The ‘New Normal’ of 1 Percent Growth

Note: Average income per tax unit. Real income is expressed at 2011 US Dollars. Tax units are families. Source: The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu/. - See more at: http://inequality.org/new-normal-1-percent-growth/#sthash.IZezJZBd.dpuf

Over the past thirty years, income has grown much faster for the top 1 percent than for everyone else.

Lars Osberg

During the so-called “Golden Age of Capitalism” (1940 to the late 1950s), the bottom 99 percent of the income distribution saw their incomes grow much faster than those of the top 1 percent, which reduced income inequality. This was followed by a long period (from the late 1950s to the early 1980s) of roughly balanced growth, which meant that income inequality remained approximately constant. Since then, the incomes of the top 1 percent have, with occasional recessionary intermissions, grown much more rapidly than those of everyone else.

To put the brakes on rising inequality, all parts of the income distribution must have equal rates of income growth. Unfortunately, the ‘new normal’ of the United States is that incomes of the top 1 percent have grown significantly faster than the incomes of just about everyone else.

This differential in income growth rates has been with us for the last thirty years. What happens if it continues for another twenty years? Table 1 presents an answer: a steadily widening gap between the top 1 percent and everyone else. The ratio of top 1 percent average income to median income more than doubled (8:1 to 20:1) from 1984 to 2012. A continuation of the same growth rates implies that it will almost double again (to 38:1) by 2032.

Table 1. Implications of income growth at historic rates — United States

Real income in US dollars at 2012 prices

Median Household Income Top 1% average Income Absolute Gap Top 1% annual income gain Ratio of top 1% to median income
1984 47 181 383 919 336 739 13 421 8.1
2012 51 017 1 021 761 970 744 35 720 20.0
2032 53 943 2 031 476 1 977 533 71 108 37.7
Average annual growth Rate 1984-2012 0.28% 3.5%

Note: Real incomes of the top 1 percent of taxpayers and of the median household in 2012 are assumed to grow over the period 2012 to 2032 at the same compound rates observed over the period 1984-2012. Source: The World Top Incomes Database http://topincomes.g-mond.parisschoolofeconomics.eu/; Census Bureau Table H-8. Median Household Income by State: 1984 to 2012.

The size of these emerging income gaps may seem extreme, but what exactly will equalize the underlying income growth rates which now produce steadily widening income gaps?

Is there any chance of a rapid acceleration of the rate of income growth of the bottom 99 percent? Income inequality shrank substantially after 1940 because of the more rapid growth of real incomes of the bottom 99 percent. However, the conditions that made that possible are unlikely to be repeated. For instance, wartime mobilization and controls were “once only” events. The structural changes of greater urbanization, increased female labor force participation and more widespread post-secondary education had large impacts on family incomes, spread over a number of years, but they all eventually reached a maximum. And unions had significant influence in both workplace bargaining and social policy determination.

Overall, balanced growth is not the norm. The thirty year period 1952-1982 appears to be a happy accident of history during which income growth rates at the top and the bottom were roughly equal.

“Increasing inequality over time” and “more rapid income growth at the top” are just two different ways of describing the same reality. Stabilizing income distribution requires income growth rates to be the same. Either an acceleration of the income growth rate of the bottom 99 percent or a decline in the income growth rate of the top 1 percent could accomplish this result.

No automatic ‘equilibrating’ mechanism is apparent in economic markets. Thus the crucial question of the next twenty years is whether political economy can rise to the challenge of preventing ever increasing inequality.

This piece was reprinted by RINF Alternative News with permission or license.