Paychecks Tell a Tale of Unfairness

http://www.nytimes.com/2013/03/22/us/22iht-letter22.html

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NEW YORK — The one thing pretty much all of us in the United States agree on is the importance of equal opportunity. Opinion is divided about the significance of rising income inequality per se. Some see it as a problem in and of itself. But for others, a growing economic divide, as long as it is meritocratic, is a healthy characteristic of a growing, entrepreneurial society.

Nowadays, though, no one is in favor of a caste-based society. Income inequality is one thing, but a permanent division into the haves and have-nots is an entirely different thing — and much less acceptable.

That is why new economic research, released at a conference this week at the Brookings Institution in Washington, is so important. The comprehensive study is by five economists, including two who work at the Federal Reserve Board, Vasia Panousi and Ivan Vidangos, and one, Shanthi Ramnath, of the U.S. Treasury Department. It draws on a powerful new data set: a one-in-5,000, random and confidential sample of the population of U.S. taxpayers.

Its conclusions are sobering: Rising inequality in the United States is “permanent.” It is not the function of a bad year, a temporary economic downturn or personal decisions to move to new jobs or new places, with consequent dips in income.

Instead, rising income inequality is the statistical reflection of an increasingly calcified society — the rich are staying rich, and the poor are staying poor, even as the gap between them grows.

This result is the most stark when it comes to male earnings. The “entire increase” in the inequality in male wages over the period the paper investigates, 1987 to 2009, was “permanent.”

The researchers thought that household income might cushion the blow. After all, this is how many traditional societies function. When the main breadwinner’s earnings falter, other sources of income — the work of other family members, cashing in family savings, income from family businesses — kick in.

In the United States, over the past two and a half decades, the household provided a little bit of this type of insurance, but not much.

“For total household income,” the study concludes, “the large increase in inequality over our sample period was predominantly, though not entirely, permanent.”

Another institution that could temper the consequences of the growing structural inequality the authors document is the state.

As it happens, like the family, the state softens the impact of permanent inequality a little, but not enough to change the broader trend of a growing and lasting divide.

“We find that the tax system helped mitigate somewhat the increase in household income inequality over the sample period, but this attenuating effect was insufficient to significantly alter the broad trend toward rising inequality,” the researchers conclude. They put a number on the cushioning effect of the American state: 15 percent.

This study is powerful partly because the data that support it are so robust and because the researchers investigating those data are so deeply rooted in the U.S. establishment.

This is no Occupy Wall Street critique — it is a sober analysis done by economists at the Fed and the Treasury.

Their conclusion that rising income inequality is overwhelmingly permanent is also striking because this stratification is so strongly at odds with the increasing political openness of those same two and a half decades. Even as class divisions have hardened, other forms of structural inequality have been eroded.

Full rights, including marriage, for gays and lesbians are swiftly becoming the status quo. Ethnic minorities have increasing demographic power, as reflected in their growing political strength on issues like immigration, or indeed in the fact that the president of the United States is black.

The earning power of women is growing, and women are increasingly likely to be the breadwinners in their families.

This is the great paradox of our age — political inclusion of groups that were once beyond the pale is steadily increasing. But at the same time, the economic divide between the top and the bottom is becoming both wider and deeper.

This contradiction is the key to so much of the stress and polarization in today’s society. The widening political inclusion is real, and it makes an implicit promise — that equality of opportunity is rising, that the world is everyone’s oyster.

But the tax data the Brookings study draws upon are real, too, and they send the opposite message. The gap between the rich and the poor is growing, and membership in each group is increasingly fixed.

Politics tells a story of increasing inclusion; economics tells a story of a widening and permanent class divide. You do not need a doctorate in economics to feel cheated by these clashing messages. Our public political ideology is promising — and delivering — ever greater openness and inclusion. Our paychecks are cementing the class divide. No wonder people are so confused and American political life is so scrambled.

<em>Chrystia Freeland is editor of Thomson Reuters Digital.</em>