The U.S. Inequality Debate

Introduction

Income and wealth inequality in the United States is substantially higher than in almost any other developed nation, and it is on the rise, sparking an intensifying national debate. The 2008 global financial crisis, the slow and uneven recovery, and the economic shock caused by the COVID-19 pandemic have deepened these trends and challenged policymakers to respond.

Economists say the causes of worsening inequality are complex and include a failure to adapt to globalization and technological change, shifting tax policy, reduced bargaining power among workers, and long-standing racial and gender discrimination. The effects of inequality are similarly varied, and they have exacerbated crises such as the pandemic and deepened societal divisions. Inequality can also weaken democracy and give rise to authoritarian movements. President Joe Biden has pledged to reduce economic inequality with new social spending financed by higher taxes on the wealthy and corporations, but he faces opposition from those who say his plans go too far.

How unequal is the United States?

According to the nonpartisan Congressional Budget Office [PDF], income inequality in the United States has been rising for decades, with the incomes of the highest echelon of earners rapidly outpacing the rest of the population. Even among high earners, income gains have been heavily skewed toward the top of that bracket. 

The growth of CEO pay is illustrative of this trend. In 1965, a typical corporate CEO earned about twenty times that earned by a typical worker; by 2018, the ratio was 278:1, according to the Economic Policy Institute, a progressive think tank. Between 1978 and 2018, CEO compensation increased by more than 900 percent while worker compensation increased by just 11.9 percent. 

The picture is much the same when looking at wealth—that is, total net worth rather than yearly income. In 2021, the top 10 percent of Americans held nearly 70 percent of U.S. wealth, up from about 61 percent at the end of 1989. The share held by the next 40 percent fell correspondingly over that period. The bottom 50 percent (roughly sixty-three million families) owned about 2.5 percent of wealth in 2021. 

Moreover, inequality in the United States outpaces that of other rich nations. This is captured by the steady rise in the U.S. Gini coefficient, a measure of a country’s economic inequality that ranges from zero (completely equal) to one hundred (completely unequal). The United States’ Gini coefficient was forty in 2019—the same as Bulgaria’s and Turkey’s, and significantly higher than that of Canada, France, and Germany—according to the Organization for Economic Cooperation and Development (OECD), a group of advanced economies. 

Recent economic shocks have deepened these trends. The so-called Great Recession from 2007 to 2009 caused incomes to fall, and even when they recovered to pre-recession levels in 2015, the median income was the same as it was in 2000: $70,200. The recovery was also unequal: by 2016, the top 10 percent had more wealth than they did in 2007 while the bottom 90 percent had less. 

Experts say the economic turmoil caused by the COVID-19 pandemic, including the largest spike in unemployment in modern history, will similarly exacerbate inequality. Low-wage workers were far more likely to be laid off and less likely to be rehired, though massive government stimulus helped blunt the impact. Meanwhile, a boom in stock and home prices primarily benefited wealthy Americans, who own more of these assets. Though wages rose at the fastest pace in decades, so did prices, and this inflation effectively canceled out wage gains.  

Why does inequality matter?

Inequality is a drag on economic growth and fosters political dysfunction, experts say. Concentrated income and wealth reduces the level of demand in the economy because rich households tend to spend less of their income than poorer ones. Reduced opportunities for low-income households can also hurt the economy. “When those at the bottom of the income distribution are at great risk of not living up to their potential, the economy pays a price not only with weaker demand today, but also with lower growth in the future,” economist Joseph Stiglitz writes [PDF].

Recent years have seen the election of populist leaders around the world, which some researchers have linked to insecurity caused by economic inequality. Wealthy people can exert outsize influence on the government by financing political campaigns, further entrenching their power. A 2020 United Nations report warned that rising inequality is eroding trust in democratic societies and fostering the spread of authoritarian and nativist movements.

However, some experts say that the harms from inequality are overstated. Analysts at the libertarian Cato Institute, for instance, argue that it makes more sense to focus on poverty because inequality does not matter so long as everyone is doing better. Also, entrepreneurship benefits society as a whole, even as it makes some individuals wealthy, they argue. The overall poverty rate in the United States fell sharply, by more than 10 percentage points, between 1959 and 1969, but it has since fluctuated around 12.5 percent. 

“We should want to live in a society with a reasonable degree of mobility rather than one where people are born into relative economic positions they can never leave,” conservative analyst Ramesh Ponnuru wrote in 2015. “But so long as those conditions are met, the ratio of the incomes of the top 1 percent to the median worker should be fairly low on our list of concerns.”

What is the state of U.S. economic mobility?

