The best books on Income Inequality

Income inequality is the topic of our discussion and your recent book, The Great Divergence. Please explain your title to us.

“The Great Divergence” is a term Nobel prize-winning economist and New York Times columnist Paul Krugman coined in his book The Conscience of a Liberal to describe the inequality trend that’s prevailed since 1979. Harvard economist Claudia Goldin coined the term “The Great Compression” to describe the period of growing income equality from about 1934 to 1979, when incomes in the United States either grew more equal or remained stable in relation to one another. Playing off Goldin’s coinage, Krugman said that the period from 1979 to the present was “The Great Divergence” because we saw the pattern that had prevailed through most of the 20th century reverse itself – incomes became more unequal.

How does the income divergence in the US over the last three decades compare with income trends in other countries?

Income inequality is an international trend but it’s worst in the United States. The level of inequality is higher in the United States than in most comparable countries. Inequality is also accelerating faster than in most comparable countries. So inequality is worse in the United States by just about every measure. But, importantly, while income inequality is a global trend, it is not a universal trend. There are certain countries where incomes are actually growing more equal. Until pretty recently France was one such country. A report that came out since my book went to press says inequality has been rising in France. The trend over the last three decades is still more or less flat in many countries. In Latin America, a place that’s long been known for its high level of income inequality, we’ve actually seen movement towards greater income equality. So while much of the Americas are moving in the right direction, the United States is moving in the wrong direction.

Your subtitle is “America’s Growing Inequality Crisis and What We Can Do About It”. Please can you make the case that this is a crisis and that something ought to be done about it?

That is a 21st century question. At the beginning of the 20th century nobody asked that question because there was enormous fear that dissatisfaction from below would lead to a violent overthrow of the United States government by socialists or anarchists. The teens in particular were very turbulent in terms of real class warfare. Today people use the term “class warfare” all the time to describe merely discussing the existence of class. Actual class warfare is violent and bloody and there was a great deal of it in the first decades of the 20th century. Because of that there was a broad consensus that it would be unacceptable and even dangerous to let income inequality get out of hand.

In the middle of the 20th century and for much of the last half of the 20th century the US was fighting the Cold War, competing with the Soviet Union for hearts and minds abroad. American leaders were very aware that too much income inequality in the United States would hurt the case they were making to Third World countries for a democracy, as opposed to communism.

In the 21st century there is no discernible danger that the United States government will be overthrown and there is no more Cold War, so the new question that gets asked is: What’s wrong with inequality? Why should we care about it? I think we should care about it because it’s destructive to democracy. The Harvard sociologist Barrington Moore had a famous quote. He said, “No bourgeoisie, no democracy.” It’s very hard to sustain a democracy without a middle class and right now the middle class is shrinking.

Another concern is economics. If it’s true that people need to be motivated in order to make the economy succeed, I don’t see why that should apply only to the rich and not to those earning at the median. If people at the median do not see an increase in their pay cheques when productivity increases then what motivation do they have to do whatever it takes to increase productivity? The economy depends on strong performance not just at the top but also at the middle and at the bottom. If there’s no economic benefit to strong performance, if the only motivator for doing a good job is fear of losing your job, over the long term that can’t be good for economic growth.

What about the argument that inequality statistics overstate the degree of divergence in American life? I’m just going to name some sticky facts that get thrown out with this argument. For example, globalisation and technological advances make items such as televisions, dishwashers and air-conditioning units more broadly affordable. Our cars might cost more but they’re safer and more comfortable. Upper-class income is pulling further away from middle-class income but average families have more leisure time while top earners have less. The average family is spending a smaller percentage of their pay cheque on food and they’re eating out more. How do you counter the general argument that the quality of life for average-income folks is improving in ways that statistics don’t show?

This is the argument often made by libertarians – that we shouldn’t be paying attention to income, we should be paying attention to consumption. My first response to that: When did libertarians lose interest in income? It’s a weird argument to come from people who think that money and markets are everything.

But to take the argument on its own terms. Yes, if you compare consumption today to consumption 60 years ago there are differences. What you will find, broadly speaking, is that the big things are more expensive and the little things are less expensive. Cars are more expensive – they may be safer but they’re more expensive. Houses are more expensive – they’re bigger but they’re more expensive. Healthcare is more expensive – more people’s diseases are cured but it’s more expensive. College education is more expensive – and I don’t think you can make the case that college education is improved in any way compared to 50 or 60 years ago. My guess is that, if anything, it’s probably a little bit worse over the last half century. So those big things are harder to obtain.

