Over the past several years, a frequent topic of discussion among op-ed writers, including myself, has been the extraordinary, and steadily widening, gap between the rich and the poor in this country. We pundits have had plenty of trustworthy data to document that gap, and therefore little hesitancy in discussing its origins and consequences. But the recently released study by the Rand Corporation, titled “Trends in Income From 1975 to 2018,” by Carter C. Price and Kathryn A. Edwards, throws new light upon this topic and displays the consequences of the gap in a startling fashion.
The most striking technique of analysis used by the authors of the study was to take the basic economic and census data for the period specified and ask the question: What income would earners have made in 2018 if their income had kept pace with the overall growth of the economy, as measured by the Gross Domestic Product (GDP)?
But before answering that question, the report provides a sketch of U.S. per capita income history in modern times. The period 1975-2018 was chosen as the focal point of the study because, in 1975, there was a significant change in income distribution. The authors point out that in previous decades — those immediately following World War II — “income grew at a rate close to the economy-wide growth rate across the full income distribution…”
Dividing that immediate post-war period into business cycles (cycles of expansion, peak, contraction, and trough), during the first cycle, 1947-1959, the economy-wide growth rate was a little less than 2 percent, and, dividing the entire range of family incomes into quintiles, the first (lowest), second, third and fourth quintiles actually grew at a somewhat faster rate (2 to 2.5 percent) than the overall economy. In the business cycle 1960-1968, the overall growth rate was a bit over 3 percent, and again, the bottom four quintiles all exceeded that rate, especially the lowest quintile, which shot up to 5.5 percent. In the third cycle, 1969-1974, growth was anemic, but that, too, “further reduced inequality.”
Then, in the business cycle that began in 1975, things changed dramatically. The bar graph which the authors present to us depicting the period from 1975-1979, looks like stair steps, rising steeply from the lowest to the highest quintile. The lowest quintile had about a 1.3 percent increase in income, the highest quintile about 2.6 percent, and highest of all — the top 5 percent of earners – increased their earnings by about 2.9 percent.
The next two business cycles, 1980-1990 and 1991-2000, show similar patterns. The cycle 2001-2007 was anomalous, with low growth, especially in the lowest quintile and the top 5 percent, but in 2008-2018 the graph returned to the earlier pattern, with the strongest growth in the top quintile and even more remarkable growth in the top 5 percent.
The report describes the overall picture this way: for the past three decades, “the U.S. settled into a pattern of unequal growth — the bottom four quintiles grew the slowest and the top quintile — and even more so the top 5 percent — grew the fastest, often faster than GDP.
Thus, income inequality has increased substantially by most measures since 1975.”
The next step in the Rand report was to create a dramatic way of documenting the extent and consequences of income inequality. The authors tracked seven income categories for full-time, full-year workers: the bottom 25 percent, the median, the top 75 percent, 90 percent, 95 percent, 99 percent and the top 1 percent. Income was recorded (in 2018 dollars), for six years between 1975 and 2018. They then created a “counterfactual” income figure that represented what each category’s average income would have been if all categories had shared equally in the growth of GDP.
The median annual income for a worker increased over that 40-plus-year period by 17.4 percent, from $42,000 in 1975 to $50,000 in 2018. But if it had increased at the GDP rate, that worker would have earned $92,000 in 2018. Contrast that with someone in the top 1 percent of earners, whose income grew from $289,000 in 1975 to $1,384,000 in 2018. That increase was 321.6 percent! If the income of someone in this top segment of workers had grown at the overall GDP rate of growth, they would have earned only $630,000 in 2018.
At the other end of the income spectrum — the bottom 25 percent — an average worker moved from an annual income of $28,000 in 1975, to $33,000 in 2018, an increase of 13.5 percent. If that person had shared equally in the growth of GDP, they would have earned $61,000 in 2018 — almost twice as much.
The Rand report contains a great deal more analysis of income, breaking down earners by sex, race, national origins and educational levels. It even includes a state-by-state breakdown, which reveals that Idaho was among the top ten states measured by the rate at which its top 1 percent of earners increased their income at the expense of the less wealthy.
The Rand report explicitly refrains from an attempt to explain why the rich were able to seize control of income increases in 1975 and have, ever since, widened the income gap between themselves and the rest of us. That’s the topic for another column.
Leonard Hitchcock of Pocatello is an alumnus of the University of Iowa and did graduate work at Claremont Graduate University and the University of California, San Diego. He taught philosophy in California and Arizona for 15 years. In 1985, after earning a library degree, he was hired by Idaho State University. He retired from ISU’s Oboler Library in 2006.