The notion that almost half of the wealth in America is in the hands of 1% of the population is widely known, but still remains a problem for the middle to lower class. The wealth inequality in America is larger than that of any other developed economy, so I wanted to take a look at how it got to be so bad, and how we can change this process for the better.
How It Happened
After World War II, the American economy experienced a steady growth as vehicle manufacturing took a turn for the better, and jobs were abundant nationwide. However, beginning in the 1970’s, economic growth slowed and the income gap widened, and has been increasing ever since.
During this time, income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly. People who owned companies, stocks, liquid assets, etc. Got very rich during this period because the economy was steadily increasing. Unfortunately for the middle class, they weren’t able to accumulate such a wealth because many were stuck working a 9 to 5 job paying an average salary and many were without strong assets.
This graph shows how the postwar period until the late 1970’s had a shared prosperity, with the 95th percentile controlling similar amounts of wealth as the middle class. This changed in the 1980’s when the top 1% began to make insane amounts of money where they separated themselves in terms of wealth from the middle and lower classes.
There are several reasons why this happened which include:
the globalization hypothesis – low skilled American workers have been losing ground in the face of competition from low-wage workers in Asia and other “emerging” economies.
skill-biased technological change – the rapid pace of progress in information technology has increased the demand for the highly skilled and educated so that income distribution favored brains rather than brawn.
the superstar hypothesis – modern technologies of communication often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less than in the past.
immigration of less-educated workers – relatively high levels of immigration of low skilled workers since 1965 may have reduced wages for American-born high school dropouts.
changing institutions and norms – Unions were a balancing force, helping ensure wages kept up with productivity and that neither executives nor shareholders were unduly rewarded. Further, societal norms placed constraints on executive pay. This changed as union power declined (the share of unionized workers fell significantly during the Great Divergence, from over 30% to around 12%) and CEO pay skyrocketed (rising from around 40 times the average worker’s pay in the 1970s to over 350 times in the early 2000s).
What really struck my attention out of all of this was the immigration of less-educated workers, as well as globalization. Before mass-scale offshoring of jobs and immigrating less-educated workers, wealth distribution in the country was pretty good. The middle and lower classes had jobs and assets because there was a high demand for their services. These people were not highly skilled workers either. Many of them only had a high school education or even dropped out of high school, yet were still able to get a job at a manufacturing plant before immigrants came and took the jobs, or before large companies outsourced these jobs.
Below are two graphs that highlight the changing dynamics of the American population that took place during the 1970’s.
This chart is very intriguing because of the scale of the Mexican-born population in the country. With the number of Mexicans in the country increasing from aprox. 1 million to about 8 million in two decades, it is not surprising that there was a huge surplus of uneducated workers in America willing to do minimum wage work.
Along with the number of Mexicans being born in America during this period, the number of Immigrants that the U.S. brought in increased by 2.3% over the same two decade period. Although this doesn’t seem like a lot, at the time, this would have been an additional 5 million or so immigrants on top of the 8 million Mexican born U.S. citizens.
Overall, the U.S. saw an increase of almost 15 million or so people beginning in the 1970’s, which contributed to a surplus of workers to do low paying jobs.
This pattern caused a drastic shift in the American economy from vehicle manufacturing to the technology market (computers, phones, etc.). Once the 1990’s hit, there was already a large wealth disparity in the country, along with a decreased need for low skilled workers, and an increased need for skilled workers, which is why many of us are told to attend post secondary education.
This graph highlights the annual income of only the top 1% of the population. Notice how after the war, their incomes saw a steady decrease, which attributed to wealth equality in the country. But once the late 1970’s hit and mass-scale immigration took over the lower paying jobs in the country, the income share of the 1% skyrocketed over the next couple decades.
And now, we have the wealth disparity problem.
Now don’t get me wrong, America letting in millions of immigrants isn’t the sole cause of this wealth inequality. They have the largest free market economy in the world, which opens the door for entrepreneurs and business executives to make as much money as humanly possible.
The reason you see a huge increase from the mid 90’s to the mid 2000’s is because of the dot com boom. Technology moguls like Bill Gates and Steve Jobs made billions during this time, which created a whole new generation of billionaires, and obviously widened this wealth gap.
Here we see how the income of the 1% literally quadrupled from 1979 to the 2007 just before the recession. However, even after the recession, their income had still risen by an astronomical 200%.
What’s hard to see when analysing these graphs is how small the 1% of America’s population really is.
The U.S. entered 2016 with an estimated population of 322,762,018 according to an end-of-year estimate from the U.S. Census Bureau
1% of that is 3.2 million people.
So if we venture back to 2013 to analyse this graph, America had about 315 million people. That means 3,150,000 people were among the 1%. Each of these people had an estimated wealth of at least, $7,880,400. While 80% of the population (252,000,000) control a fraction of the wealth. That isn’t even the worst part. A staggering 10% of the population (31,500,000) had an average family wealth of -$2000, where in 1983, the average was $703.
Basically, the rich are getting richer, and the poor are getting poorer because their are too many people and not enough jobs.
Now the question arises,
What can we do to fix this?
As heart wrenching as this is to say, electing Donald Trump could be one way to help the American economy. I do not like Donald Trump, I don’t like what he stands for, how he handles situations, or how he treats people. But, he has promised (which doesn’t mean a lot in the political world) to domesticate American jobs. He wants to resource jobs (Idk if that’s a word but he wants to take jobs back to America) Jobs.
Although the way that Trump is carrying out his candidacy is highly unprofessional and disrespectful to many ethnic groups, he has the potential to strengthen America’s economy if he carries out his plan to domesticate jobs.
Believe me, I am not the first person to take a crack at this issue. Many people say we should tax the rich more and more, but we all know that isn’t going to work. They worked hard for their money (or maybe they didn’t) and they don’t deserve to be taxed more than someone who sits at home all day and collects welfare checks (not discriminating just trying to make a point).
The fix to this issue does not come from taxing people. It comes from stabilizing the economy. The best way to stabilize an economy is to have a surplus of jobs, not a surplus of workers. Well, it would be best to have an equilibrium but we don’t live in a perfect world.
It is possible for these graphs to be reversed in a sense. It will mean cutting down on immigration however, which is a whole other issue in itself. But, if America is to ‘become great again’, cutting down on the wealth disparity issue should be high on the agenda of the next presidential candidate.