The little things – electronics, food and clothing – are easier to obtain. The only one of those items that you have to get on a regular basis is food. And yes, clothing is less expensive. So are TVs. But you probably buy these less frequently, so they’re less meaningful. Meanwhile you have these gigantic expenses for things that are really vital. Healthcare keeps you alive. College education makes it possible for you to achieve upward mobility. An automobile in many parts of the country is a necessity to get you to your job.

Another point worth making here is one made by Barbara Ehrenreich in her book Nickel and Dimed. She went undercover as a house cleaner to collect information about what life was like at the bottom. She observed that other cleaners were skimping on lunch, having a bag of potato chips. An economist would interrupt and say, wait a minute, my statistics demonstrate that food is substantially cheaper today than it used to be, so they ought to have plenty of money to purchase lunch. But if you’re spending all your money on housing and don’t have enough money left to pay for lunch it doesn’t matter that food is cheap. You have to look at all these things in combination to understand inequality fully.

And the five books you’ve selected help us understand the inequality crisis more fully. Let’s begin with The Wealth and Income of the People of the United States by early 20th century economist Willford King. Please introduce us to this monograph. What were its main findings?

This book is actually not very well known, even by economic historians. Willford King was a very influential economist in his time but he is largely forgotten. Part of why he is forgotten is because he was eclipsed by his successor at the National Bureau of Economic Research, Simon Kuznets, a Nobel prize-winning economist, and another reason he’s forgotten is he ended his life as a bit of a crank. He turned against the New Deal and was very bitter about the preeminence of Kuznets.

But early on in 1915, King, who got his PhD at the University of Wisconsin, which was the white-hot centre of progressivism in the United States, wrote a book looking at income distribution based on the suggestion of his advisor Richard Ely, who was a very prominent progressive economist. It was the first reasonably accurate description of how income was distributed in the United States.

You might ask, why was it only in 1915 that somebody did an extensive survey of income distribution in the United States? Questions of economic equality certainly were raised long before 1915, that’s true. But prior to the Progressive Era the perception was that what mattered was not income but wealth. That was a legacy of our agrarian economy. What mattered for farmers was not how much income they had – they didn’t really have income – what they had was land and the means to produce food for their families and food to bring to market. So what really mattered was your wealth, ie, your land. It took a long time to get used to the idea that America was not going to return to that agrarian ideal, that the Industrial Revolution, which the left initially saw as a horrible blight, had produced a new way of life. The Progressives really were the first ones who accepted that as a new reality and recognised that urban workers were not going to grow their own food, they were going to buy food for their families with the money that they earned working in factories. That’s why it took until the teens for someone to perform what one would think is the obvious task of measuring income distribution.

So King wrote this book and he looked at income distribution and he found two things. One was that income distribution in the United States compared favourably with European countries. But the second thing that he found was that income distribution in the United States was fairly unequal. His numbers line up reasonably well with subsequent research that was done based on much more accurate data. King really had to cobble together his findings in all sorts of indirect ways but he got pretty close to an accurate description of income inequality in 1915, which was pretty high but nonetheless lower than it is today and lower than it would become right before the 1929 crash.

How did he do it?

Another thing about the Progressive era is that the Progressives worshipped the scientific method and they worshipped data. They were the ones who decided that there would be something called “social sciences” and they were very scientific in their orientation. King looked at state-level data and extrapolated. He took bits and pieces and did a lot of crosschecking. He did an incredibly thorough job parsing an enormous amount of data. He got pretty close to what Thomas Piketty and Emmanuel Saez were able to find in 2003 by reviewing a hundred years of IRS records.

Why is a monograph on income inequality in 1915 still worth reading, a century after its publication?

It’s worth reading to get a sense of the newness of looking at income distribution and to get a feel for what attitudes were towards this in 1915. King was nobody’s idea of a radical. He was anti-immigration, he believed in eugenics, but nonetheless he recognised that the famous 1% were pulling down a wildly disproportionate percentage of the nation’s income.

Before we move on to your next book, which was published two years after the crash of 1929, what happened between 1915 and 1931? Was inequality on the increase before “the Great Compression” began?

Income inequality rose until World War I then it fell when the war was on. Wars are usually good for equality. The income inequality trend resumed after the war and lasted through the 1920s. It reached historic peaks in this period, even compared to today. Still, income inequality in 1929 was probably not as great as it was in the late 19th century, when the Industrial Revolution was really getting underway. But we don’t have especially good records that predate the teens. After the crash, during the Great Depression, incomes once again grew more equal and considerably more equal during World War II and through the 1950s.

