Disparity and despair


The growing income disparity between the rich and just about everybody else in America helps explain the country's current economic malaise and the deep pessimism that most citizens feel today about their future prospects.

Some analysts argue that Americans have no reason to be depressed about the economic outlook. After all, they point out, per capita income has continued to rise: From 1977 to 1989, for example, it went up a healthy 23 percent. In reality, this increase stems partly from the fact that there were fewer children and that workers had fewer dependents. And, during this period, real income per family rose only 8.6 percent. Still, the combination of smaller families and rising income, say these analysts, should have led to a substantial improvement in material well-being. The anxiety about our economy, they add, is more psychological than real.

But Americans are not crybabies; they are in true economic distress. The real income of families in the middle fifth of the population actually fell 5.3 percent from 1977 to 1989; and the incomes of poorer Americans fell even further during this period -- 10.4 percent. At best, most middle-class families have been able to achieve modest increases in living standards over the past 15 years. How was it possible for families to have stagnant or declining income in an era of economic growth? The answer is that the income of a few very well off families soared. This raised average family income -- but most families didn't share in the good times. Economic growth, as Princeton economist Alan Blinder puts it, has become a spectator sport for the majority of American families. The numbers are actually quite amazing. While the typical U.S. family struggled to earn a living, the real incomes of the top 1 percent of families skyrocketed 78 percent before taxes, according to the Congressional Budget Office. Not surprisingly, this same top 1 percent was the main beneficiary of Ronald Reagan's tax cuts, which boosted its after-tax income by a whopping 102 percent.

Republican legacy. When the incomes of well-off families double, we are talking about a lot of money. In effect, the bulk of U.S. economic growth under Ronald Reagan and George Bush has been poured into the pocketbooks of those at the very top. From 1977 to 1989, real after-tax income per family rose by about $ 2,700. The average income of families in the top 1 percent, however, grew by more than $ 200,000. This means that some 70 percent of the overall rise was concentrated in the hands of that top percentile. Almost all of the rest went to families near the top: The upper 5 percent of families received about 95 percent of the overall increase in family income. No wonder most Americans feel despondent -- the U.S. economy has been growing, but not for them.

Official numbers do not show how the income of the top 1 percent is distributed, but a good guess is that even among the well-off the biggest gains have gone to the best off. Half of the income of the top 5 percent of families goes to the top 1 percent; and it is a good bet that half of that income, in turn, goes to the top 0.2 percent. If this estimate is correct, the richest 200,000 U.S. families now have a combined annual income almost equal to that of 10 million families in the middle. Just as startling, this tiny rich group has probably received more than 40 percent of the income growth since the 1970s.

The key question is why the rich have gotten so much richer. The conventional wisdom -- expressed in this year's ''Economic Report of the President," for example -- is that inequality in the United States has increased because the world economy puts a premium on skill and education. It is easy to think of reasons why highly educated workers might be in greater demand. In an increasingly integrated global economy, production of many less sophisticated manufactured goods is shifting to the Third World; as advanced nations concentrate on higher-end goods, their demand for manual workers falls and their demand for well-educated ''knowledge workers" rises. The growing importance of technology may also have increased demand for highly educated workers.

This conventional wisdom undoubtedly captures part of the truth. College-educated working couples with a combined annual income of $ 100,000, for example, clearly did far better in the 1980s than did blue-collar families. In the mid-'70s, college-educated workers earned only 30 percent more than did those with a high-school degree; today the figure is at least 80 percent.

Yet, the big winners in America have not been garden-variety yuppies. If you are a married couple with two children, an income of $ 100,000 does not quite get you into the top 10 percent. Since the lion's share of economic growth has gone to families in the top 1 percent, a family of four had to make a minimum of $ 325,000 in 1988 to get into that uppermost tier; and the average family in the top 1 percent made $ 560,000 in 1989.

People who have incomes in that range aren't the kind of knowledge workers the conventional wisdom has in mind. Computer programmers and engineers, for example, don't bring home that kind of money. The people who have really done well in America are corporate CEOs, investment bankers, real-estate developers and leading lawyers -- people who are more expert in high finance than in high technology. Indeed, Graef Crystal, a management compensation expert, estimates that while the real earnings of U.S. production workers have declined slightly since the early 1970s, the real incomes of top CEOs in the United States have nearly quadrupled.

Why do so few people make so much money? The best answer was provided more than a decade ago by Sherwin Rosen, a University of Chicago economist. Rosen spotted the growing importance of what he called the ''superstar" syndrome: the tendency to heap vast rewards on a few celebrities in each field, while neglecting less visible talents. This syndrome has nothing to do with international competition or a growing need for knowledge workers. Instead, the rise of economic superstars in America reflects a growing demand for celebrity. Everyone wants the lawyers they have seen on television, the investment banker whose picture appears in the business magazines, the real-estate magnate who wrote the bestseller. Michael Jackson and Lee Iacocca have more in common than either would like to admit.

Technology may have helped promote soaring incomes at the top: Computers and fax machines allow superstars to stretch themselves a little thinner and thereby also crowd out less celebrated rivals. But American levels of income inequality don't seem to be an inexorable consequence of modern technology or a necessary byproduct of global competition. Our rivals in Japan and in most of Europe seem to do quite well without paying anyone nearly as much as thousands of Americans make. These international competitors have also managed to achieve better economic growth than America, and they have spread it in such a way that most people benefit.

The fact that America has more inequality but less growth than its major competitors challenges a widely held belief: that there is a trade-off between equity and efficiency. Economists have long argued that attempts to tax the rich and help the poor come at a price: reduced incentives and slower overall economic growth. Conservatives still argue that tax breaks that help the rich get richer will make everyone better off. But when America is compared with Japan and Europe, it doesn't seem to work that way.

You don't have to be a Marxist to believe that America as a whole would be a happier place if the fruits of economic growth had been spread a little more widely. It is not clear exactly what can -- or should -- be done about the incredible growth in income inequality. But it is time we faced up to the fact that something enormous and unattractive is happening to what we still imagine to be a middle-class nation.

Most of America's economic growth under Reagan and Bush has poured into the pocketbooks of the rich.

Average real income for U.S. families in the top 1 percent grew more than $ 200,000 between 1977 and 1989.

The richest 200,000 families now have an annual income almost equal to that of 10 million families in the middle.

Originally published, 3.23.92