Rich Man, Poor Man
Americans remain optimistic that it is possible the American dream has not receded entirely into the mists of history. We still have faith in it because, as a people, we are natural optimists. The hard reality, however, is that it is no longer possible for more than a very small minority to start out poor, work hard, and become well off. Our fabled equal-opportunity society is in hostage to a gathering of circumstances we must address with urgency, for the sake of social justice, but also to obtain the greatest benefits from the talents of our fellow citizens and maintain a cohesive community.
The generation that emerged from World War II enjoyed income growth fairly evenly spread throughout our entire population. The past 25 years tell an utterly different story. Median family incomes have risen by less than 1 percent a year--for a total of 18 percent overall--but median incomes for the top 1 percent have gone up more than 10 times faster--by an astounding 200 percent! As a nation, America has experienced extraordinary growth. From 1980 to 2004, our gross domestic product rose by almost two thirds, but when you factor in inflation, the wages of the typical earner actually fell--not a lot, but compare that with the top American earners, and the widening gap between the richest and poorest Americans becomes starkly clear: Among the top 20 percent of American earners, real incomes increased 59 percent.
And there's no sign the trend is moderating. This year the top 10 percent of wager earners are projected to receive 45 percent of all household cash income, up from 40.6 percent in 2000. And what about the average family in the 80 percent of the workforce who make up our rank and file? Incomes are actually slightly lower, after adjusting for inflation, than they were four years ago. This means that those Americans have effectively taken a pay cut since 2002, even as the economy has been growing by over 3 percent a year. Sadly, this isn't--or shouldn't be--terribly surprising: Except for a few years in the late 1990s, the hourly pay of most workers has done no better than inflation for the past 30 years.
Translate these graphs going in opposite directions, and we have a picture of two highly divergent societies. Today, in fact, we have slipped back to the excesses of the notorious Gilded Age and beyond. Making matters worse, the gap between the ostentatious new rich and the rest of America is growing fast. Twenty-five years ago, the top fifth of all American households' post-tax incomes were 6.7 times those of the bottom fifth. Today, that ratio has jumped to 9.8 times--nearly a 50 percent increase. The result? More and more American workers are in danger of slipping into outright poverty. Not only were 37 million Americans living below the poverty line in 2004, but an additional 54 million were the "near poor," who live between the poverty line, earning annual incomes of roughly $19,000, and double the poverty line. Between 1982 and 2004, median earnings of fully employed men grew by only 2.7 percent. That's just about as close as you can get to absolute stagnation over a span of 22 years.
Optimists (or politicians intent on painting a rosy picture of the economy) will point you to the statistics on median family income. Don't be fooled. While the numbers show incomes up, from $43,913 to $54,061, a 23 percent growth in real terms, the growth has been due almost entirely to the fact that more and more wives have gone out to find jobs to make ends meet.
Stratification. We can now see clearly that there is no silver lining to any of these gathering clouds. If we look at net worth, as distinct from income, the growing inequality is equally manifest. Some 85 percent of the nation's wealth now resides in the hands of the richest 15 percent of American families. The bottom 50 percent of families, on the other hand, claim only 2.5 percent of household net worth. In the most recent three-year study of median family net worth, covering 2002 to 2004, the growth was virtually zero--much lower than in the previous couple of three-year periods studied. The average net worth of the richest 10 percent of American families rose to $861,000 last year, a 6.5 percent increase over 2001. What happened to the typical family in the bottom 25 percent? Net worth actually fell, by 1.5 percent.
What's going on?
First, our tax system has become much less progressive, enabling families in the top decile to benefit, and especially the top within the top. It is true that the rich have paid more taxes, but that's because their pretax earnings have taken off, up by 67 percent since 1980 compared with 12 percent for the middle fifth of society. It is here that the tax system hurts ordinary Americans most. Progressivity used to mean taxing the better-off to assist society's less fortunate. That concept has now been stood squarely on its head. Taxes for the well-to-do are lower today than they have been in 60 years. It is role reversal for Robin Hood: We are robbing the poor to enrich the rich. This is not to say that the rich aren't entitled to the fruits of their hard work, talent, risk-taking, and innovation, but the rewards for high achievers shouldn't be inconsistent with an economy that helps the average American family. And certainly the government shouldn't be exacerbating the differences in income between the rich and the nonrich. All of us have the potential to earn a comfortable living in a safe environment under the protection of our armed forces, the police, the FBI, and our firefighters. That's certainly not true of a lot of places in the world, so it's not inappropriate that our tax system should be reasonably progressive.
