If you’ve read an article or two about economic inequality in the United States at any point in the past decade, chances are you’ve come across a chart like this:
The left-leaning Economic Policy Institute has been producing that graphic, and ones like it, for years now. It shows that in the aftermath of World War II through the early 1970s, workers got paid more as the economy grew. Median hourly compensation rose in tandem with productivity (the amount of economic output workers could produce per hour).
But something changed in 1973 or thereabouts. While productivity kept growing, and the economy as a whole did too (with some temporary setbacks during recessions), the average worker’s pay package did not. The implication is clear: The economy broke at a certain point, and now workers are getting screwed.
The point is especially powerful when you consider that the share of income going to the top 1 percent, and particularly the top 0.1 percent and top 0.01 percent, has skyrocketed:
Now there’s a new graph to add to the pile, one that is uncommonly thorough and precise and gives a portrait of how incomes have grown for each segment of the population from 1913 to the present. Produced by Berkeley economist Emmanuel Saez and his frequent collaborators Thomas Piketty (EHESS), and Gabriel Zucman (Berkeley), and using a mix of tax and survey data, it shows compellingly that income gains in recent decades have gone overwhelmingly to the ultrarich, not the middle class:
This is not just another chart. The data it uses directly answers conservative attempts to claim that middle-class incomes really have grown substantially, and that the rich aren’t taking all the economic gains. The conservatives argued that the standard data used to illustrate inequality is incomplete; Saez, Piketty, and Zucman have completed it, and demonstrated that income growth has been quite low for the middle class and very unequally distributed between them and the wealthy.
The background context for the new research is that a growing number of conservative economists and policy analysts, most notably Cornell’s Richard Burkhauser and the Joint Economic Committee’s Scott Winship, have argued that even though the data is right, the takeaway message (that the middle class has barely benefited since the 1970s, or that it’s gained a lot less than it should given productivity growth) is false.
They argue that charts like the first two above make a number of choices that cause them to understate how much things have improved for poor and middle-class households. Among them:
- They don’t include taxes (including refundable tax credits like the earned income tax credit) or transfer programs (food stamps, Medicaid, etc.) Those help poor and middle-class people more than the rich, and so including them reveals more income growth for people at the bottom and middle.
- The charts adjust for inflation using the Consumer Price Index (CPI), which many economists believe overstates inflation. A slower-growing inflation measure, like the Personal Consumption Expenditures (PCE) index, shows incomes rising more because less of the increase from the rise in incomes from the 1970s to the present is attributable to inflation.
- Many charts about inequality, like the Piketty/Saez one above showing growth in the top 0.1 percent’s share of income, use data from IRS tax returns. That’s great in some ways (you get more data than if you just take a survey, and tax records are more accurate than people’s self-reported incomes), but it necessarily leaves out nontaxable benefits that people get from their employers, like health insurance or pension contributions. A tax return can also come from a single person, a couple with no kids, or a couple with many kids. Because of declining fertility, the number of people in each “tax unit” has declined over the years, meaning more income growth per person than tax data on its own implies.
When you put those factors together, the conservatives’ contention is things aren’t all that bad — the standard of living of middle-class families has grown quite a bit from the 1970s to the present.
Most liberals and leftists concerned with inequality have argued with this not by disputing the underlying numbers but by pointing out that it’s a rather odd conservative defense of the way the economy works.
“So the argument (of the right) has to be: cash market income of the bottom 99 percent of adults has stagnated but the bottom 99 percent get much more expensive private and government provided health care benefits, some more government transfers, and they have fewer kids,” Saez, who pioneered the use of tax data to study inequality, told the New York Times’s Thomas Edsall in 2012. “This does not seem like a great situation, especially from a conservative point of view.”
But the new research by Saez, Piketty, and Zucman suggests that might have been conceding too much. They attempt to track down where all the income in the United States from 1913 to the present has gone: how much has gone to the bottom 20 percent, how much to the top 1 percent, how much to everyone in between.
With the results, called “distributional national accounts,” researchers can see exactly where economic growth is going, and how much each group is seeing its income rise relative to the overall economy.
