Research Shows Rich Getting Richer Makes Poor Poorer
Jeff Thompson: New research shows that as wealth increases at the top, it does not lead to either greater equality or better living standards for the middle class - August 31, 2011
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Jeffrey Thompson, Assistant Research Professor in Economics, University of Massachusetts at Amherst, focuses primarily on domestic economic policy, with particular emphasis on the New England region and public finance at the state and local government levels. Jeffrey comes to PERI from Syracuse University, where he recently completed his Ph.D. in economics with a dissertation on how migration influences the ability of states to use their tax codes to redistribute income. Prior to his Ph.D. work, Jeffrey was a labor analyst at the Oregon Center for Public Policy for six years and received his Master's degree from the New School for Social Research.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. In 1980, the richest 10 percent of Americans received 33 percent of the nation's income. Today, that same 10 percent takes home 46 percent of all income. If we look at wealth, not just income, today the top 5 percent hold 65 percent of all assets in the United States. So the underlying thesis behind the Republicans and most of the Democrats in this debate is that if the rich are free to invest and if government is smaller, and particularly if the debt is smaller, people will have more confidence to invest. And if they invest and the rich spend more, everyone will do better, and as we know, we're told a rising tide raises all boats. Well, a new study by Jeffrey Thompson and Elias Leight shows something otherwise. In other words, the better the higher end did, the top 10 percentile, and even more so the top 1 percentile, actually, the worse was everyone else's standard of living. Now joining us to talk about the study is Jeffrey Thompson. He's at the Political Economy Research Institute, PERI, at the University of Massachusetts Amherst. Thanks for joining us, Jeffrey.JEFFREY THOMPSON, POLITICAL ECONOMY RESEARCH INSTITUTE: Yeah. Thanks for having me.JAY: So, first of all, talk about the basic objective of the study. What were you trying to find out?THOMPSON: Well, there's a lot of literature in the economics field asking the question as what the distribution of income has--how the distribution of income impacts overall economic growth. So as you stated in your intro, a basic economic theory finding is that the larger the return that rich people or investors are able to take home, the more they will invest, leading to greater economic growth. And there is a big empirical literature trying to explore whether or not this actually happens, and it's a very mixed literature. Some studies find that there is no impact at all in terms of rising shares of income held by rich households on economic growth. Some find a relationship is positive, leading to more growth. Some find it's a negative, so that it actually diminishes growth. And--but when we look at this debate and we also connect it to the broader debates in the public eye, people don't so much care about economic growth, per se, but they care about standards of living. So we extended that previous literature to a new question: what is the impact of rising inequality at the top end of the distribution on the standard of living of your typical family or your family at the bottom of the income distribution?JAY: So what did you find?THOMPSON: We found that in fact the relationship is negative. So the higher the top share goes, so the--when the top 10 percent increase their share of income from 30 percent to 46 percent like you mentioned, we found that the impact on middle-income household incomes falls, and the impact on household incomes of families toward the bottom of the distribution also falls.JAY: So what was your methodology? What kind of data did you use? And what are some examples of what you found? 'Cause I thought it was interesting, one of the things in your study, is that it's not uniform in all states. I'm talking about American states here.THOMPSON: That's right. The extent to which inequality has increased varies markedly across states. You know, for example, two New England states, Rhode Island and Connecticut, the top 10 percent share of income was about 30 percent in both states in 1979. But by 2005, Connecticut's share had gone well above the 50 percent, and in Rhode Island the share was, you know, closer to 40 percent. So there's a wide variation in the extent of inequality. It's important in our study that we do use state-level data, and the whole reason for doing this is that if you just look at national trends, so the national trend in income inequality and the national trend in median family income, say, one of the things you'll see is--since 1980 is that both series tend to rise and fall together. So if you just took a naive impression from the data, you would say, well, clearly, inequality's going up and incomes are going up. The problem with doing that is that they're both affected by other factors. They both tend to be highly cyclical, so when the economy is doing well, you find incomes at the middle and the bottom rising, and you find the high-income share of income rising. So we need to use a data source that lets us control for those cyclical factors in a convincing way and is able to exploit differences across states and the extent of changes and inequality on differences in the experience of different types of households.JAY: Now, you found a marked increasing of the gap of inequality, and at the same time a lowering of standard of living, 'cause it's not a--just to be clear, it's not necessarily the same thing. You can have a greater inequality but somewhat of a rise in the