Bloomberg – The Good News About Income Inequality – Karl W. Smith 9/12/19

The headline from the U.S. Census Bureau’s report this week on health insurance coverage was that the ranks of the uninsured swelled by almost 2 million Americans in 2018. But the larger trends illustrated in the report are more consequential — and more positive — for the U.S. economy.

The upshot is this: The number of uninsured is growing because more people are moving out of poverty and thus losing Medicaid coverage.

That’s consistent with another piece of good news in the report. The average incomes for those in the second quintile — a proxy for the working-class — rose faster than any other group. Indeed, over the last five years incomes for all quintiles have risen nearly in unison, with incomes for the working class slightly edging out all other groups.

This could be a run of good luck, of course. But there is reason to believe that it reflects fundamental changes in the economy. Over the same period, U.S. workers’ compensation as share of GDP has been rising or stable. That’s the longest such period since this figure peaked in 1970.

Taking the long view, the census data on income distribution tells a mostly positive story, albeit with some twists and turns. From 1967 (the earliest date for which there is data) to 1980, incomes rose for all groups, but the most for those at the very bottom of the income scale.

By the late 1970s, however, incomes were stagnating. Then came nearly two decades of neoliberal reforms, including tax cuts, deregulation and an emphasis on inflation control by the Federal Reserve. Real incomes exploded from 1981 to 1999 — but so did inequality. The entire population did better, but the top 20% outstripped the rest.

Then came the China shock. In 2001, China became a member of the World Trade Organization. From then until roughly 2012, Chinese exports grew at double-digit rates, transforming both China’s economy and the rest of the world’s. Economists often downplay the role of China, suggesting that the decline in U.S. manufacturing in particular was driven primarily by technological progress. That undoubtedly played a role, but it’s impossible to overstate the impact of the introduction into the world trading system of a huge and rapidly industrializing nation. It strained the U.S. economy to the breaking point.

Every income quintile lost ground. Once again, however, the poor and the working class were hardest hit. The financial crisis accelerated the process, and the overall downward trend was only briefly interrupted when the housing boom raised incomes in the mid-2000s.

Since then, however, the trajectory of U.S. income has changed fundamentally. All quintiles are rising roughly together, and the working class is doing particularly well.

Much of the populist anger in U.S. doesn’t stem from inequality per se. Instead, the current obsession with inequality is a hangover from the shock of the first decade of the 21st century, when falling incomes were widespread but especially crushing for those at the bottom. That created very real pain and justifiable outrage at the system.

Now the economic tide has turned. The working class is doing better, not just in real terms but relatively. This is news worth recognizing — and celebrating.