Why has this profound shift in incomes taken place? Is it because of foreign competition from lower-paid foreign workers or lower-paid immigrant workers, or because of the personal computer that made junior clerical workers less valuable?
Well, the primary reason is that over the past 25 years, globalization and technology have increased the rewards for intellectual skills, vastly increasing the value of a college degree. Education and family background are replacing the old barriers of class based on race and gender. The income gap between college graduates and those without university degrees doubled between 1979 and 1997. In the 1930s and 1940s, only half of all American chief executives had college degrees. Now virtually all do, and three quarters of them also hold advanced degrees, such as an M.B.A.
The stratification in American incomes is a reflection of the stratification in education. In an era when a four-year degree has become the ultimate ticket to middle-class security and prosperity, those who have a university degree are the most likely to move out of the income bracket from which they started. Education, however, is no longer the giant escalator moving everyone inexorably upward. America's pre-eminence as an industrial economy in the latter part of the 19th century and the early part of the 20th was built on mass secondary education. College education, stimulated by the GI Bill after World War II, did the same for America from the 1950s on. This is beginning to change at two levels, however. At the secondary level, American education is financed largely by local property taxes so that wealthy suburbs can afford superior schools, a reverse of the days when the best public schools were in the cities. In addition, the cost of a university education has soared. An Ivy League education is out of the reach of most middle-class and poorer students. State universities, which provide a college education for 80 percent of American college graduates, have been constrained by state budget cuts over the past five years, leading to increased fees in state colleges and squeezing out students from poor and low-income families. A student from the top income quartile is six times as likely to enter the workforce with a bachelor's degree as someone from the bottom quartile: 46 percent of 24-year-olds in the top quartile earned a bachelor's degree, compared with just 8 percent from the bottom income quartile--a disparity that, believe it or not, is even worse at our most elite universities. But how could it be otherwise when tuitions at four-year colleges have more than doubled, in real terms, since 1980, reinforcing the educational gaps created by class and race, which have regressed to where they were 30 years ago?
Human capital. The widening gap in educational opportunity is aggravated by the fact that upward socioeconomic mobility is often determined by family behavior, which includes finishing an education, getting and staying married, and finding and holding a good job. College-educated women tend to postpone children for their careers. But at the lowest income levels, more women have children younger, more have them out of wedlock, and more are without a job--whereas college graduates tend to marry other college graduates and typically enjoy the benefits of two good incomes, plus their educations.
Human capital, then, is critical. Income inequality is driven, at least in part, by human inequality, which is why we must now focus intensively on building human capital. Development of the brain function is affected by the number of words children hear from their parents, and the children of college-educated professionals hear roughly twice as many words as children of working-class parents and about three times as many as the children of welfare parents, limiting the ability of those children to develop the necessary brain function while providing dramatic advantages to the children of educated parents that continue to accumulate all along the trajectory of their academic accomplishment. That's why it is so necessary that governors and state legislators begin thinking about creating and enhancing preschool programs, because the earlier one starts learning, the better one continues to learn later on in life.
Americans still retain that great sense of optimism that derives from our faith in social mobility. To a limited extent, the concept still works. Despite the fact that very few from the bottom of society get college degrees, the majority of those who begin at the bottom still manage to climb at least one tier up the income scale, while about a third move up two or more tiers. But we must make climbing the ladder of success a reality for more and more Americans, and begin reducing the gap between the rungs. This means that governments, at all levels, must give more of a helping hand to poorer qualified college students, expand preschool education, and develop a tax system that no longer turns the American dream into an American nightmare.
This story appears in the June 12, 2006 print edition of U.S. News & World Report.