Less Equal Than in 1774?

20 09 2012

Economic inequality had become a prominent feature of this year’s presidential election campaign. Just a few years ago there were those who claimed that class politics were dead in the United States and the Western world more generally. The Occupy Movement and the furore about Mitt Romney’s statement about the 47% have falsified these claims: competing definitions of equality are now central to electoral politics in the United States.

The current political climate has increased the public’s interest in the history of inequality.  Yesterday, Salon.com posted an article that claimed that economic inequality in the United States was now greater than it had been in 1774. This article, which was written by Natasha Lennard, was widely circulated and commented on.  The article was based on research by two academics, Peter Lindert of UC-Davis and Jeffrey Williamson of Harvard.

The current debate about economic inequality in the United States offers economic historians a wonderful opportunity to disseminate their research findings to the general public. It’s a “teachable moment” as we educators say.

Among economic historians, it is well known that inequality trends are non-linear: it is possible for measurable economic inequality in a society to go up and then go down, or vice versa. The basic story of economic inequality in the United States goes something like this: in the colonial period up and then up to about the Civil War, wealth and income was fairly evenly distributed among (white) families. Unlike Europe, where there was a vast gap between the aristocracy and the hungry poor, the United States c. 1800 had few really rich people and few desperately poor (white) people. Benjamin Franklin said that American society was characterized by a “happy mediocrity”. [1]Industrialization and urbanization after 1850 changed this, so that during the Gilded Age of the late 19th century, US society had become much more stratified. The period after the Civil War inaugurated a social revolution in the United States that witnessed rapid urbanisation, the rise of Big Business, and the growth of family fortunes, like that of the Rockefellers. In the Gilded Age, some rich American families built European-style mansions and even married into the British aristocracy. In reaction to these changes in society, new political movements such as the Populists, the Progressives, and more militant labour unions emerged. [2]  The introduction of peacetime income tax in 1913 was a response to increasing discontent with the level of inequality in America.

 

Income inequality in the United States remained fairly high until the New Deal when the United States was rapidly reverted into being a country with low income inequality. Economic historians call this the Great Compression. Between 1933 and 1945 the United States became a society with a fairly egalitarian distribution of wealth and a vast middle class that included unionized blue collar workers. Capitalism was tamed, the wealthy under FDR, Truman, and Eisenhower paid tax rates that were extremely high by today’s standards. Paul Krugman fondly refers to this society as the “middle-class society of my childhood.”[3]

Great Compression

 

This situation persisted until roughly 1980. Since then inequality has increased dramatically. The United States is now reverting into a society of haves and have-nots. The trend in Britain and, to a lesser extent Canada, has been similar. Economic historians continue to debate the exact reasons for the re-polarization of society since 1980s. Some attribute it to technological change and globalization, which decimated the old blue-collar working class. Others argue that taxation policy, particularly the massive tax cuts for the wealthy under Reagan and George W. Bush, explain why inequality had grown. See here.

 

I’m inclined to think that politics (i.e., the Reagan tax cuts) explain most of the increase inequality, as other countries with similar levels of technology and exposure to globalization have not experienced a marked increase in inequality in after-tax incomes. I’m thinking of Scandinavian countries here. Richard Wilkinson wrote inThe Spirit Level: Why More Equal Societies Almost Always Do Better, “if you want to live the American dream, move to Denmark.”

Income inequality since 1980

 

In any event, there is a lot of good research on the history of inequality out there. It needs to be showcased to the broader public as it can inform political debate. Kudos to Salon’s Natasha Lennard for starting this process.


[1] Benjamin Franklin, ‘Information to Those Who Would Remove to America’ Sept. 1782 in The Writings of Benjamin Franklin, edited by Albert Henry Smyth (New York: Macmillan, 1905–7), vol. 8:603–14. The historiography on inequality and social class in early North America is discussed in Gordon S. Wood, The Radicalism of the American Revolution (New York: A.A. Knopf, 1992), 44-53. Peter Lindert,  “When Did Inequality Rise in Britain and America?” Journal of Income Distribution. 9 (2000): 11-25; Peter Lindert, “Three Centuries of Inequality in Britain and America.” In A.B. Atkinson and François Bourguignon (eds.), Handbook of Income Distribution, volume 1.  Amsterdam: Elsevier Science, 2000, Ch. 3 (pp. 167-216).

[2] Glenn Porter,, The Rise of Big Business, 1860-1920, 3rd ed. (Harlan Davidson, 2006); Alan Trachtenberg, The Incorporation of America: Culture and Society in The Gilded Age, 1st ed., American century series (New York: Hill and Wang, 1982); Bryant Morey French, Mark Twain and The Gilded Age, the Book That Named an Era (Dallas: Southern Methodist University Press, 1965).

[3] Claudia Goldin and Robert A. Margo, “The Great Compression: The Wage Structure in the United States at Mid- Century,” The Quarterly Journal of Economics 107, no. 1 (February 1992): 1-34.

