How the Rich Got Richer

How the Rich Got Richer

By any measure, the rich are getting richer. The now-iconic Piketty and Saez data (based on a century of tax returns) show the income share of the richest 1 percent suspended between two Gilded Ages: claiming over 8 percent of national income in the late 1920s, falling below 2 percent during the heyday of postwar growth and New Deal policies, and climbing back over 8 percent by 2007. And although the 1 percent felt the recession, they have recovered nicely—claiming all of the income gains in 2010 and 2011 (over those two years, the incomes of the top 1 percent grew 11 percent while the incomes of everyone else fell .4 percent).

A flurry of recent work has focused not just on these distressing patterns, but on their political roots. Andrew Fieldhouse at the Economic Policy Institute and the continuing research of Piketty and Saez and their colleagues underscore the direct links between tax policy (falling rates and a shifting burden) and uneven income gains. And a new paper from Larry Mishel and Josh Bivens at EPI shines a spotlight on the ways in which the surge in both executive pay and the financial sector’s share of the economy have vaulted the 1 percent to its current heights.

The basics are summarized in the graphic below. The red line traces the 1 percent’s share of national income since 1947. The other metrics provide a sense of where those gains have come from. (Don’t worry about the scale of the blue lines, they have been converted to a logarithmic scale in order to facilitate comparison; the actual values can be seen when you drag your mouse over the line.) First, it is clear that gains at the top are accompanied by (and paid for) by losses at the bottom. As the income share of the top 1 percent has climbed, the share of national income going to labor has fallen.

At the same time, as Bivens and Mishel point out, the top 1 percent has increased its share of all forms of income. More of that labor income is flowing into the financial sector, where gains flow overwhelmingly to the top of the income distribution. The trajectory of CEO pay (shown here as the ratio between CEO and worker compensation), which has spiraled upwards irrespective of company performance, closely tracks that of the top 1 percent share. And declining tax rates (shown here is the top marginal rate) exaggerate the incentives—and the rewards—for pushing income to the top.

The common ground here is that all these sources of growing inequality can be considered forms of economic rent—income that is either generated through preferential status or that exceeds the real market value of the service provided. And the glimmer of hope is that those incentives or opportunities (tax-dodging, financial speculation, CEO pay-setting) can be regulated. We know (from our own history and the experience of our international peers) that higher tax rates and more rigorous financial regulation and corporate governance don’t threaten economic prosperity, they sustain it.


Colin Gordon is a professor of history at the University of Iowa. He writes widely on the history of American public policy and is the author, most recently, of Growing Apart: A Political History of American Inequality, published by the Institute for Policy Studies at www.inequality.org.


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