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Growing Apart

A Political History of American Inequality

Colin Gordon, Author

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Americans today live in a starkly unequal society. We have, in fact, more inequality today in the United States than Americans have experienced at almost any time in the last century.  And our gaps in income and wealth now run deeper than the divides in virtually any other democratic and developed economy. 

The dimensions of that inequality are fully described and explained in the pages that follow.  The graphic below offers a summary overview, tracking trends in various inequality measures and metrics since the end of the Second World War. The basic pattern is not hard to discern: against a backdrop of fairly steady economic growth (the grey bars show gross domestic product in inflation-adjusted 2012 dollars), the richest Americans have raced ahead.  Working Americans and their families, by contrast, are either treading water or slowly sinking (for an indexed version of the same graphic, allowing comparison across measures, click here).  

The international comparison--across countries and across our recent history--is just as telling.  The graphics below plots the gini index measure of inequality for 2000 and 2010 for the United States and its OECD (Organization for Economic Cooperation and Development) peers.  By this measure, the United States is second only to Portugal in 2000, and--its inequality growing at a faster rate than that of any of is peers, an unqualified number one by 2010.  

Yet, for all the jaw-dropping comparisons — between rich and poor, then and now, the United States and other nations — we hear very little about how and why we arrived this point. Our current economic troubles have certainly aimed a spotlight at our inequality problem. But these troubles did not create it.

What did? Those explanations that do sometimes gain public attention generally posit one or both of two simple plotlines: The first: Somebody took the money. This version stresses Wall Street greed and the Bush-era tax cuts, and features a plutocracy determined to claim more than its share of private wealth and shoulder less than its share of public goods.  The second: something happened to the economy. This version has both a backstory, the inexorable march of globalization and technological change, and a more recent plot twist: the recession that began in 2007 and—for most of us—has not yet ended. 

These accounts are not so much wrong as they are misleadingly incomplete, inattentive to longer term historical trends and to the political choices made across that history. 

The fuller explanation starts to come into focus when we consider the political and economic conditions that prevailed right after World War II. At that historical moment, the United States displayed much narrower gaps between the rich and poor than we do now.1   The gains of economic growth back then would be much more broadly distributed. And working families--well, white working families at least2--enjoyed much greater economic security. Why?

This shared prosperity of the postwar years was no accident or lucky combination of circumstances.  A "rising tide" of robust economic growth does not necessarily lift all boats.  Political struggle and policy choices determine whose boats rise. The inequality of the 20th century's early years actually began closing before economic growth took off in the 1940s, as a consequence of the political response to the Great Depression.3 

Thanks to this response, federal support for collective bargaining rights sustained a surge in labor organization that dramatically improving the bargaining power of America's workers. Other political innovations of the New Deal—ranging from social security to the minimum wage—secured a floor for working class incomes. Postwar social movements, especially civil rights and “second wave” feminism, then girded that floor by closing off avenues for discrimination.4 

The nations' tax system. meanwhile, and new regulatory obstacles to speculative finance erected something of a ceiling for higher incomes. And substantial public investments—the GI Bill support for access to higher education, mortgage subsidies for veterans, housing projects, the interstate highway system, and the Cold War—would kept the rest of the structure in pretty good repair.5 

Since then, that structure has essentially collapsed. The conventional wisdom describes this collapse as an unfortunate but necessary response to changing economic conditions.  The world has become a leaner and meaner and more competitive place, so the argument goes.  As a result, the policies of the New Deal—and the costs they imposed on business—had to go. 

But there is little evidence to actually support this account.  Indeed the initial handwringing over American economic decline came at a time when our principal competitors, Japan and Germany, boasted both higher wages and more expansive social programs than the United States.6   

Political choices, not economic necessity, dismantled the New Deal.  Future Supreme Court Justice Lewis Powell would first sketch out the organizational and ideological dimensions these choices in a now infamous 1971 memorandum to friends at the American Chamber of Commerce (see sidebar below). The conservative ascendance in state and national politics then etched these choices across the political landscape. The policy consequences have been dramatic: steep cuts in social spending, the political abandonment of organized labor, deregulation and privatization, tax cuts, punitive cycles of unemployment—all justified in the name of lowering business costs, capturing economic efficiencies, and unleashing markets.   

Sidebar: The Powell Memorandum

But these lofty aims camouflage the real policy goal of the pushback against the New Deal: a redistribution of income upwards via the erosion of the hard-earned bargaining power of ordinary Americans. Rising inequality was not a lamentable side effect of America's new policy framework. Rising inequality was its intent.7  

Why it Matters

Our inequality has widened over recent decades in part because so few national figures have considered growing inequality a serious problem. Market systems, the mainstream consensus has held, will always yield inequality. Such inequality, in this view, provides an essential incentive to innovation and investment [see sidebar below].

Sidebar: Defending the One Percent? 