Crucially, the way that Saez, Piketty, and Zucman calculated the numbers answers basically all of the conservative critiques. They use tax data on incomes as their base, but then fold in the cost of employer-provided health care, pensions, and other benefits, as measured by survey data. They also add in the effect of all taxes and government transfer programs like food stamps or Medicaid. They measure changes in income among adults, rather than households or tax units, meaning changes in family size don’t matter. And they use the slower-growing inflation metric, rather than CPI.
And what do they find? This:
The chart above shows how much the incomes of each group grew, on average, every year from 1980 to 2014. The two lines show both pre- and post-tax incomes.
The implication is clear. People at or below the median income saw their incomes rise by 1 percent or less every year during that period. That isn’t nothing, but it’s hardly great. At the very bottom, some people have seen incomes fall pre-tax; while most poor households get government assistance to help with that, programs like food stamps or the earned income tax credit fail to reach about 20 to 25 percent of the people they’re meant to help.
But the rich? Boy, the rich made out like bandits. The top 1 percent, but really the top 0.1, top 0.01, and even top 0.001 percent (that last group included only 2,344 adults in 2014) saw really fast, dramatic growth in their incomes after 1980. Contrary to some recent commentary, the large increase in inequality isn’t due to the top 20 percent; affluent, educated professionals with low-six-figure salaries and nice homes in good suburbs aren’t driving this. Their incomes are growing about 1.5 percent a year — not bad, but not that much better than the middle class either. The major spike is in the top 1 percent (adults receiving an average of $1.31 million per year each out of national income) and above, where annual income grew by 3, 4, 5, even 6 percent.
This doesn’t appear to have been the way the economy worked from, say, 1946 to 1980. On the request of the New York Times’s David Leonhardt (who has a knack for smart suggestions for research from empirically minded economists), Piketty, Saez, and Zucman reproduced the same graph for every 34-year period from 1946 to the present. Here’s how the 1946-1980 graph compares to the 1980-2014 graph:
If the 1980-2014 graph was staggering, the 1946-1980 one is even more so. It shows that the uneven distribution of economic growth in recent decades is not the way things have always been.
In the 1950s and ’60s, poor and middle-income Americans actually saw greater income growth than rich ones. The big fat spike at the end of the chart doesn’t exist in that period. The richest of the rich got rather muted increases in income. And everyone’s income rose a great deal faster from 1946 to 1980 than the bottom 95 percent’s did from 1980 to 2014. The rich saw incomes rise more slowly then, but their incomes were still growing much faster than those of today’s middle class.
What explains this dramatic change? That part is much less well-known. But one theory, which Saez, Piketty, and Harvard economist Stefanie Stantcheva have floated, holds that very high marginal tax rates (the top rate on wages was 91 percent for most of the 1950s) discouraged the rich from making very large salaries. In particular, it prevented them from bargaining with their employers to divert money from shareholders or lower-ranked staffers into higher executive compensation.
Think of it this way. In 2017, the top federal income tax rate is 39.6 percent. So if a CEO convinces his company to raise his pay from $5 million to $6 million, he’ll get to keep $604,000 of that raise (I’m ignoring state and payroll taxes for the sake of simplicity). That’s a really healthy after-tax raise, so that CEO has a very big incentive to lobby for pay hikes like that. But in 1955, the top federal income tax rate was 91 percent. So that same pay raise would only net him $90,000. Not nothing, but a way, way smaller windfall. So back then, executives had less reason to try to fight to earn more, which kept down inequality.
Saez, Piketty, and Stantcheva argue that the main effect was to deter wage bargaining — that is, high earners used to be much less aggressive about fighting for raises. They don’t think the high tax rates actually stopped high earners from engaging in useful economic activity, or did much to harm economic growth.
Conservative and libertarian economists, naturally, disagree, and contend that rates that high have massive economic costs. The actual average tax rate that the richest Americans paid in the 1950s was only slightly higher than the average rate today (42 percent then versus 36.4 percent now); because there was less inequality, very few people were rich enough to pay the top rates, and there were many more deductions and loopholes. That also limited the amount of revenue the tax rates could raise for social programs.
But if nothing else, the Saez, Piketty, and Zucman research confirms that something really did change in the 1970s and ’80s, to make the economy less rewarding to the middle-class and poor and more rewarding to the rich. That’s an important finding, and given how careful their latest work is to include all sources of income, it’s going to be a hard one to rebut.