The Best Policy

In Sickness and in Wealth

How America’s rising income inequality figures in to the debate over health care.

The debate about bank bailouts and health care is missing a critical piece of context: The American economy hasn’t been working for the working- and middle class for decades. It is impossible to determine who should pay for what or whether it is “fair” to ask the wealthy to contribute more to the health care of those who are uninsured, without better understanding the winners and losers in the U.S. economy over the past several decades.

One of the great accomplishments of the American economy, or at least the mythology so claims, is the creation of an enormous middle class after World War II. Americans all shared in the wealth generated by the most dynamic economy the world had ever seen. At one end of the economic spectrum, we reduced the number of people living in poverty, while at the other end, we applauded those whose work benefited the entire economy.

Between 1947 and 1967, this was a somewhat accurate image, as the distribution of income made the population look more and more like a bell curve with each passing year. Yet since 1967, this story has reversed course. For more than 40 years, income has been distributed less equitably. As we consider the policy remedies to crises that are of immediate impact—such as the crisis in health care or in our financial system—it is critical to understand the larger arc of this socioeconomic narrative. How we think of distributing the costs of reform should be informed by this larger story.

Presenting income data is fraught with risks, as there are so many ways to look at any arrangement of numbers. So I will use three sets of data to shed light on the road we have traveled. The single most frequently used measure to gauge income distribution is the Gini coefficient, which ranges from zero to one, with zero representing perfect equality (that is, everyone has the same level of income) and one representing perfect inequality (that is, one person has all the income).

U.S. Gini Coefficient

As a point of reference, the Gini coefficient for Canada is 0.326, for the United Kingdom it is 0.36, for Norway it is 0.258, and for Germany it is 0.283. In fact, the U.S. Gini coefficient is significantly higher than that for any Western European nation.

More textured are the data showing the percentage of total income garnered by each quintile of the population over a particular time frame.

Percentage of Total Income by Population Quintile
  Lowest  Quintile Middle Quintile Highest Quintile
19674.0 17.343.6 
19774.2 16.944.0
19873.8 16.146.2
19973.6 15.049.4
20073.4 14.849.7

The top 1 percent of all income earners garnered 21.8 percent of all income in 2005, up from 8.9 percent in 1976.

Of course, it can be argued that these pure distributional percentages are less meaningful if everybody’s absolute income grew substantially over the period of time measured. But that is not the case. In fact, the gap here is quite remarkable:

Mean Household Income
  Lowest  Quintile Middle Quintile Highest Quintile
1967$8,683 $38,415 $96,725
1977$10,394 $45,323 $110,579
1987$10,706 $45,492 $130,768
1997$11,385 $47,886 $158,128
2007$11,551 $49,968 $167,971

Before 1987, it might have been reasonable to argue that overall income growth was softening the effects of rising inequality. But since then, the rate of overall growth for all but the top quintile has slowed dramatically, with the lowest quintile seeing its income grow by only 7.8 percent in the last two decades, while income for the top quintile grew by 28 percent. And looking at after-tax income, which factors in the impact of favorable tax policy for the rich, the numbers are even starker: Between 1979 and 2004, the top 1 percent of all earners saw their income grow by an astounding 176 percent.

Pretty much no matter how you examine the numbers, they are not encouraging for those in the middle class—and they are even worse for those at the bottom of the income totem pole. Once upon a time, America’s income was distributed across the economy like a bell curve, with an increasing share of both population and income converging in the middle. Now a slow but continuous redistribution to the top, with the middle being squeezed, makes the graph look more like a barbell, with a bigger bump at either end—income at one end, population at the other.

Against this backdrop are two other perhaps better documented trends: the decline of our manufacturing base, where we have lost one-third of our jobs over the past decade, and our ballooning balance-of-payment deficit, which totaled nearly $700 billion last year. Although causation among these factors is hard to establish and has generated a healthy debate among academics, at a political level it is hard not to see the toxic brew that is created by this mix of declining income share, deep recession, manufacturing job loss, and trade deficits.

The larger arc of this economic narrative must play a larger role in our discussion of the current economic climate. The outcry over Wall Street salaries and bonuses is more understandable when you realize that, over the last 40 years, there has been an inexorable shift of wealth and income toward the upper end of the income spectrum. With the return to profitability of many of the institutions that needed bailouts, taxpayers are wondering why we have socialized the risk of failure but allowed the rewards of success to remain private. Where is the public’s fair payback for playing banker to the bankers?

But the significance of this 40-year cycle of income distribution may be playing out most clearly in the context of health care. One of the current debates is how to pay for the costs of expanded access to health insurance. A restructuring of the system will save some money, but more will be needed, and one proposal is to get it from a higher tax on the upper strata of income earners. Given income distribution trends over the past four decades, it is difficult not to support asking wealthier Americans for some help in closing the gap in our effort to give all Americans health insurance.

And these data also suggest that we must begin to think seriously about the policy shifts that have moved us back to creating a society that is less, not more, equal in terms of income distribution.