The Scary Implications of Modern Wealth Inequality

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Everyone knows that inequality in the United States has risen in recent decades. And anyone who has looked at any data - or an earlier post from my Brookings colleague Gary Burtless - also knows that most of this rise is explained by the pulling away of the rich from everyone else.

The implications of this particular kind of inequality are quite profound. In recent history, concerns about equality have been, at heart, concerns about the poor. Egalitarian political philosophers have tended to adopt a version of John Rawls' ‘difference principle' - that inequalities are acceptable to the extent that they help the worst-off in society, for example by incentivizing overall economic growth.

Many social policies are anti-poverty policies of one form or another, whether or not they are described as such: targeted income transfers, additional services for poor families, or subsidized savings or health care. To a large extent, these programs have been successful, at least in terms of helping the poor to keep pace with the majority.

Inequality is now a top versus majority story rather than a bottom versus majority story. And the forces driving the gap between the top and the majority are not likely to pass. Higher returns to education, ‘assortative mating' (like marrying like), gaps in family structure and parenting, and geographical segregation are deep-seated economic and social trends. They would not be easy to curb, even with quite aggressive policy interventions. Scholars like Sean Reardon suggest that gaps in educational attainment are growing in the top half of the distribution, not the bottom. Work by family researchers, including Isabel Sawhill in her new book Generation Unbound, points to a growing divide between college-educated Americans and the rest in terms of marriage, intentionality of childbearing and family stability. Top-majority inequality, then, is likely to be an important pattern in coming years.

The question is, how do we react? Probably in one of three ways. First, indifference. If inequality in the majority of the population is unchanged, perhaps it really doesn't matter if the top decile is doing a bit better, and the top percentile doing a whole lot better. It might make some people angry. But it might make others inspired to try and reach the top. So long as the elite are paying their taxes, and not buying the political system, perhaps we all just need to relax. Of course, sometimes they are not paying their taxes, and the structure of political funding means they may well have disproportionate influence: but in theory at least, these problems could be addressed independently.

Second, shifting attention to the middle. If the big problem is the pulling away of the top from the middle, perhaps policy should be focused on helping the middle. The ‘new poor' are now arguably the majority, at least compared to the lucky few at the top. So policies could be explicitly aimed at helping the middle. This could mean more tax breaks or tax credits for those on average incomes. Rather than using income tests to focus benefits on the poor, perhaps they could be used to screen out the affluent. The UK government, for example, now gives child benefit to all parents except those making over 50,000 pounds a year. Rather than being universal, or being targeted on the poor, transfer payments and/or services could be for the ‘ordinary majority' - in other words, for everyone except the rich.

The third reaction to the top-majority gap is to worry about opportunity rather than money: or rather, only money in the sense that it influences opportunity. You might be reasonably relaxed about the affluent doing so well, so long as poverty is not rising - and so long as the children of today's rich are not automatically going to be tomorrow's rich. By investing heavily in education, leveraging social capital and networks, and providing buffers against downward shocks, the elite may be able to hoard opportunities for their own children, creating a ‘glass floor' so that they cannot fall too far.

Opportunity hoarding is otherwise known as committed parenting. All of us want our own kids to do as well as possible. But when this natural instinct interacts with social and economic institutions, we must pay attention. There is already some evidence that the sons of the top 1% of earners are more likely to stay near the top of the earnings ladder in the US than in Canada. This could be a red flag for the future. It is one thing for the top 1% to do well; quite another for them to reserve a place for their children at the top of the ladder.

 

Richard V. Reeves is a senior fellow in Economic Studies and Co-Director of the Center on Children and Families at the Brookings Institution.  

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