Americans have long prided themselves on the ability to move up the income ladder, but there are signs that U.S. economic mobility is disappearing. The fraction of Americans who earn more than their parents has shrunk from more than 90 percent of those born in the 1940s to 50 percent of those born in the 1980s.

Harvard University economist Raj Chetty, who has studied social mobility extensively, found that mobility in the United States varies widely across the country [PDF]. Some wealthy cities have high mobility, on par with countries such as Denmark and Canada, while children in some lower-income areas have less than a 5 percent chance of reaching the top fifth of the income distribution when starting from the bottom fifth.

Overall economic mobility is lower in the United States than in many other developed countries, which some experts argue hampers U.S. economic growth. In a 2016 Stanford University study [PDF], the United States ranked behind several other wealthy countries, including Australia, Canada, France, Germany, and Japan. 

How do race, ethnicity, and gender factor in?

The relationship between race, ethnicity, and inequality has been well-documented. Since 1960, the median wealth of white households has tripled while the wealth of Black households has barely increased. For decades, the unemployment rate among Black Americans has been roughly twice that of white Americans. Black Americans are also underrepresented in high-paying professions, including corporate leadership. As of 2020, only four of the CEOs of Fortune 500 companies are Black. Black and American Indian children have far lower economic mobility compared to white, Asian, and children of Hispanic ethnicity, according to Chetty’s research.

U.S. inequality today is rooted in systemic racism and the legacy of slavery. Through a policy known as redlining that resulted from a New Deal program in the 1930s, Black Americans were systematically denied mortgages, leading to housing segregation and a disparity in home ownership, which is a major source of wealth. Though racial discrimination in housing was banned by the Fair Housing Act of 1968, the effects persist. Black Americans were similarly excluded from the benefits of the G.I. Bill after World War II, which is widely credited with helping to grow the middle class.

Black Americans also face discrimination in the labor market, because hiring is often done internally via networks that exclude them, says William E. Spriggs, an economics professor at Howard University and the chief economist at the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO).

The COVID-19 pandemic laid bare many of these disparities. American Indian, Black, and Latinx Americans were more likely to be hospitalized with and die from COVID-19 than white Americans—an inequity that CFR’s Catherine Powell calls the “color of COVID.” People of color were more likely to be laid off; and they were more likely to be considered essential workers, performing jobs that typically came with greater exposure to the virus, such as cashiering and package delivery.

The existence of a gender pay gap is also well-founded, though there is a debate over its causes. The pay gap has narrowed over the past forty years as women have obtained more education, but it has not shrunk as much since 2000, according to the Economic Policy Institute’s Elise Gould. Gould attributes this in part to discrimination and the underrepresentation of women in high-paying jobs.

What role does education play?

Most high wages come from jobs that require a high level of education. In 2016, U.S. families headed by someone with a bachelor's degree earned double that of those headed by someone without, and families with a postgraduate degree holder earned nearly three times as much, according to a 2019 study [PDF] by economists at the Federal Reserve Bank of St. Louis. The share of the nation’s income earned by families with at least one bachelor’s degree increased from 45 percent to 63 percent between 1989 and 2016.

The difference is even starker for net worth. In 2016, families headed by a postgraduate degree holder had nearly eight times more wealth than families without a college degree. In 2015, nearly 25 percent of people without a high school diploma were living in poverty, compared to just 5 percent of those with a college degree, according to the U.S. Census Bureau. The percentage of Americans with a bachelor’s degree has steadily increased since the end of World War II, reaching around 38 percent in 2021. The United States is above the OECD average in attainment of higher education but is behind several other wealthy countries, including Canada, Japan, and South Korea. 

However, college degrees do not guarantee good jobs. Though the college wage premium (the percentage by which the wages of college graduates exceed those of high school graduates) grew rapidly from 1979 to 2000, it has since fallen off, and there is significant income inequality even among college graduates. The Federal Reserve study found that the college wealth premium (the increase in net worth from having a degree) has declined significantly for white Americans born in the 1980s and has disappeared entirely for Black Americans born that decade. According to the study, these diminishing returns could be due to the surging cost of college—which has risen by almost triple the rate of consumer price increases since 1978.

What about tax rates?

The top U.S. income tax rates have been repeatedly cut over the past half century, which some experts say has contributed to growing inequality. When President John F. Kennedy entered the White House in 1961, the top tax rate was more than 90 percent. Today, the top rate stands at 37 percent. The top 1 percent’s share of income dramatically increased after President Ronald Reagan slashed taxes in the early 1980s.

