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By John Maggs, National Journal
© National Journal Group Inc.
Friday, Jan. 19, 2007

America has always been more unequal, in economic terms, than other democracies -- and also more tolerant of this fact than other nations, where inequality has caused political upheaval and even revolution. But while income gaps have stabilized or diminished in European countries, Japan, and other developed countries in the last three decades, disparities here have continued to grow. The United States is already as unequal as China, Egypt, Indonesia, Pakistan, and Russia.

Economic inequality lies beneath much of the debate between Democrats and Republicans over taxes, entitlements, health care, and education, but little that either party proposes would address its root causes. Conservatives argue that inequality is the inevitable and even desirable consequence of a free-market system that rewards work and talent, and that it gives Americans a greater incentive for success than people have in, say, Sweden. Liberals say that growing inequality is a failure of capitalism and of democratic government. Can the gap between rich and poor continue to widen without causing a political backlash?

Using one common measure (called the Gini index), income inequality is twice as high in the United States as in much of Europe, and significantly higher than in any other developed nation. The United States ranks 84th in the world on this scale, behind many nations where the gap between rich and poor is at the center of public debate or political turmoil.

Income inequality in the U.S. dropped sharply in World War II and remained fairly steady until the 1970s. Unlike the gap in many developed nations in Europe and other regions where living standards have improved without exacerbating inequality, the American gap has steadily grown. From 1975 to 2002, the percentage of U.S. income earned by the richest 10 percent (now about 30 million people) of the population increased from 33 percent to 45 percent. The portion held by the richest 3 million people doubled, from 8 percent to 16 percent. And the share held by the richest 300,000 people tripled, from 2.25 percent to 6.73 percent.

The decline of the stock market in 2000 reversed this direction briefly, but census figures showed that it resumed in 2003. The long-term trend is clear -- inequality is widening -- and the consistency of the trend belies the claim by many Democrats that President Bush's tax cuts are a major factor. Jared Bernstein of the Economic Policy Institute and other left-leaning economists concede that taxes are a minor contributor to inequality and that a more progressive tax code wouldn't reverse the trend.

Likewise, it is tempting to think that the solution is simply to improve education and skills. Over time, the relative value of education and skills has increased. In 1979, a college-educated man earned 29 percent more than his high school-educated counterpart; that premium rose to 77 percent by 2002. But research by David Card, an economist at the University of California (Berkeley), shows that, when other differences between workers are taken into account, skills and education don't explain why some of them earn more. Do the higher skills and greater productivity of tech-savvy workers, doctors, and lawyers in an Information Age economy explain why the unskilled are falling further behind? No -- other research shows that wages, after inflation, lagged behind productivity for 90 percent of workers over the past 35 years. Those at the very top of the income scale reaped all of the gains provided by the productivity of everyone else, including a lot of techies and other highly productive workers. Something much deeper than education or the tax code lies at the heart of the economic divide.

In the United States, the cost of health care is growing rapidly, and it is a considerable source of inequality, particularly for people who cannot afford insurance. In Europe, socialized medicine is an equalizing force on incomes. Likewise, job losses and pay cuts contribute more to inequality here than in Europe, where inflexible rules on pay, benefits, and employment tend to equalize income (and discourage job creation). While Bernstein is one of the few people to suggest that only a radical move toward the European model would cause a major shift toward equality in this country, he doesn't pretend that this is in the cards, even under a Democratic Congress and White House. After campaigning on a pledge to repeal Bush's tax cuts for high-income people, Democratic leaders in the House and Senate took less than a week to rule out such tax increases. Democrats' proposals to increase retirement savings, encourage the earning of college degrees, and even overhaul the unemployment insurance system would only incrementally affect the powerful market forces that seem to bestow the productive gains of most of American society on a narrow band of business moguls and other economic superstars.

History and common sense suggest that inequality won't keep growing forever, but for now there is no sign that change will come from Washington. [an error occurred while processing this directive]

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