standard of living at the lower end. And the point of your study is that's not what's been happening, inequality and a lowering at the lower end. But you found something particular happening from the 1980s on. What was that?THOMPSON: That's right. You know, the idea about how standard of living could rise with inequality rising is that--is, if these incentive effects were really dramatic, so if you said the--you change the rules of the game, taxes, you know, changing labor laws, whatever, that let the rich take home a lot more of the share of total income, they invest a lot more, create a lot more jobs. You know, the story is pretty standard. So it could happen. We found that it didn't. So, for example, one of the things that we found is that when we look at the incomes of middle-income families, we found that if you raise the top 10 percent of the distribution, their share of total income rises by 10 percent. We found that your typical middle-income household annual income fell by 2 percent. So a 10 percent rise in income inequality led to a 2 percent decline in the actual incomes of those in the middle of the distribution. And that's looking at the period between 1979 and 2005.JAY: So what were some of the factors? I should say, in your study you make it clear this is not a study in itself about what causes all this. It's more to try make the data objective. And the study says you more or less prove this point, that it's not [so much] that the rich get richer and the poor get poorer as the rich getting richer makes the poor get poorer, if I have it right. And if that's the case--but you do explore some of the underlying reasons why this took place, especially since the '80s. What did you look at?THOMPSON: Yeah. This is an initial study in what we intend to be a series of research projects. You know, stage one is this study, which essentially establishes the existence of this relationship. But there are a number of possible explanations that could explain what's going on, and some of them could be the actual effect of rising inequality. And what does that look like? Well, the rich households tend to behave differently in a number of ways. They have so much disposable income. They tend to use it to do foreign travel, they buy imported goods to a greater extent, and even--and they save more, which sometimes can be thought of as translating into more investment. But investment is a global phenomenon. You know, when investors buy stocks and bonds, they can buy international bonds, they can buy the stocks of international corporations. So additional investment doesn't necessarily translate into localized economic--.JAY: And, in fact, a lot of investment now is pushing into what they're calling emerging markets.THOMPSON: That's right. So your neighborhood rich guy, you know, increasing his savings doesn't necessarily mean that local firms will have easier access to capital in any meaningful way.JAY: I think one of the things you point out I thought was interesting in the study is that you're talking about standard of living, and that's not just income. One of the examples you give is the wealthier people get, the more likely they are, for example, to put their kids in private schools, which means they're less interested in the public school system.THOMPSON: Yeah. And that whole idea, I think, is nicely phrased by Robert Reich's term, "the secession of the successful". So when the rich secede to gated communities, sending their kids to private schools, and they work against efforts to fund public education and public safety because they have, you know, rent-a-cops, etc., that whole idea is completely consistent with what we found, and that phenomenon could drive what we're looking at.JAY: Now, the other big factor, and maybe it's the biggest factor, is wages, which is the one thing that never gets talked about in Washington. I think it's practically a banned word. But if I own a business, my--you know, the fundamental way I make more money, other than trying to gain market share, and I guess, you know, that's sort of an ongoing fight, but is to lower wages that I have to pay to make my product. And if that works for one business, it works throughout the society. So, I mean, how significant at this point do you think that is in this not just increasing inequality but lowering of the standard of living?THOMPSON: I think that's a very important factor. I mean, at this point in the research project, we haven't parceled out assignments of the portion of responsibility of different factors, but we suspect that the influence on wages is an important part of the puzzle. You know, one of the things we talk about toward the end of the study is that the rise in inequality could directly cause what we've observed, but also it could be a whole host of other factors that are simultaneously causing the changes in inequality and standard of living. And among those factors are the things that we think about [as] driving wages, so the declining share of the workforce represented by unions, the declining value of the minimum wage, increased globalization, things like that. So there's a whole set of institutions that are simultaneously weakening the bargaining position of workers, feeding more of the share of income to higher income households, and driving down income and wages.JAY: Alright. So just to sum up, so your fundamental point that you think you've proven here, it's not just that the rich getting richer don't--does not raise all boats; the rich getting richer actually sinks some boats or actually lowers the level of some boats.THOMPSON: That's right.JAY: Thanks for joining us, Jeffrey.THOMPSON: Thanks for having me.JAY: And thank you for joining us on The Real News Network.
End of Transcript
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