The Great Divergence: 8 Ways to Help Reverse Income Inequality

Eonomics isn’t an easy study to interpret. Economists and politicians constantly disagree about the economy. However, there is one undisputable fact that all economists on both sides of the political spectrum can agree upon. Since the 1980s, income inequality in the United States has dramatically increased and has done so at a much faster rate than in other developed nations. Income shares have risen disproportionately for the nation's top 10 percent and in particular, the top 1 percent. America’s richest 1 percent possess 24 percent of the nation’s pretax income. By virtually every metric, the United States ranks worst in the world for income inequality among developed nations.

Economics isn’t particularly good at predicting the future, but it does exceptionally well at documenting and interpreting the past. In his 2007 book The Conscience of a Liberal, Nobel Prize-winning economist Paul Krugman termed the age of inequality “The Great Divergence”. It began in 1979 and is when income distribution began to diverge. The period before this was termed the Great Convergence and started shortly after the Great Depression from 1932. The phenomenon of income inequality was further explored in Timothy Noah’s exhaustively researched 2012 book, The Great Divergence. The Great Depression cause severe income inequality in America. However, the economy recovered and incomes became increasingly more equal over the following decades. This was in no small part due to FDR’s New Deal program and the powerful industrial stimulus of the Second World War. It was also a time that saw the zenith of power in the labor movement.

There were many factors that contributed to The Great Divergence, but among the major ones was the corporate deregulations that occurred in the 80s under president Reagan that enabled corporations to amass incredible wealth. It was also, not surprisingly, at this time that saw a dramatic increase in the number of corporate lobbying groups in Washington that continues to this day. Regan was also the first president to adopt an openly anti-union stance on a time when unions were already in decline.

During The Great Divergence, the structure of the U.S. economy drastically changed. It went from a primarily manufacturing economy to a service one. Also, the economy has been revolutionized through automation and computers. And of course globalization has changed how products are created and distributed.

So what can we do about it? We’re not talking about redistributing wealth 100% equally as in some communist utopia, but rather to reverse the trend increasing income inequality. In The Great Divergence, Noah offers several suggestions:

1) Tax the Rich

Tax rates on the rich are at historic lows. Billionaire Warren Buffet himself suggested creating new tax brackets for the rich, those earning over $1 million and $10 million annually. Noah proposed yet another bracket for those earning over $20 million. Also, we must reform the tax system, eliminating s-corporations and other shelter schemes and loopholes that unjustly benefit wealthy corporations. How would this new tax wealth be used? Well, it wouldn’t necessarily reduce income inequality directly, but could be used to reduce the budget deficit. This is also important and would eliminate the need for large budget cuts to other government services that would likely increase inequality.

2) Increase the number of Federal Jobs

In 2010, there were 4.4 million federal employees. Yet, despite citizens and politicians alike complaining about the size of the U.S. bureaucracy, this is in fact far lower that the number of federal employees in 1962 at 5.4 million. Why not create more government jobs? Use the  Works Progress Administration as a model. During the Great Depression, President Roosevelt’s WPA program created 3 million jobs per year at a cost of $71 billion in today’s dollars. Its predecessor, the Civil Works Administration created 4 million jobs in only 4 months for less than $1 billion. This is far better than President Obama’s job stimulus package that from 2009-2011 created 3,6 million jobs for $221 billion. The government should put people to work to repair America’s aging a dilapidated infrastructure. It would be much more cost effective to create jobs and pay people directly from the government.

3) Import More Skilled Labor

Former director of the Fed, Alan Greenspan recommended removing visa barriers for highly skilled laborers as a way to reduce income inequality. Making it easier for foreign engineers, doctors, and professors to enter the United States and eliminating native-biased protectionist policies would help make hospitals and universities more competitive. It would also help stimulate innovation and investment and likely create more jobs across the economy.

4) Universal Preschool

The early 20^th century saw the high school movement that made high school standard across America and improved the education of the workforce. We should do the same thing with preschool/kindergarten today. Now, early education is largely elective, but there are big potential benefits to making preschool standard. A 2011 Harvard study showed a 1% score increase in kindergarten final scores resulted in a nearly $100 increase in annual wages.

5) Impose Price Controls on Universities

In the last few decades, demand for college degrees by companies has increased significantly, but so has the cost. Between 1981 and 2006, the average yearly college tuition after inflation more than doubled. The problem today is that universities can charge pretty much whatever they want because they know a college degree is as necessary today as a high school diploma was 50 years ago. The fact is that universities experience almost no serious market pressure to control prices. The government should take steps to rectify this. There is a similar situation today in healthcare, where costs are spiraling upwards out of control.

6) Regulate Wall Street

During The Great Divergence, there were big changes on Wall Street and the financial sector. Deregulation led to consolidation of banks into huge entities, especially in the 90s and naughts. There was also a trend for banks to move away from traditional banking and focus more on trading. There was a shift towards a high risk, high gain mentality. Then came the 2008 financial crisis and the subsequent Wall Street bailout by the government. The Banks were so big, they felt encouraged to take risks because they knew the government couldn’t allow them to fail and bail them out. This led to instability in the market and the crisis. In 2009, Alan Greenspan said about the banks, “If they’re too big to fail, they’re too big.” The government should break up the banks. The same was done with Standard Oil in 1911, and the separate parts became more valuable than the whole.

7) Elect Democratic Presidents

In his 2008 book Unequal Democracy, political scientist Larry Bartels convincingly showed that the bottom 95 percent of income distribution experienced greater income gains under Democratic presidents. All politicians want the economy to do well, but they differ in who they want to benefit. In the 80s, again under Reagan, supply side economics, which later became known as trickle-down economics came into vogue. The idea was if you give tax breaks and policies favorable to corporations and the wealthy, it will result in better wages down below. Production did increase and the economy grew, but more equal raises in income did not materialize. Generally speaking Democrats are more concerned about unemployment, siding with labor and Republicans are more concerned about inflation, siding with management. 

8) Revive the Labor Movement and Workers Unions.

Today, unions almost seem like something belonging to the past. It’s true that unions have significantly helped reduce income inequality in the days before The Great Divergence, not just for union workers, but society as a whole. In 1945, President Harry Truman convened a labor management conference three months after the end of WWII. Its purpose was to create an agreement governing the postwar economy’s conversion back to a civilian one. This was a time when Labor had immense influence and power, sitting down with the Federal government and national business leaders on more or less equal footing. Such a situation is hard to imagine today. Over the years, anti-union legislation passed that greatly reduced labors power. Union membership reached its peak in 1954 at 28 percent of the workforce and if you add non-union workers who were covered by union contracts it’s closer to 40 percent. In 1979, union membership represented about 21 percent of the workforce. Today, it’s about 12 percent and if you exclude federal workers unions, it’s only about 7 percent of the private sector workforce. Large corporations, especially retailers like Wal-mart are famous for being aggressively anti union. In 2007, Harvard economist Richard freeman calculated that the decline in unions explained about 20 percent of The Great Divergence among all workers. We generally think of unions for manufacturing or construction jobs, but there’s no reason other industries couldn’t be unionized. Corporations aren’t just going to raise worker’s wages out of the goodness of their hearts. Rights have to be fought for and the fact is that unions are a powerful tool to secure better wages and benefits for workers.

None of these strategies is simple or would be easy to implement. It would take a lot of work and cooperation among lawmakers, but there is no time to waste. With a billionaire businessman in the White House, Trump's budget and tax plans will likely only increase inequality among Americans and keep money and power in the hands of the top 1%. America has done better in the past and other countries are doing better now.  The only thing worse than trying and failing is to do nothing.