Today the more popular topic to discuss is income inequality, usually spoken of as the gap between the top earners in America, whose incomes and wealth continued to grow after the Great Recession, and everyone else, whose incomes stagnated or declined and who have little wealth, in terms of investments. The topic gets people riled up because it strikes at the core of what it means to be an American: a level playing field where anyone has the chance to rise to greatness on his or her own merit. But what if income inequality is not an aberration but the norm and we are returning to it? What if more responsibility for what we have or don’t have is falling on us? Two economists among more liberal thinkers—Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics—have created a fascinating compendium of income around the world that goes by an unwieldy name, the World Top Incomes Database. In 2010, the top One Percent of earners in America had 17.42 percent of the wealth in the country, which was just about the same percentage they had in 1936. It was down from the 18.42 percent they had on the eve of the Great Depression in 1929, which in turn was slightly higher than what they had in 2007 (18.33 percent), when the Great Recession began.The highest percentage was in 1916, at 18.57 percent. If one looks for a time of income equality, or at least less income in the hands of the One Percent, it would be the 1970s, a decade remembered more for economic stagnation, high gas prices, and lack of political leadership than equality. In contrast, the One Percent in France, where the economists were raised, had 20.65 percent of the wealth in 1916 but only 8.94 percent in 2006, the last year for which they had data.
The conservative take on inequality looks at different metrics to make its case. Kevin Hassett and Aparna Mathur of the American Enterprise Institute wrote about what they said were two more accurate measures of inequality: the Consumption Expenditure Survey, which measures what households spend, and the Residential Energy Consumption Survey, which tracks how much people run appliances such as dishwashers and washing machines, if they have them. By the first measure, consumption has been stable since the 1980s and lower-income households are better off. They found that the rich also consume less in recessions, which periodically narrows the gap. By the second measure, poorer people are not only running their washing machines with abandon but they own them (even if they used credit cards to buy them).
I found both of these takes to be coming at the key issue of income inequality with ingrained biases. Saez and Piketty have the very French view of rectifying distortions by taxing higher earners—with Piketty going so far as to call for a global wealth tax. This idea, if ever adopted, would simply put more money in the hands of federal and state bureaucracies that have generally been inept at managing their own budgets. It also fails to account for the propensity of the children and grandchildren of the wealthy to spend their family’s fortune quite quickly, putting all that money back into the economy. On the other side, Hassett and Mathur are looking at superficial indicators of how poor people consume and wealthy people cut back in bad times: Who cares about someone’s washing-machine usage?
I prefer another economist, Ronald M. Schmidt, at the University of Rochester’s business school, who took the analysis of inequality in a different direction. He looked at how educational choices impacted earnings. In comments on a Congressional Budget Office report, he argued that incomes began to diverge greatly from 1979 to 1986, and the gap had actually started to close in the years after the Great Recession. He wrote that income inequality had been declining since 2000—the year after the dot-com bubble burst. What was more compelling to me, though, was his exposition of three male workers who made different educational choices but all finished high school in 1980. One stopped at high school, another got a college degree, and the third went on to graduate school. “In 1987, when these three were between the ages of 25 and 34, the average high school graduate earned $22,595, while a college graduate earned $31,631 and a holder of a graduate degree earned $36,667,” Schmidt wrote. “But 20 years later, in 2007, the corresponding averages for male full-time workers ages 45 to 54 were $46,667, $88,242, and $120,391.” Here was his key point: “Unequal? Yes. But the increase in inequality arose because these individuals made different decisions about their education, not because tax policy favors the rich. In essence, economic inequality is another term for incentives that encourage investment in education—or, for that matter, starting a new business.” He went on to argue against raising taxes on the wealthy, but he also made the case for people to realize that the choices they make in life have economic consequences. If you look at data on the One Percent, his point is born out. About a third of them started businesses. The next big chunk were doctors at 16 percent. Financiers were right behind them at 14 percent. Athletes and celebrities, who may have limited education, were 2 percent of the top group. What wasn’t clear from the data was where these people had started out in life—were they born with lots of financial and family advantages that put them ahead of their peers or had they worked their way up?
Whatever impact Confucius had on the Chinese economy, for long periods of history China was the richest country in the world. Economist Angus Maddison figured that China and India were the two largest economies in the world for most of the Common Era. But China’s position began deteriorating rapidly in the nineteenth century. In 1820, China accounted for 33 percent of world output, according to Maddison, and Western Europe and the United States a combined 25 percent. But by 1950, China held a measly 4.6 percent, while the West commanded nearly 57 percent. Not only had China failed to keep pace with the West in science and technology, but it had also fallen far behind in economic innovation. The Industrial Revolution, which propelled the West to its new wealth and power, had left China almost untouched, and the country entered the twentieth century by and large an agrarian society. Nor did China develop the types of institutions that had allowed industrialists, investors, and entrepreneurs in the West to mobilize capital on a massive scale—such as stock markets and modern corporations and banks. The bottom line was that the West developed capitalism and China didn’t.