Income inequality worst since eve of Great Depression
By Chris Stiffler, CFI Economist
Twice in the past century we have seen the widest gaps between what the richest households make and what everyone else takes in. It’s probably no coincidence that these income disparities came in 1928 and in 2007 — the years preceding the biggest economic crises of the past hundred years: the Great Depression and Great Recession.
Indisputable evidence of widening inequality has been mounting for several decades, but only recently has it received the attention that it deserves. This is largely due to two things: more accurate data and the recognition that this growing gap is bad for the entire economy, not just some people.
Until recently it was hard to get a handle on income at the top levels because the U.S. Census lumped all income of $1 million or more into a single category. But now researchers have access to another data source that reveals the actual incomes of the highest income-earners, and stretches back before the 1920s. This source is IRS tax data, adopted from the research of economists Emmanuel Saez and Thomas Picketty. Now we can see a much more complete — though not very pretty — picture of trends in Colorado. The graph below shows the share of income held by the top 1 percent of Colorado taxpayers.
Income inequality reached a peak in 1928 before declining rapidly in the 1930s and 1940s and then more gradually until the late 1970s. From the end of World War II to the late 1970s all workers — from the lowest-paid to the highest — experienced similar growth in incomes. It was a period when the workers’ wages rose with productivity gains. That trend, however, has not continued.
The unbalanced growth since the late 1970s has brought the share of income held by just 1 percent of households back to its peak prior to the Great Depression. Since 1979, the top 1 percent of earners in Colorado captured nearly half of all growth in income, which has resulted in the top 1 percent’s income increasing by 200.8 percent while the income of the bottom 99 percent only grew by 21.2 percent.
The Great Recession has made income inequality worse. In what can only be described as a staggering disparity, we now know that 95 percent of the gains since the end of the recession in 2009 have gone to 1 percent of earners. Meanwhile, the incomes of Colorado households in the middle — we’re talking households making around $57,000 a year — have fallen. Between 2009 and 2011, the incomes of the top 1 percent grew by 23.5 percent while the incomes of everyone else in Colorado (the bottom 99 percent) fell by 4 percent.
Why is this a bad thing?
It’s becoming clear that drastic income inequality harms economic growth. That’s because 70 percent of all U.S. economic activity is driven by consumer spending. So members of a strong middle class are the real job creators because their spending power supports local businesses. Unfortunately, stagnating wages have seriously eroded that purchasing power, which translates to fewer customers for businesses and an economy-wide slowdown.
When introduced to this data, people often ask, “Which country deals with income inequality better?” The answer is, “The United States — of 50 years ago.” The period between 1940 and the late 1970s shows that there is nothing inevitable about the top incomes growing faster than other incomes and shows that growth in everyone’s wages is possible with the right policies that cultivate an educated, strong middle class with growing wages.
The economy does better when everyone does better — not when all the income gains are concentrated at the top, but when the middle class has the purchasing power to drive the economy forward.
