Capital in the Twenty-First Century (52 page)

To proceed further, it will be useful to break the top decile of the income hierarchy
down into three groups: the richest 1 percent, the next 4 percent, and the bottom
5 percent (see
Figure 8.6
). The bulk of the growth of inequality came from “the 1 percent,” whose share of
national income rose from 9 percent in the 1970s to about 20 percent in 2000–2010
(with substantial year-to-year variation due to capital gains)—an increase of 11 points.
To be sure, “the 5 percent” (whose annual income ranged from
$
108,000 to
$
150,000 per household in 2010) as well as “the 4 percent” (whose income ranged from
$
150,000 to
$
352,000) also experienced substantial increases: the share of the former in US national
income rose from 11 to 12 percent (or one point), and that of the latter rose from
13 to 16 percent (three points).
²⁹
By definition, that means that since 1980, these social groups have experienced income
growth substantially higher than the average growth of the US economy, which is not
negligible.

Among the members of these upper income groups are US academic economists, many of
whom believe that the economy of the United States is working fairly well and, in
particular, that it rewards talent and merit accurately and precisely. This is a very
comprehensible human reaction.
³⁰
But the truth is that the social groups above them did even better: of the 15 additional
points of national income going to the top decile, around 11 points, or nearly three-quarters
of the total, went to “the 1 percent” (those making more than
$
352,000 a year in 2010), of which roughly half went to “the 0.1 percent” (those making
more than
$
1.5 million a year).
³¹

As I have just shown, the financial crisis as such seems not to have had an impact
on the structural increase of inequality. What about the reverse causality? Is it
possible that the increase of inequality in the United States helped to trigger the
financial crisis of 2008? Given the fact that the share of the upper decile in US
national income peaked twice in the past century, once in 1928 (on the eve of the
crash of 1929) and again in 2007 (on the eve of the crash of 2008), the question is
difficult to avoid.

In my view, there is absolutely no doubt that the increase of inequality in the United
States contributed to the nation’s financial instability. The reason is simple: one
consequence of increasing inequality was virtual stagnation of the purchasing power
of the lower and middle classes in the United States, which inevitably made it more
likely that modest households would take on debt, especially since unscrupulous banks
and financial intermediaries, freed from regulation and eager to earn good yields
on the enormous savings injected into the system by the well-to-do, offered credit
on increasingly generous terms.
³²

In support of this thesis, it is important to note the considerable transfer of US
national income—on the order of 15 points—from the poorest 90 percent to the richest
10 percent since 1980. Specifically, if we consider the total growth of the US economy
in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that
the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent
alone absorbed nearly 60 percent of the total increase of US national income in this
period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5
percent per year.
³³
These figures are incontestable, and they are striking: whatever one thinks about
the fundamental legitimacy of income inequality, the numbers deserve close scrutiny.
³⁴
It is hard to imagine an economy and society that can continue functioning indefinitely
with such extreme divergence between social groups.

Quite obviously, if the increase in inequality had been accompanied by exceptionally
strong growth of the US economy, things would look quite different. Unfortunately,
this was not the case: the economy grew rather more slowly than in previous decades,
so that the increase in inequality led to virtual stagnation of low and medium incomes.

Note, too, that this internal transfer between social groups (on the order of fifteen
points of US national income) is nearly four times larger than the impressive trade
deficit the United States ran in the 2000s (on the order of four points of national
income). The comparison is interesting because the enormous trade deficit, which has
its counterpart in Chinese, Japanese, and German trade surpluses, has often been described
as one of the key contributors to the “global imbalances” that destabilized the US
and global financial system in the years leading up to the crisis of 2008. That is
quite possible, but it is important to be aware of the fact that the United States’
internal imbalances are four times larger than its global imbalances. This suggests
that the place to look for the solutions of certain problems may be more within the
United States than in China or other countries.

That said, it would be altogether too much to claim that the increase of inequality
in the United States was the sole or even primary cause of the financial crisis of
2008 or, more generally, of the chronic instability of the global financial system.
To my mind, a potentially more important cause of instability is the structural increase
of the capital/income ratio (especially in Europe), coupled with an enormous increase
in aggregate international asset positions.
³⁵

Let me return now to the causes of rising inequality in the United States. The increase
was largely the result of an unprecedented increase in wage inequality and in particular
the emergence of extremely high remunerations at the summit of the wage hierarchy,
particularly among top managers of large firms (see
Figures 8.7
and
8.8
).

