For Corrosive Inequality, Look to the Upper Middle Class

(Bloomberg Opinion) - The US finally seems to have decided that inequality is a problem. The certainty that a rising tide would hollow all boats after a series of recessions left so many stuck in the mud. Economists recognize that greater inequality often does not encourage growth. And the moral argument for inequality - the notion that rich people are adequately compensated for creating enormous economic value - seems to have largely collapsed. Even some Republicans are now talking about the problem.
However, the difficult and interrelated questions of why inequality has increased and what to do about it remain largely unanswered. The loudest voices on the subject tend to emphasize the upper part of the distribution - the great fortunes of Jeff Bezos, Mark Zuckerberg or Elon Musk. Even before the recent surge in stock valuations, a small fraction of Americans controlled a significantly larger proportion of the nation's wealth.
As a rule, the most famous Crusaders Against Inequality demand much higher taxes to bring the mega-rich to earth.
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While wealth inequality at the top has certainly increased dramatically, there is another, more subtle, type of inequality that receives far less attention. In the 1980s, the middle class broke up, with the upper middle moving away from the lower middle.
You can see this by looking at the US Gini index. The Gini is a traditional measure of inequality that is not very sensitive to what happens at the end of the distribution. This makes it a reasonably good measure of the inequality between the upper and lower middle classes. It also measures income, which is more relevant than wealth to most people's daily consumption habits and standard of living. The Gini index rose sharply in the 1980s, but had stabilized at the new higher level in the mid-1990s:
The fact that the expansion of middle class inequality has taken place over the past few decades and was largely over by the mid-1990s probably explains why it is not discussed much these days. But it's a change that has never been reversed. It has become an integral part of our economy, which we now take for granted. And it can have long-term corrosive effects on American society and politics.
Richard Reeves, in his 2017 book Dream Hoarders, suggests that the upper middle class hoarded the best educational, professional and housing opportunities from the lower middle class, which has fueled resentment among the latter. If the people who make $ 50,000 a year feel that there is simply no way for them to live in the same neighborhoods or attend the same schools as the $ 100,000 a year, they may become dissatisfied and annoying. Indeed, this separation could ultimately result in a death knell for the perception of America as a civil society. Something similar to Karl Marx's distinction between the proletariat and the petty bourgeoisie could arise in the United States and spark social conflict, much as Marx successfully predicted in Europe.
The big question, of course, is why middle class inequality increased in the 1980s. One option is education. The Hamilton Project, which is part of the Brookings Institution, calculates that the wage premiums of a college degree and college degree rose tremendously from under 40% to around 200% between 1979 and 1994 and then flattened out afterwards - which exactly mimics the behavior of the Gini -Index. So it is possible that the rise of computers and information technology has benefited educated people far more than those without degrees.
A second related explanation is an industrial shift. Economic research shows that midsize, routine jobs have disappeared from big cities, which means it is now very difficult to move to New York or Los Angeles and get a good job as an office drone or factory worker. This could be due to the rise of clusters of knowledge industries that are pushing old industries out of cities. This could also be related to the general decline in manufacturing relative to services as the country's main engine of job growth and the offshoring of routine jobs.
A third possible reason is the decline of private sector unions, which really accelerated in the 1980s:
Weak or non-existent unions could also exacerbate change from industrial change and technological change by preventing workers in restaurants, shops and other local service companies from forcing companies to ensure that their jobs are as good as the factory jobs they are replacing.
With the US focused on the fate of Bezos and Musk, it would be good not to forget about this other type of inequality. The 1980s left an uncomfortable legacy in the United States that we have never looked at. If we are to restore the ideal of a bourgeois nation, at some point we must do something about it.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Noah Smith is a columnist for the Bloomberg Opinion. He was an assistant professor of finance at Stony Brook University and blogs for Noahpinion.
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