 





Inequality in America

16 09 2010

Slate Magazine has been running a series of articles by Timothy Noah on the growing inequality in the United States. Since the late 1970s, the gap between the rich and the poor in that country has increased dramatically. The share of the national pie controlled by the top few percentiles of the population has grown.

It is also increasingly difficult for Americans to escape from the social class in which they were born–according to the OECD it is much easier for a bright young man from a poor family to get rich in Canada, Australia, or Germany than in the United States, Italy, or the United Kingdom. In the United States, a father’s income is a stronger predictor of his son’s income than in some other countries.

The higher the bar, the lower earnings mobility across generations.

Everyone agrees that inequality has intensified and most people regard growing inequality as a bad thing. We need some inequality to make people work hard, but nobody wants to live in a society in which a hereditary aristocracy of rich people live in gated communities surrounded by slums.

However, the precise reasons for the increase in inequality in the United States are a subject of debate. Noah considers a number of possible explanations: the breakdown of the nuclear family (the favourite explanation of social conservatives), immigration from low wage countries (which drives down the wages of unskilled workers), the technology boom, federal government policy (tax cuts for the rich), the decline of labour unions, globalization and the outsourcing of manufacturing work (no more quality jobs at GM), and the poor quality of public education in the United States.

There has been some research on inequality in Canada, where the distribution of wealth is much more egalitarian than in the United States but less egalitarian than in the Scandinavian countries. See here. The precise reasons for the lower degree of measurable inequality in Canada are, of course, open to debate, but one suspects that the presence of so many high wage jobs for men in the natural resources sector is a factor.

According to a 1998 StatsCan report:

“Conventional wisdom has it that U.S. society is both richer and more unequal than
Canadian society and that the two have become more unequal in recent decades. Moreover,
increasing globalization has raised concerns about a “race to the bottom” – that global
competition in the production of traded goods and services is forcing countries with more
generous social transfers or more egalitarian wage structures to abandon these mechanisms or risk
losing out. This article addresses such conventional wisdom by focusing on a comparison of
income inequality in Canada and the United States over the past two decades. Given the
similarity of the two countries’ societies, as well as their close and growing economic integration,
with the highest level of bilateral trade of any two countries in the world, this comparison
provides an opportunity to assess the possible impact of globalization on the convergence of
income inequality… A number of intriguing results emerge from the analysis. One is that, even though the
U.S. economy appears better off in terms of total output per capita, families (including unattached
individuals) living in the United States are not necessarily better off, in terms of disposable
income, than their Canadian counterparts. Indeed, roughly half of Canadian families had
disposable incomes in 1995 that gave them higher purchasing power than otherwise comparable
U.S. families. The reason is that the very rich in the United States pull up the average income
much more than in Canada, while those at the bottom of the U.S. income spectrum have less
purchasing power than those at the bottom in Canada.”

The excellent articles in Slate are must-read material for anyone interested in social class or anyone who teaches modern North American history.

As a historian, I find the current situation in the United States curious, since 19th century Americans prided themselves on the rough equality  of conditions in their country and its vaunted social mobility. They often contrasted their society with the monarchies of Europe, where there was a vast gulf between the peasantry and their rulers. Americans called their country a nation of “happy mediocrity”: nobody was rich enough to live in a palace like Versailles, but everyone had enough to eat. It now seems that the opposite is the case and that some European countries have become more egalitarian than the United States.





Bliss on Taxation in Canada (Nostalgianomics)

18 02 2010

Michael Bliss, who is one of Canada’s most accomplished historians, has published a piece in the Globe and Mail calling for Canada’s system of taxation to be made more progressive. I really admire Bliss’s work as a historian and he makes an interesting case in this op-ed piece, but there are some ideas lurking in his piece that I cannot let pass without comment.

Bliss writes: “Inequality of compensation has soared in our time, as the rich have become much richer and much less taxed. Higher taxes on high incomes would begin to narrow the immense chasm that has opened up between the über-rich and the ordinary North American. If properly applied, they could put an end to the frustrating debate about the obscene salaries and bonuses that we pay not only to flailing financiers but to mediocre professional athletes.”

There is no such country as North America. Canada and the United States are very different countries when it comes to inequality. One common measure of income inequality is the Gini coefficient.  The most egalitarian society in the world is Denmark, with where the Gini coefficient is 24.7, according to the UN stats. In Canada, the Gini coefficient is 32.6. This makes Canada’s distribution of income somewhat more egalitarian than in France, Australia, the United Kingdom and far more egalitarian than in the United States, where the Gini coefficient is 40.8. Moreover, while the level of inequality in the USA has increased dramatically since the 1970s, it has remained roughly the same in Canada. Anyway, the divergence is partly a function of different economies producing different distributions of pre-tax incomes (there are lots of well-paying jobs for male high-school graduates in Canada) and partly because of different tax regimes (read Geoffrey Hales’s excellent book on this subject). Executive compensation is also lower in Canada than in the USA. My point is that we can’t say that the same trends are at work on both sides of the border.

“From 1945 to the 1960s, the United States and Canada experienced what appears to be a golden age of affluence, growth and, by our standards, increasing social equality.”

