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Income Inequality Rising

Jared Bernstein photo by Andrew Harrer/Bloomberg via Getty Images.

So Says Former White House Economist Jared Bernstein

In 2008, when Vice President-elect Joe Biden chose Jared Bernstein to be his chief economist, he was hoping Bernstein, along with the rest of Barack Obama’s all-star team of advisors, could help pull the country out of the worst financial crisis since the Great Depression.

This week, the U.S. Census Bureau’s report on income and poverty in 2016 provided a final affirmation for the Obama administration’s economic policies. In the last year of Obama’s presidency, median income continued to grow at a healthy pace while poverty declined and the percentage of Americans without health insurance fell to historic lows.

The upbeat census report, however, seemingly clashes with one of the driving forces behind Donald Trump’s election: the economic struggles of the middle class.

Capital & Main spoke to Bernstein, now a senior fellow at Washington DC’s Center on Budget and Policy Priorities, to get his take on how rising income, persistent inequality and populist politics all fit together.

Capital & Main: Inequality and economic insecurity played a huge role in the 2016 election, yet the new census report shows big gains in income for the middle class, drops in poverty and higher rates of health insurance last year. How do we make sense of this?

Jared Bernstein: One of the most important things to realize is that with these gains, middle-income families are back to where they were in about 2007, which is about where they were in 2000. So, if you abstract from a few good years — and we celebrate them and we want to make sure that they keep going — and you ask how are you doing relative to seven years ago or 10 years ago or 15 years ago, there you don’t see nearly enough progress.

But is the narrative of the decline of the American middle class overblown, given what we’re seeing in these findings?

It’s not that the middle class has somehow shrunk or declined, it’s that the middle class is having a harder time over the last few decades getting ahead, and particularly ensuring that their kids do better than their parents.

Bernstein: I don’t think that narrative is overblown, but neither do I think that narrative is exactly right. It’s not that the middle class has somehow shrunk or declined, it’s that the middle class is having a harder time over the last few decades getting ahead, and particularly ensuring that their kids do better than their parents. You work hard, you play by the rules, send your kids to the best schools you can, possibly muster and maybe scrape together enough for them to get a college education — and the implicit deal is that you know they’ll do better than you did. Well that kind of immobility where kids are stuck without the kinds of opportunities they should have has been an evolving problem for middle-class households.

Then you’ve got great geographical dispersion. There’re parts of this country that have done very well — they tend to be more urban. And then there are parts of the country, including the Rust Belt, that have long been job deserts.

We hear a lot about the negative impacts of the gig economy and the mass replacement of jobs by robots. Do the new census data tell us that those worries are inflated?

Bernstein: I guess it does, but we didn’t need the new census data for that. We continue to create something close to 180,000 to 200,000 jobs per month on average. The unemployment rate is low, so I don’t think there is really much of an argument that there has been an increase in technological unemployment yet. It doesn’t mean that there can’t be in the future, but in the present, it’s just not in the data.

Although the results were characterized by good news, there were a couple of data points that weren’t so upbeat. If you look at the earnings of middle-class workers, both for men and women — and these are workers that work full-time — they actually didn’t grow in 2016. How do you have flat earnings and rising incomes? You work more. You send more family members into the job market, and people who are already in the job market move from part-time to full-time work, and that’s what happened there. That suggests that even as wages haven’t been growing nearly as fast as you might expect, or as fast as they should given how low the unemployment rate is, families have been able to get ahead with more work.

Given the income gains for 2015 and 2016, is it fair to conclude that Trump’s victory had less to do with the economic woes of the white working class and more to do with his race-based attacks on immigrants and other minorities?

Bernstein: You cannot conclude that from these or from other data that I’ve looked at. I don’t discount for a second the role of racism, xenophobia, nationalism, gender politics in Trump’s victory — that was all there, in levels that were extremely disturbing [and] bad for our country. That said, if you look at median family income growth by race, the growth of incomes for African Americans and Hispanics actually outpaced that of whites, and by a few percentage points. One of the reasons for that is that as the economy strengthens, and you start moving closer to full employment, the folks who disproportionately get a bump from that tend to be those in more economically vulnerable circumstances. So it’s not surprising that in year seven or eight of an economic expansion you’d start to see income growth of blacks, for example, outpace that of whites, and this is actually of course a positive development in the sense that you’re closing some racial gaps.

Prior to this census I’ve looked at the earnings of non-college educated white guys, 25-54 — economists call them “prime age workers” — and sure enough, their earnings have looked pretty terrible for a pretty long time. So there really is something there.

While the census report shows the biggest earnings increase is among blacks, Latinos and Asians, at the same time we know that the wealth gap between blacks and Latinos on the one hand, and whites on the other, remains enormous in this country. Which of these should we pay more attention to?

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Bernstein: We have to keep all the variables in our head but it’s important to raise that question because there you really have a legacy effect. Even if you believed — and you’d be crazy to believe this — that somehow we’ve banished discrimination, you’d have to accept that the legacy effects of discrimination have meant that African-American communities simply haven’t been able to accumulate the wealth of other communities, particularly [of] whites. So yes, that gap remains as wide as ever.