Broadly speaking, wage inequality in the United States changed in major ways over
the past century: the wage hierarchy expanded in the 1920s, was relatively stable
in the 1930s, and then experienced severe compression during World War II. The phase
of “severe compression” has been abundantly studied. An important role was played
by the National War Labor Board, the government agency that had to approve all wage
increases in the United States from 1941 to 1945 and generally approved raises only
for the lowest paid workers. In particular, managers’ salaries were systematically
frozen in nominal terms and even at the end of the war were raised only moderately.
³⁶
During the 1950s, wage inequality in the United States stabilized at a relatively
low level, lower than in France, for example: the share of income going to the upper
decile was about 25 percent, and the share of the upper centile was 5 or 6 percent.
Then, from the mid-1970s on, the top 10 percent and, even more, the top 1 percent
began to claim a share of labor income that grew more rapidly than the average wage.
All told, the upper decile’s share rose from 25 to 35 percent, and this increase of
ten points explains approximately two-thirds of the increase in the upper decile’s
share of total national income (see
Figures 8.7
and
8.8
).

FIGURE 8.7.
   High incomes and high wages in the United States, 1910–2010

The rise of income inequality since the 1970s is largely due to the rise of wage inequality.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Several points call for additional comment. First, this unprecedented increase in
wage inequality does not appear to have been compensated by increased wage mobility
over the course of a person’s career.
³⁷
This is a significant point, in that greater mobility is often mentioned as a reason
to believe that increasing inequality is not that important. In fact, if each individual
were to enjoy a very high income for part of his or her life (for example, if each
individual spent a year in the upper centile of the income hierarchy), then an increase
in the level characterized as “very high pay” would not necessarily imply that inequality
with respect to labor—measured over a lifetime—had truly increased. The familiar mobility
argument is powerful, so powerful that it is often impossible to verify. But in the
US case, government data allow us to measure the evolution of wage inequality with
mobility taken into account: we can compute average wages at the individual level
over long periods of time (ten, twenty, or thirty years). And what we find is that
the increase in wage inequality is identical in all cases, no matter what reference
period we choose.
³⁸
In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a
year of their lives as top managers of large US firms, any more than professors at
the University of Chicago or middle managers from California do. One may have felt
this intuitively, but it is always better to measure systematically wherever possible.

FIGURE 8.8.
   The transformation of the top 1 percent in the United States

The rise in the top 1 percent highest incomes since the 1970s is largely due to the
rise in the top 1 percent highest wages.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Furthermore, the fact that the unprecedented increase of wage inequality explains
most of the increase in US income inequality does not mean that income from capital
played no role. It is important to dispel the notion that capital income has vanished
from the summit of the US social hierarchy.

In fact, a very substantial and growing inequality of capital income since 1980 accounts
for about one-third of the increase in income inequality in the United States—a far
from negligible amount. Indeed, in the United States, as in France and Europe, today
as in the past, income from capital always becomes more important as one climbs the
rungs of the income hierarchy. Temporal and spatial differences are differences of
degree: though large, the general principle remains. As Edward Wolff and Ajit Zacharias
have pointed out, the upper centile always consists of several different social groups,
some with very high incomes from capital and others with very high incomes from labor;
the latter do not supplant the former.
³⁹

FIGURE 8.9.
   The composition of top incomes in the United States in 1929

Labor income becomes less and less important as one moves up within the top income
decile.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In the US case, as in France but to an even greater degree, the difference today is
that one has to climb much further up the income hierarchy before income from capital
takes the upper hand. In 1929, income from capital (essentially dividends and capital
gains) was the primary resource for the top 1 percent of the income hierarchy (see
Figure 8.9
). In 2007, one has to climb to the 0.1 percent level before this is true (see
Figure 8.10
). Again, I should make it clear that this has to do with the inclusion of capital
gains in income from capital: without capital gains, salaries would be the main source
of income up to the 0.01 percent level of the income hierarchy.
⁴⁰