Next, a book that was an international bestseller when it was published in 1931 – The Epic of America by Pulitzer prize-winning writer James Truslow Adams. Why did you select this book and what is it about?

This book’s enduring contribution was the phrase “the American dream”. In fact, Adams wanted to call his book The American Dream but his publicist said no, the book will never sell if you call it that. Yet the only thing that anybody remembers of the book today is that phrase. The book is a history of the United States but what makes it worth reading today is finding out about the original conception of the American dream, which he elaborates on in his final chapter. Adams describes the American dream as having to do with a kind of classlessness, having to do with the absence of barriers for upward mobility. He said it wasn’t just about money – he had vaguely aristocratic ideas about grasping too blatantly for wealth. Adams believed in improving oneself economically but not to the exclusion of all other values. He was concerned about the excesses of capitalism but he had a vision of America as a place where people could improve their lot economically and move upward in society. In Adams’s view this was what really distinguished the United States from Old World Europe.

We inherited his view of American mobility. But American mobility is no longer – either in absolute terms or compared to Europe – the same as it was during Adams’s lifetime. The American dream, in Adam’s words, was of “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement… It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognised by others for what they are, regardless of the fortuitous circumstances of birth or position.”

Was America ever that egalitarian? Was the American dream ever real or even achievable?

It was more realisable during his lifetime than it is today. Certain barriers were harder to cross – racial barriers, gender barriers. But those barriers weren’t based on how much money you started out with and how much money you ended up with. If you were just looking at society in economic terms then it was easier during Adams’s lifetime – obviously not during the Depression, but prior to the Depression – to move upward, as the United States was becoming a more industrialised economy. The strange thing about the process of industrialisation in the United States was that it brought one good thing and one bad thing. It increased upward mobility, as people moved off the farms and into the cities, but it also increased income inequality.

Isn’t it much easier to obtain, for instance, a higher education now than it was during those times?

Yeah, it’s easier to obtain a college education today, but it’s also true that a lot more jobs require a college education today. You have to remember back in 1900 most Americans didn’t even go to high school. I think something like 90% of all Americans at the turn of the 20th century didn’t have high-school diplomas. Obviously that meant that most of the economy operated without the assistance of people who went to high school let alone college. That changed rapidly in the early decades of the 20th century with the spread of the high-school movement, where society basically decided that high school had to be paid for by the government and everybody had to be required to go. It was a lucky thing for the United States that the high-school movement coincided with a period of rapid technological advances. The technological advances in the early 20th century were much greater than the technological advances at the end of the 20th century.

Let’s turn to a book by two Wall Street Journal journalists – the bullishly titled Prosperity: The Coming 20-Year Boom and What It Means To You. It was written in 1998, on the eve of the tech crash. The book seems to argue that the American dream was about to come within reach of ever more people, when actually the opposite occurred. What is this out-of-print title about and why have you chosen it?

This book does have the disgrace of being called Prosperity on the eve of the bursting of the tech bubble. That’s the aspect of the book that isn’t so great. The aspect of the book that is great is the really detailed fine-grained reporting that Bob Davis and David Wessel do into the question of how living standards in the late 1990s compare to living standards a generation earlier. They compare two families – one that entered the workforce in the 1970s and one that entered the workforce in the 1990s. The stories of these families give you a good feel for how life changed during that period. In some ways it got easier but in many ways it got harder. It got harder to purchase a house, it got harder to purchase an education and there was less economic security overall.

I followed through on their reporting by checking in with the Blentlinger family, who had been interviewed for Prosperity, to see how they were doing now. Davis and Wessel chose the Blentlinger family because they were right at the median in terms of income. I was pleased to discover that the Blentlingers were doing better than the median today – they’ve managed to move up and that’s the good news. The bad news was that the way the Blentlingers were able to achieve this advancement was by absenting themselves completely from the private sector economy. Jim Blentlinger’s wife was a schoolteacher and he went to work for the Tennessee Valley Authority. So today they rely on government jobs to provide the kind of security that you could get from private sector jobs in the 1970s, including a labour union, which is almost impossible to get in the private sector these days. In large part, because of those two features, the Blentlingers are now much better off.

This book, like your book, relies on personal narratives to inform the reader about the inequality crisis. What do those stories tell you that looking at statistics doesn’t?

I think these stories give you a more vivid sense of many of the historic trends that I’m describing in my book. There are two kinds of personal stories in the book. One, stories about real people like the Blentlingers and a bank teller during a period when the advent of ATMs was making that job somewhat obsolete. I also tell the life story of Yves-Andre Istel, who had worked on Wall Street since the 1950s. In the book he describes the ways that the culture changed there. The other type of story I tell in the book are stories about figures who were shaping history like Horatio Alger and Walter Reuther. Alger spread ideas about upward mobility and Reuther took the labour movement about as far as it was ever going to go in the United States in a spirit of cooperation with management. Again, I think these stories give you a concrete sense of underlying trends.