The  relatively egalitarian distribution of incomes in the US between the New Deal and the 1973 oil shock was due to a conjunction of factors that simply aren’t present today. Tax policy is just one of them. The world is more globalized (as workers in Flint, Michigan will tell you), the labour movement and the big Chandlerian corporations have declined, technology has automated certain formerly well-paying jobs out of existence, there is more immigration from low-wage countries, and gender roles are massively different. Bliss’s piece reminds me of Paul Krugman’s nostalgia for the relatively egalitarian society of the United States of his childhood. As critics have pointed out, Krugman’s “nostalgianomics” overlooks important flaws of 1950s American society (very limited immigration, women being kept out of a workforce).

We watched an episode of Mad Men last night. Neither I nor my wife would want to live in the society Krugman and Bliss appear to regard as some sort of golden age.

Canada’s egalitarianism is generally a good thing (it makes muggings less common), but it also has some drawbacks that we should acknowledge too. For one thing, it probably makes university students less competitive.  I also suspect that it is one of the reasons why the expected rate of return on investment in a university degree is lower in Canada than in the United States.

Update: I have been asked by a reader to back up my claim that the ROI on a university degree in Canada is lower than in the US. This OECD data shows that the present value of a degree is lower, which certainly suggests that the ROI is lower.

2009 OECD Report on Education, “Education at a Glance” Chart A8.1. Economic returns for an individual obtaining upper secondary or post-secondary non-tertiary education, ISCED 3/4, and for an individual obtaining tertiary education

“The chart depicts the present value of an investment’s future cash flows net of  the initial investment,  discounted by 5% interest rate. Investments in tertiary education generate substantial financial rewards in most OECD countries. Male students in Italy, Portugal and the United States can expect to gain more than USD150 000 over their working lives by investing in tertiary education. The returns for female tertiary students exceed USD 100 000 in Korea and Portugal. With few exceptions, the returns for investing in a tertiary education are higher than for upper secondary or post-secondary non-tertiary education… For males the returns are USD 81 000 compared with USD 40 000 and for females USD 51 000  compared with USD 26 000. Incentives to continue education on a tertiary level are thus strong for males and females in most countries.”

Direct cost Foregone earnings Gross earnings benefits Net present value of a post-secondary degree
Country Male Female Male Female Male Female Male Female
Australia -2,810 -2,810 -22,021 -22,719 73,492 70,932 49,482 25,782
Austria -2,032 -2,032 -38,001 -36,463 146,283 103,739 62,805 33,435
Belgium -1,441 -1,441 -32,999 -28,338 63,700 91,261 13,659 37,145
Canada -2,161 -2,161 -23,450 -24,386 91,065 71,299 53,918 37,540
Czech Republic -1,722 -1,722 -15,426 -14,635 44,843 50,019 63,524 55,584
Denmark -578 -578 -27,078 -27,534 111,279 82,278 23,587 2,828
Finland -138 -138 -22,955 -22,309 50,777 32,073 10,432 -2,020
France -2,119 -2,119 -30,492 -27,181 41,450 44,826 5,284 8,081
Germany -5,085 -5,085 -27,421 -27,631 51,356 109,920 19,134 32,039
Hungary -577 -577 -15,805 -15,024 38,406 39,545 15,046 19,029
Ireland -599 -599 -29,199 -28,740 66,937 76,038 31,618 35,058
Italy -1,114 -1,114 -35,954 -30,570 89,302 75,509 21,487 30,417
Korea -2,865 -2,865 -11,898 -11,980 68,412 4,787 50,950 -12,011
New Zealand -3,113 -3,113 -28,129 -27,056 83,873 75,997 31,051 11,511
Norway -2,372 -2,372 -33,342 -33,625 133,548 83,842 84,606 27,123
Poland -194 -194 -9,622 -8,202 31,601 40,648 27,137 31,933
Portugal -11 -11 -20,562 -16,867 123,842 88,143 62,570 50,158
Spain -481 -481 -5,925 -4,348 52,086 45,557 37,604 48,136
Sweden -19 -19 -19,592 -21,107 93,464 69,113 43,505 23,900
Turkey -324 -324 -10,837 -11,750 37,719 48,598 16,308 15,126
United States -2,689 -2,689 -21,168 -21,572 180,543 126,069 112,929 81,889
AVG -1,545 -1,545 -22,946 -22,002 79,713 68,104 39,840 28,223

The other interesting stat I would like to share is that ROI on a university education appears to be increasing. I know the cost of education has gone up a bit, but the earnings premium of college graduates has skyrocketed, at least in the United States. As globalization has accelerated and more manual labour jobs have been sent offshore, the gap between what a university graduate can earn and the earnings of high school graduates has opened up. Let me quote a recent report from the US College Board:

“The earnings premium for college education has increased over time:
Among men, the earnings premium for a college degree increased from 19 percent in 1975, to
37 percent in 1985, 56 percent in 1995, and 63 percent in 2005.
The earnings premium for women is larger—70 percent in 2005. It was 47 percent in 1985, but
has not increased since 1995.”

Anyway, I should get back to work….