The Blog

The Future of "Two Americas"

What's really going on with income inequality.

12:00 AM, Jun 12, 2007 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

But before signing on to presidential wannabe John Edwards's "Two Americas" thesis, consider a new study by Barry Bluestone, professor of political science at Northeastern University and the late Bennett Harrison, at the time a professor at Harvard's Kennedy School. They concentrate on the "typical American family," the 29-to-59 year-old group that is in its prime working years, and adjust for household size. That eliminates the distortion created by students and retirees, whose earnings are not representative of their lifetime experience, and by the lowering of family size that makes a given family income go further. The median income of this typical family is $63,000, which buys a reasonable standard of living in most parts of the United States. The portion of families in the "middle class," those with incomes of between $30,000 and $90,000 fell from 47 percent to 39 percent between 1974 and 2004, which sounds ominous, until we note that the portion with incomes above $90,000 rose by 9 percentage points, and the percentage of households that are poor has not increased.

Rather than bewilder you with more statistics, let me do something more useful, and describe the underlying forces at work.

* Private equity firms are making large fortunes because they increase the operating and financial efficiency of the companies they take over, and can claim a portion of the increased profits for themselves.

* CEOs are earning more because they manage larger companies--the six-fold increase in CEO compensation about keeps pace with the six-fold increase in the market value of big companies--and, it must be said, because friendly boards of directors have been more generous with shareholders' money than is warranted by executive performance.

* Highly skilled workers are earning more than their less skilled counterparts because the premium paid by employers for education and skills is rising, and because globalization has brought over one billion unskilled, low-paid workers in developing countries into the labor market, depressing wages at the low end. College graduates now can look forward to salaries 75 percent above those of high-school graduates; 25 years ago the gap was 40 percent.

All of these developments add to inequality. But none of these developments should have you reaching for your handy copy of the Communist Manifesto and the Marx-Engels forecast, "Society as a whole is more and more splitting into two great hostile camps, into two great classes directly facing each other."

Market forces are already in motion to change some of these trends. As more and more imitators follow the path of the original private equity players, those profits are being competed down--which is what happens to all builders of better mousetraps in the long run. CEO compensation is now under greater scrutiny than ever, as increasingly active shareholders and corporate boards, awakened to their fiduciary responsibilities by Sarbanes-Oxley, become less generous. More and more workers are enrolling in community (two-year) colleges to upgrade their skills. Wages in China and India are rising, easing some of the pressure on wages of unskilled workers in developed countries.

Throw in a bit of political pressure--easy to deride, but sometimes useful in injecting equity considerations into policy debates--and the prospect is that grumbling might produce some jiggling of the tax system, but no sustained assault on market capitalism--at least, not in America where we still believe that although academics Marx and Engels had it wrong, Deng Xiaoping, one of the founders of Communist China and for the last 18 years of its life its "paramount leader," had it right, "To be rich is glorious."

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.