Your next book selection helps explain why the great divergence emerged and why America has failed to fully mitigate it. Tell us about. Fluctuating Fortunes: The Political Power of Business In America by Berkeley professor of business ethics David Vogel.

Today, when we look at the landscape in Washington, we observe that much legislation and much regulation is captive to corporations – that was not always the case. Business influence in Washington in the 1950s and 1960s was at a low point and the 1970s saw the rise of the consumer movement. This movement had so much momentum that not even a Republican like Richard Nixon in the White House could stop it. He ended up promoting it.

Vogel is great at telling the very important story of how business mobilised to push back in the 1970s and what a change that was. He describes several of the fights that took place and I believe it was Vogel who provided this wonderful quote I use in my book, where some lobbyist said: “Gee, my job used to be just providing booze, broads and golf, and now I’m actually expected to make things happen here in Washington.” So there really was a substantial cultural transformation, and Vogel’s book is a pioneering work of economic history describing how that came about.

The roots of the great divergence are explored quite comprehensively in your book. Please preview the answers you provide to the question: Why is income inequality on the rise?

What I say in my book is that there are really two divergences. There’s a skills-based divergence, which is very complicated, and then there’s a divergence between the 1% and the 99%, which is very simple.

The skills-based divergence was caused by multiple factors. One factor was the decline of labour, caused in part by the rise of extensive trade with China, which represented the first time the United States was doing a lot of trade with a country that had both really low wages and so many people that bringing wages up as it industrialised was going to take a long time. So trade played some role, but not until the late 1990s. Education also played an enormous role in skills-based divergence. The high-school graduation rate levelled off in the 1970s as technological demands on the workforce were increasing. The supply and demand curves crossed for skilled labour – that bid up the price of skilled labour.

The divide between the 1% and the 99% was caused by two simple things. One cause was the runaway pay for CEOs, which really spun out of control in the 1980s and 90s. The other was the financialisation of the economy, the gradual deregulation of Wall Street, the conversion of investment banks from partnerships to corporations and the letting loose of a culture of leverage. Yves-Andre Istel points out that some of that change was generational. The current generation hadn’t lived through the Great Depression, therefore they aren’t as fearful of debt as earlier generations.

Your final selection gets at both the source of inequality and how we can redress it. Tell us about The Race Between Education and Technology by Claudia Goldin and Lawrence Katz.

What I think is really ingenious about this book is that it squares the circle. In the 1990s Bill Clinton told us that computers had revolutionised what was required from the workforce and that all of a sudden you needed to get a college education to perform in this knowledge-based economy. Goldin and Katz actually point out that the technological changes at the beginning of the 20th century were probably a lot more dramatic. At the beginning of the 20th century you had the spread of electricity, then the advent of radio, the spread of air travel and the growth of television. And as technological change imposed greater and greater skill demands on workers, the skill level of American workers rose and rose. Why? Simultaneously the United States was experiencing the high-school movement.

At the start of the 20th century very few people went to high school. Within a few decades most people were going to high school as part of a conscious policy change. Europeans snickered at Americans for the sentimental notion that there should be universal secondary education. They thought that secondary education should be for preparing the small segment of the population that was going to college. Consequently, American workers were able to meet rising technological demands in a way that European workers were not, just when high-school education became more necessary for all sorts of blue-collar work. Factory workers needed to have a fundamental understanding of how electricity worked and farmers needed to be familiar with new agricultural and marketing processes.

In the United States the high-school graduation rate rose and rose, as did technological demands, until the graduation rate levelled off in the 1970s. But with the advent of the computer technological demands continued to rise – that bid up the price of skilled labour. That’s Goldin and Katz’s central insight: It wasn’t computers that caused inequality, it was the fact that for this technological revolution, as opposed to the technological revolutions that preceded it, the American K-12 [primary and secondary] education system was no longer keeping up with marketplace demands. Europeans had realised their mistake and started spreading secondary education. Secondary school attendance rates in many Western European countries now exceed those in the United States. College completion rates in many Western European countries exceed those in the United States.

And those countries experience less economic polarisation?

Yes. There are no advanced industrial economies in Western Europe that are experiencing economic inequality to the same extent the United States is and there are no countries where inequality is increasing as fast as it is in the United States.