It’s interesting that even as the labor movement has continued to decline we’re seeing significant income growth.

Bernstein: The diminished power of unions doesn’t mean that none of the growth is going to reach working people. One of the things that I’ve argued is that the tightening labor market, and these kind of full-employment conditions that we’re getting closer to, act in a somewhat similar way in that they create more bargaining power for working people. So if you can get to a situation where the economy is such that employers have to bid up wages and compensation offers in order to get and keep the workers they need so that they can meet strong consumer demand, then workers who are in the middle of the scale – blue-collar workers, some folks who maybe don’t have a college education, workers who often face various types of discrimination — are able to tap a bit more of that bargaining power.

That’s never been as powerful a force as collective bargaining, so the absence of collective bargaining is pervasive and germane, and not just in our economy but in our politics. It’s really important to think about ways to reverse this long-term negative trend of unionization, which probably requires some modernization of labor law.

Do you think though that at least some of the gains that we’re seeing in income could be the result of some of the new strategies that organized labor, along with its allies, have deployed in the last few years — most notably the Fight for 15 and the passage of much higher minimum wage laws in major cities?

Bernstein: I do think that higher minimum wages are in these data and in these results. Elise Gould at the Economic Policy Institute has shown that if you want to see where wages went up at the bottom 30 percent of the pay scale, it’s going to be in states that raise their minimum wages. It also leads you to think about what places are not going to do that and it tends to be Southern states. They tend to largely hue to the federal minimum wage, which is stuck at $7.25.

How is it that we’re seeing both very high levels of inequality and broad economic gains for everybody? Isn’t that contrary to one of the maxims of progressive economic thinking?

Bernstein: It’s actually pretty easy to understand, just based on the arithmetic of income distribution, which [says] that as long as income is growing fast enough you can see gains at the middle and the bottom, as well as at the top, but those at the top will be disproportionate to everybody else’s. The average gain for the top five percent was in the neighborhood of six percent. That’s a very nice chunk of change, and that’s for families whose average income is around $300,000. If you look at the middle-income family, the gain is around three percent. If you look at the bottom-income family, it’s around 2.5 percent to three percent.

It doesn’t mean that all the growth gets channeled to solely those at the top. That has characterized the American income distribution over the last couple of decades and that’s inequality at its worst. But when things tighten up and bargaining clout gets a little bit improved for people at the middle of the pay scale, and perhaps you have some better policies in there, like a higher minimum wage, then you can see growth at least a bit more equitability distributed.

I also would not make too huge a deal out of a couple of years of positive growth. You have to take the longer-term view. While these last couple of years have posted very strong, very welcome results, it kind of gets you back to where you were 10 years ago and then back in 2000 as well.

So are we still fundamentally in a situation like the one described by Professor William Lazonick and quoted by your former boss, Joe Biden, where the so-called shareholder mentality in corporate America, which maximizes the wealth of those at the top at the expense of the well-being of everybody else, is still a defining problem in America?

Bernstein: The short answer is yes. But the more nuanced answer is that there are two things going on at once. One is the dynamic that you described, and so I’m here in Washington DC. where that kind of view is alive and well in the political economy, and in the policies that are being pushed. People like me are trying hard to prevent a big regressive tax cut that we don’t need and that’s going to exacerbate economic inequality. We’re trying to fight against financial market deregulation. We’re trying to point out that it’s not sensible to crack the tax code to further favor multinational corporations who are already killing it on the profit side while middle-class families are just starting to catch a buzz.

But then there’s this other thing, which is the macro economy, the labor market. A really tight labor market does help lower-income people, and policies like raising the threshold for overtime help middle-income people. Some of those dynamics, especially in the real economy, are alive and to some degree well, but they’re not reaching as far as I would like them to.

How do you think this census report, in particular its news about the high concentration of economic gains among the wealthiest Americans, should shape the coming debate over tax reform — including proposed tax cuts that would benefit the rich?

Bernstein: It should shape the tax debate, but obviously the question of how it will is much more dubious because it would imply that these debates are based on facts, and you know they’re not. If the market is already driving inequality higher and higher, why would you ever want to pile on with policy that was going to make that worse? That’s kind of what they call in football unnecessary roughness.

If anything we’re going to need more tax revenue going forward, not less. So not only would a big, wasteful, aggressive tax cut exacerbate a market-driven inequality problem that’s getting bad enough on its own, it would also rob the Treasury of revenue it needs to meet demographic challenges — the fact that we have an older society, we have Social Security and Medicare obligations, we have climate issues that need to be dealt with.

I pride myself on paying almost no attention to Donald Trump’s ridiculous tweets, but he tweeted out something this morning where he said, “Well look at the devastation from the hurricanes, we really need to get those tax cuts moving.” If you think about that you will break your brain. Congress has already appropriated tens of billions of dollars to deal with these disasters, as they should — these are true disasters and emergencies for people. But all of it goes right into the deficit.


Danny Feingold
Capital & Main