Opinion

Inequality in America: More than just a question of where to live and what to study

Posted February 1

Economists like to distinguish between income inequality and wealth inequality. Income is fairly easy to define. Wealth is the sum of people's assets minus their liabilities. Measured either way, inequality in the U.S. is staggering. Take, for example, household income in 2014. The bottom 90 percent's average income was $33,068, whereas the top 0.1 of 1 percent earned $6,087,113.

Research recently completed by Dr. Peter Diamond sheds light on these issues. Diamond finds that, historically, the income share for the 10 percent of Americans with the highest pretax income was roughly 40 percent before the Great Depression started in 1929. Then, after World War II, their share fell steadily to less than 35 percent and stood stagnant for at least two decades. It wasn't until the 1970s, with the acceleration of globalization and deregulation and the increased dominance of fields such as high technology and finance, that wealthier individuals’ income share started to climb quickly to reach about 48 percent by 2010.

The same types of trends hold on wealth distribution. At the beginning of the 20th century, the top 10 percent richest holders of assets owned up to 80 percent of all wealth in the United States. When the Great Depression struck, that share went down to about 68 percent. Then, by 2013, the share had risen above 70 percent. Recently, it has climbing slowly and steadily.

It is one thing to cite statistics about the past. It is another to discuss the chances a person has to reach the top fifth in income distribution starting from the bottom fifth. Generally speaking, the chances of reaching the top from the bottom are slim. What is interesting, though, is this: Some places offer much better opportunities. For example, people living in San Jose, California, hold the highest chance of moving from the bottom quintile to the top. There, chances are 12.9 percent. A similar percentage is found in nearby Silicon Valley. On the other hand, in the Southeast, the figure is about 6 percent.

At this point, it may be worth asking whether other countries are better at offering greater opportunity to those who are less fortunate. According to Diamond's data, in the U.S., the probability for a child born to parents in the bottom fifth in income distribution of reaching the top fifth is 7.5 percent. Comparatively, in the U.K., that probability is 9 percent. In Denmark it is 11.7 percent and in Canada it is 13.5 percent. America is at the bottom of this list of four and Canadians are almost twice as likely to live what I consider to be the American Dream and climb to the top quintile from the bottom one.

On the other hand, there is some good news. While a significant number of people in the U.S. are still struggling to achieve income levels that allow them to pay for their basic needs, improvements have been made. According to the U.S. Census Bureau, 43.1 million Americans lived in poverty in 2015, down from 46.6 million in 2014. By way of contrast, the percentage of wealth accumulated by top earners increased also. This raises an important question: Is it good enough that the poor are making small gains while the wealthy are moving ahead at an even faster rate?

As always, much of the future will depend on education. With higher education rising in cost by 3 to 5 percent annually, it becomes harder for many to go to college each year. Many are also aware that educational loans are piling up. My hope is that, at the very least, more will know where to live and what to study.

John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Mario Alejandro Mercado Mendoza, Hoffmire’s colleague at Progress Through Business, did the research for this article.

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