Goldin and Katz point to human capital investment as one way we can begin to breach the great divergence. You offer several suggestions in your book. What is currently being done to redress “the inequality crisis”? What more can we do?

The debate is miles behind what needs to be done, but it’s picking up. There’s certainly more discussion of this issue today than there has been in the previous third of a century. For example it’s good that President Obama is calling for raising taxes on incomes above $250,000, but he also needs to talk about laying in some brackets at $1 million and $10 million and $20 million. I think they should go up to 70% top marginal rate. But that’s not really within the political mainstream right now.

Here’s something that is in the political mainstream – expanding Pre-K [nursery school] education. Right now just a little more than a quarter of all four-year-olds are receiving Pre-K education. There’s no controversy about the fact that early childhood education vastly improves a child’s chances of succeeding academically.

Another issue that I thought was outside the mainstream when I suggested it in my book, but then to my surprise President Obama suggested something very much like it in his State of the Union address, was the idea of price controls on college tuition increases. Obama didn’t put it so bluntly, but he did say he was putting college and universities on notice that if they could not get their tuition increases under control the federal government would use its leverage to force them to do so.

Has the trend towards income divergence remained steady over the last 30 years or fluctuated based on which party is in power? What does the research show?

Am I allowed to put in a plea for a sixth book here? Larry Bartels’s Unequal Democracy looked at economic performance under presidencies going back to 1948. What he found was under Democrats the greatest income gains went to those at the bottom and tapered off as he went up the income scale. Under Republicans, the greatest income gains went to those at the top and tapered off as you went down the income scale. It correlates perfectly with our cartoon notions of how Democrats and Republicans differ – the idea that Democrats really are the party that cares about people at the bottom and Republicans really are the party that cares about people at the top.

Do you see any reason to be optimistic about ameliorating inequality in the coming decades?

Yes I do. I think that for the first time in 33 years there’s a national movement to address the problem. For the first time we have a president who’s not only interested in the problem but willing to discuss it out loud. We have a chairman of the council of economic advisers, Alan Kruger, who not only has looked at this problem extensively in his academic life but is continuing to research and discuss it as chairman. He issued a report a few months ago that looked at the relationship between rising income inequality and falling mobility. Certainly at the discussion level more is going on.

But the most difficult task is reviving labour. As I talk about the book to various groups I find that this is the one idea that even liberals resist. They just don’t want to hear that if you really want to address income inequality you have to revive the labour movement – there is no alternative. You can’t achieve this just by sending everybody to college. You want to train as many people as you can to perform more technologically demanding work but to revive the economic condition of the middle class it is going to be necessary for people to have labour unions that defend their interests against bosses.

Today it is just about impossible to organise a workplace in which the bosses are determined to keep unions out. In my book I talk about an attempt to unionise a Wal-Mart in Colorado. What that illustrates is how thoroughly the deck is stacked against labour unions today. The laws favour managers and even when the laws don’t favour managers the penalties for violating laws are so pitiful that it’s actually economically irrational for managers to obey the law. This is the most difficult challenge but it has to be done. I guess that gives you a sense of the relative difficulty of various things that I propose.

Cite an example from history where government and society have set out to reverse economic trends and succeeded.

The government has a huge influence over trends towards greater income equality or greater income inequality. This is not just something that the economy does all by itself. There’s a lot of research showing that these trends are heavily influenced by government action. For a long time people didn’t realise that because taxation and government benefits did not have an enormous impact on income inequality – but researchers were looking in the wrong places.

There are all sorts of other things that the government does that do make a difference. It can’t be a coincidence that Democratic presidents have tended to foster economic equality while Republican presidents have tended to foster economic inequality. Democrats and Republicans govern in a million different ways. Fed policy has enormous impact on income inequality. The fact that Democrats are more tolerant of inflation than Republicans has meaningful distributive consequences. Monetary policy is very influential in this area. Raising the minimum wage is certainly a factor. One aspect of Obamacare that President Obama doesn’t want to talk about is that it’s fairly redistributive. It extends healthcare coverage to lower income people through the expansion of Medicaid. I think the Obama administration is a little nervous about talking about that because they don’t want to sound socialist, but Obamacare will certainly achieve a kind of invisible redistribution – it will change the distribution of benefits and the availability of medical care.

The thing to be most hopeful about is that people are concerned about inequality now. They want to talk about it. They want to understand what’s causing this phenomenon. Glib explanations coming from conservatives who would like to deny the Great Divergence aren’t really persuading anybody because they are not only untrue but also unpersuasive. This problem was not created overnight and it’s not going to be solved overnight, but I think that it can be solved and we can start to see some improvement.