In this view of the world, people work hard to avoid poverty, and even harder to get rich.  Any pursuit of "equal outcomes"--through policies that would, for example lift the floor on income for the poor or lower the ceiling on income for the rich--(created for example, by a very high “guaranteed income” floor and a very low taxation ceiling) would stifle this initiative and, with it, the economic growth on which we all depend. The poor, this view takes as a given, will find themselves much better off with a thin slice of a growing pie than with a thicker slice of a small one.  One version of this argument, especially popular among the conservative think tanks, holds that gaps in income or wealth gaps hold far less significance than gaps in consumption and living standards.  Our poor aren't poor. in this argument, if they have flatscreen TVs.8 

Such arguments miss the essential question, not whether we should strive for equal or unequal outcomes, but what kind or degree of inequality we are willing to live with?

Americans understand quite clearly that the market will not reward all equally.  But they also dramatically underestimate how unequal those rewards are [see video summary of this research below] The “market incentives” argument holds water only as long as hard work is reliably rewarded in the short term (wages) and in the long term (economic mobility)—a prospect that has unraveled in the last decade.9   

And, we cannot pass off relative inequality on the grounds that everyone is doing better: the well documented rise in income inequality during the last thirty years has been accompanied by an increase in consumption inequality of nearly the same magnitude.10 

In turn, there is little credible evidence to suggest that our society needs inequalities--and the incentives they create--to grow economically. In fact, nearly the reverse is true. In our own recent history, sustained economic growth is closely associated with a relatively equitable distribution of economic rewards. 

Higher levels of inequality lead to underinvestment in education (as those left behind are priced out of higher education) and in public goods and infrastructure (as skewed income distribution erodes tax revenues). Relative equality sustains demand--and sustainable economic growth--across the economy. Stark and sustained inequality, by contrast, perverts incentives, discouraging those at the bottom of the income distribution (whose hard work goes unrewarded) and encouraging those at the top to engage in short-sighted speculation—much of which (think predatory lending and usurious credit card rates) exploits the poor and widens the gap. 

Inequality does matter, most obviously and directly, to those who ever greater concentrations of income and wealth leave behind. This includes the very poor--the “underclass” or “the truly disadvantaged,” in the social science literature--who have long been cordoned off from the rewards and opportunities enjoyed by most Americans. And this increasingly includes the broad middle class, for whom growing inequality has begun to erode wealth, incomes, living standards, and opportunities.11 

Inequality also matters more generally, to society at large and to the health and prosperity of all who live within it. The evidence on this point is overwhelming. Citizens in unequal societies, researchers have shown, more likely end up sick, obese, unhappy, unsafe, or in jail. These social outcomes, in turn, undercut the productivity and efficiency of the economy as a whole, as the high costs of poor public health, heavy policing, and mass incarceration,siphon off our resoruces and leave our human capital underprepared and underutilized.

More directly, pervasive inequality undermines economic health and economic growth. At a certain point, stark income gaps begin to hollow out consumption. “A millionaire cannot wear 10,000 pairs of $10 shoes,” as one advertiser warned on the eve of the Great Depression in 1929, “but a hundred thousand others can if they’ve got the $10 to pay for them, and the leisure to show them off. “ 

Rising inequality in the last generation has created the same tension, eased only temporarily by the availability of consumer credit or home equity.12   Efforts to patch together substitutes for aggregate demand, in turn, create their own inefficiencies—including a bloated and parasitic financial services sector, fed by both the desperate demand for credit from those falling behind and the frantic search for speculative returns by those leaping ahead.13    

And finally, economic inequality endangers our democracy.  Market power will always shape political outcomes, if only because the rich will always have both the wherewithal and the motive to play a role more influential than any individual votes they might cast. But pervasive or sustained inequality has broader political consequences.  Massive inequality tends to tilt public policy towards shortsighted rewards or special treatment (deregulation, tax breaks), and away from the public or collective goods (education, infrastructure) essential to future economic growth. Economic inequality breeds political inequality, whose highest goal, in turn, becomes those policies that make economic inequality even worse.

Democratic institutions, at their best, provide a basic infrastructure--physical, legal, and fiscal--where which markets can thrive.  These institutions also ameliorate or regulate the excesses of market competition, and provide the public goods and services that markets are unable or unwilling to generate on their own. Under conditions of stark economic and political inequality, all of this begins to unravel. Shortsighted and speculative market activities get rewarded, not restrained. Collective investment in the economy’s infrastructure—everything from good schools to good roads—withers. And deepening economic inequality robs our politics of the collective will—and the resources--to do much about it.14 

A Road Map to These Pages

First and foremost, the chapters that follow seek to lay out the political and institutional changes which have contributed to the stark rise of inequality in the last generation. 

Our first section, Mind the Gap, identifies and describe the problem, lays out the various measures of inequality, and charts each in historical and comparative terms.  How, we ask, have things changed? How do we stack up against our international peers?

Our second section, Usual Suspects, critically assessed the various explanations most commonly advanced to account for our inequality, particularly those that lean on broad and immutable trends in global competition, technological change, or family structure.  

This clears the deck for our third section, Differences that Matter, where we trace the key policies--or policy reversals--that have brought us to our current unequal state of affairs. Here we both explain what has changed and assess—drawing on the relevant economics literature—how and when and to what degree each policy shift contributed to inequality. 

By way of conclusion, our final section touches on possible and promising solutions.

NEXT: Mind the Gap

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