All figures are expressed in real terms. These results should not surprise. That higher incomes within the United States have outgrown median wages has been widely discussed, as has the struggle of ordinary workers to outdo inflation. Some items have become relatively cheaper, such as basic foodstuffs and airline flights. And, of course, modern technology permits services that previously did not exist.
However, many common goods, including oil, houses, and gold, have become costlier for average Americans. This outcome has been caused by shifts in both earned and unearned income. With earned income, elite employees have expanded their negotiating power. But college graduates overall have fared well over the past several decades.
In contrast, employees who lack college degrees have increasingly been regarded as replaceable. Their wages have languished along with their standing. The role of unearned income has been less discussed, but it is equally relevant. In recent decades, U. This result has lifted the prices of stocks, which are mostly owned by the higher-income households. For the well-positioned, the economic circle has been splendidly virtuous. The next chart depicts the growth in aftertax corporate profits.
Although suggestive, this illustration alone does not indicate that stock-market shareholders prospered, as this measure of corporate profits, calculated by the Bureau of Economic Analysis, includes both private and publicly traded firms. It could be that privately held businesses thrived while listed companies struggled.
Or perhaps public corporations profited handsomely, but for whatever reasons, equity investors refused to pay higher share prices for those greater earnings. What they disagree about is the role of government policy. Rising inequality coincided with a profound shift in economic policy throughout much of the advanced world. In the nineteen-seventies, productivity growth in advanced economies stalled, unemployment rates jumped, and inflation rose and remained obstinately high.
And so, in one country after another, political parties got elected by promising to cut tax rates, free up markets, and reduce government intervention in the economy. Well, figuratively speaking; he was a diminutive five feet two. He loved nothing more than an argument, and, unlike many of his colleagues, he was a brilliant communicator, able to convey his points in plain English. When Friedman joined the economics department of the University of Chicago, in , it already had a distinctive philosophy, going back to its founding in the previous decade, which involved a belief in the efficacy of free markets and skepticism about the benefits of most government intervention.
Thirty Nobel Prizes have been awarded to people who taught or were taught in the department. Today, Friedman is acknowledged as the most influential economist of the second half of the twentieth century. An old joke has it that an economist is someone who wanted to be an actuary but lacked the charisma. A live wire from the start, he conformed to another, more accurate professional stereotype, namely, that economists are know-it-alls.
Friedman advocated freely floating exchange rates, because he thought that no policymaker would know better than the market where to set the right rate—yet he himself could not resist the temptation to second-guess the market.
When the Canadian dollar instead rose by thirteen per cent, Friedman was forced to admit he had been wrong and cut his losses. Appelbaum credits him with providing the theoretical underpinnings of the idea of a single currency—making him in effect the intellectual father of the euro—and of supply-side economics. In the late sixties, convinced that inflation was heading upward, Mundell bought a run-down fifteenth-century palazzo in the Tuscan countryside for ten thousand dollars.
He turned out to be right about inflation, and later claimed to have multiplied his investment a hundredfold. Yet, three decades later, when he won the Nobel Prize in Economics, he was still shovelling cash into his Italian money pit. One reason was that they led to improved economic growth for a while. Yet international competitive pressures played a role, too. As the world economy opened up in the nineteen-eighties, newly mobile capital tended to flow to places that offered the highest return, and very often these were countries with the lowest taxes and the least onerous regulation.
To hold on to capital, countries found themselves forced to match the free-market policies of their trading partners. There is ample evidence that this shift, in turn, led to more uneven income distributions. Countries with larger tax cuts experienced bigger increases in inequality. Even though inequality began to rise after , it took economists a couple of decades to really notice.
Among those who turned their attention to the fallout was Milanovic, who grew up in Communist Yugoslavia, spent a couple of decades in the research department of the World Bank, and now teaches economics at the City University of New York. Milanovic originally built his reputation in the late nineties, when, using a giant World Bank database of household incomes, he was able to demonstrate how the benefits of globalization had been distributed among different classes across various groups of countries.
The big losers were Western middle-class workers whose incomes stagnated as the industries they worked in were hollowed out by foreign competition. Darcy would put her in the top tenth of one per cent, while, as a spinster, she would have fallen from the top percentile to about the fiftieth percentile.
Indeed, so many of the themes and ideas in the new book were prefigured in the last one that ideally the two should be read together. Surveying all the data, Milanovic concludes that there seems to have been some sort of cap on inequality—a limit to the economic divisions a country can ultimately cope with. The rise of inequality in the United States during the nineteenth century, its subsequent fall during the middle decades of the twentieth century, and its resurgence in the past four decades provide an example of the wave at work.
Kuznets had come up with his inverted-U-shaped curve only because he had focussed on too small a slice of history. With the rise of the emerging economies of Asia, he says, we now have two alternative forms of capitalism operating side by side.
Like all schematics, this one elides a lot of details, but it provides a useful conceptual frame. The rich are able to save more than the poor, and thus come to own a disproportionate share of the capital and the wealth in the economy. Stand with millions of American workers by adding your name below. Share Tweet. To: Congress New research shows that a shift from defined-benefit retirement plans pensions to defined-contribution plans k s is exacerbating income inequality and poorly preparing the majority of Americans for their retirement.
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