Likewise, the corporate income tax has declined steadily as a share of corporate profits and as a percentage of gross domestic product over the past half century. The Tax Cuts and Jobs Act of 2017 dramatically lowered the corporate rate from 35 percent to 21 percent.

The capital gains tax, a tax on the sale of assets including stocks, land, and art, has also declined over time, though the rate was increased in 2013 to 20 percent. The wealthy generally benefit more from capital gains than from regular employment income, leading some experts to argue that the gap between the capital gains tax and the income tax contributes to inequality.

What are some other drivers of growing inequality? 

Long-term economic forces play a role, both by boosting rewards to high earners and undermining wages for low- and medium-skill jobs. Those forces, experts say, include waning worker power, increased monopolization of the economy, and globalization. Some Americans have greatly benefited from a globalized world, whereby they can reach more consumers and manufacture products at lower costs. But globalization has also introduced tough competition for American workers, as some jobs were moved overseas and wages stagnated. 

The decline of unions is another contributing factor: the average union member earns roughly 25 percent more than their non-union counterpart. In 1983, about 20 percent of all workers were represented by unions. By 2019, that number had dropped to just 6.2 percent. This has disproportionately affected Black workers, who historically have been more likely to unionize. However, union power is on the rise, as the rapid economic recovery from the pandemic has created a tight labor market in which workers have greater leverage.

Then there is trade policy, a perennial controversy that was supercharged by President Donald Trump’s election in 2016. Trump has long been critical of U.S. trade deals, claiming that other countries, particularly China, have taken advantage of the United States to the detriment of U.S. workers. Many economists have disputed the role of trade in manufacturing job losses, arguing that such losses were offset by gains in other sectors [PDF] and that wages have increased as a result of trade.

Still others say that technological change, including automation, is primarily responsible for job losses, not trade. In Foreign Affairs, former U.S. Trade Representative Robert Lighthizer writes that even though trade is not the sole reason jobs have disappeared, “it cannot be denied that the outsourcing of jobs from high- to low-wage places has devastated communities in the American Rust Belt and elsewhere.”

What are some policy proposals to address inequality?

Proposals put forward in recent years to address income and wealth inequality have included supporting unionization and raising the minimum wage; making the tax code more progressive, as well as taxing wealth alongside income; and increasing access to education, including early education and college.

One tool for addressing income inequality that has received significant attention is a more progressive tax code, meaning that higher incomes are taxed at a higher rate than lower ones. Some experts and politicians argue that shifting more money from the rich to the poor would reduce inequality and benefit society overall. But others say that higher taxes would stifle economic growth and innovation. Democrats generally subscribe to the former view and Republicans to the latter, though some Democratic presidents have cut taxes and some Republican presidents have raised them. The parties’ positions on taxes have calcified in recent years.

Proposed taxes on wealth, rather than income, have become increasingly popular among Democrats and were championed by Senators Bernie Sanders and Elizabeth Warren in the 2020 presidential primary. In March 2022, for the first time as president, Biden called for a wealth tax, proposing a “billionaire minimum income tax” in his annual budget request. Households worth more than $100 million would have to pay a tax of at least 20 percent of their income, including on so-called unrealized gains from assets such as stocks that have increased in value but have not been sold. Critics challenge the merits of such redistribution, arguing that such a tax would be bad for the economy, difficult to implement, and even unconstitutional. 

Biden has also proposed increasing the tax on inherited wealth, which is known as the estate tax or, to critics, as the death tax. While proponents say such a tax would dramatically reduce inequality, others argue that it could lead to more tax evasion and discourage investment and entrepreneurship. Biden has also called for raising the corporate tax rate, the top income tax rate, and the capital gains tax.

To address the rising cost of college and increase access to higher education, some policymakers, including Sanders and Warren, have proposed tuition-free public college and the elimination of student loan debt. Some Republicans, including Trump, meanwhile, have pushed to allocate more federal money toward teaching skills and trades as an alternative.

To help close the Black employment gap, Howard University’s Spriggs suggests making all job postings publicly available, using computer algorithms to better match job seekers with job openings, and encouraging companies—particularly Silicon Valley firms—to recruit more Black students. Spriggs also argues for stronger monitoring and enforcement of antidiscrimination laws.

Some experts, including CFR’s Edward Alden, say the pandemic should compel Washington to retool the U.S. economy. A stronger social safety net, including better unemployment benefits, robust sick leave policies, and more job retraining programs, could help workers manage shocks and make the economy more resilient. “What the country needs is not a series of short-term bailouts, but long-term plans to ensure that most Americans are protected against such crises in the future,” writes Alden.