argue, amount to theft of wages and prosperity for the American worker.
As Trump stated during a recent speech before the United Nations General Assembly:
“We will no longer tolerate such abuse. We will not allow our workers to be victimized, our companies to be cheated, and our wealth to be plundered and transferred.”
Trump at the UN General Assembly in September 2018. Watch full coverage of Trump’s statement.
Others, including Tea Party leaders like Sarah Palin, point to domestic politics and ‘crony capitalism‘ to explain the diminishing prospects for the working class. In their view, big Wall Street corporations and other special interests have captured government, carving out generous bailouts, subsidies, and tax loopholes at the expense of Main Street.
Others still say that economic inequality is an inevitable consequence of capitalism itself—the natural tendency of money to concentrate in the hands of those who started out ahead in the game. In Capital in the 21st Century, Thomas Piketty observes that as the global economy rises, the boats of wealthy capitalists rise much faster than those of workers.
If so, maybe the real heist took place inside our own tax code. A recent NY Times Op-Ed examined how the tax rate the IRS imposes on America’s top income bracket (currently individuals making over $500,000 or couples making over $600,000) has changed over time.
Between 1930 and 1980 the average marginal tax rate for top earners was 78 percent. From 1951 to 1963 it peaked at more than 90 percent.2
The most dramatic sea change in recent times coincided with the election of Ronald Reagan in 1980. When he first took office as president the top tax rate was 70 percent. By the time he left office in 1988, it had been slashed to 28 percent. Just as American workers started losing jobs to foreign manufacturing, we stripped communities and regions of the government resources that were needed to help them adjust.
Instead of re-tooling workers for a more competitive global economy by providing them with affordable technical schools and colleges, public funding for post-secondary education has been gutted since 1980. One result is that tuition at public colleges and universities rose by 281 percent between 1973 and 2015. This shifts the burden of job training to working-class families that are already struggling to cope with stagnant wages and diminishing job prospects.
For many workers, especially those in the hard hit cities and towns of America’s rust belt, the cost of re-tooling may appear too high. For those willing to take on debt in order to get that training, the burden of student loan payments has culminated in a dramatic uptick in delinquency and even default.
As whole regions of the United States slip deeper into the vicious cycle of wage stagnation and economic decline, these data suggest that we’re wrong to put the blame solely on Mexican migrants and Chinese trade deficits.
What next?
Whatever the combination of factors contributing to rising economic inequality, it has profound consequences for the ability of individuals to pursue the American Dream. Unless something is done to arrest this decline into have’s and have-nots, the American economy is unlikely to become great again.
