For Corrosive Inequality, Look to the Upper Middle Class

(Bloomberg Opinion) -- The U.S. seems to finally have decided that inequality is a problem. The reassurance that a rising tide would lift all boats rings hollow after a series of recessions left so many stuck in the mud. Economists are realizing that allowing greater inequality often doesn’t boost growth. And the moral case for inequality — the notion that rich people are fairly compensated for creating huge amounts of economic value — also seems to have largely collapsed. Even some Republicans are now talking about the problem.

But the difficult and interrelated questions of why inequality has increased, and what to do about it, remain largely unanswered. The loudest voices on the issue tend to emphasize the upper tail of the distribution — the vast fortunes of Jeff Bezos, Mark Zuckerberg or Elon Musk. Even before the recent surge in stock valuations, a small sliver of Americans was controlling a noticeably larger share of the nation’s wealth.

Typically, the most prominent crusaders against inequality call for much higher taxes as a way of bringing the mega-rich down to earth.

But while upper-tail wealth inequality has certainly increased a lot, there’s another, subtler kind of inequality that gets far less attention. In the 1980s, the middle class diverged, with the upper middle pulling away from the lower middle.

You can see this by looking at the U.S. Gini Index. The Gini is a traditional measure of inequality that isn’t very sensitive to what happens at the ends of the distribution. This makes it a reasonably good measure of inequality between the upper and lower middle class. It also measures income, which is more relevant to most people’s daily consumption habits and living standards than wealth. The Gini Index increased a lot in the 1980s, but by the mid-1990s it had stabilized at the new higher level:

The fact that the widening of inequality in the middle class happened decades in the past, and was largely complete by the mid-1990s, probably helps explain why it doesn’t get discussed much these days.  But it’s a change that never reversed itself; It's become a permanent feature of our economy, something we now just take for granted. And it may be having a long-term corrosive effect on American society and politics.

Richard Reeves, in his 2017 book “Dream Hoarders,” suggests that the upper middle class has been hoarding the best educational, occupational and residential opportunities from the lower middle class, creating resentment among the latter group. If the people making $50,000 a year feel that there’s just no way for them to live in the same neighborhoods or go to the same schools as the $100,000-a-year set, they may become disaffected and resentful. In fact, this separation could eventually deal a death blow to America’s perception of itself as a middle-class society; something akin to Karl Marx’s distinction between the proletariat and the petit bourgeoisie might emerge in the U.S., fomenting social strife similar to what Marx successfully predicted in Europe.

The big question, of course, is why middle-class inequality rose back in the 1980s. One possibility is education. The Hamilton Project, part of the Brookings Institution, calculates that the wage premiums from a college degree and from an advanced degree both increased enormously between 1979 and 1994, from under 40% to around 200%, and flattened out thereafter — exactly mimicking the behavior of the Gini Index. So it’s possible that the rise of computers and information technology benefitted educated people much more than those without a degree.

A second, related explanation is an industrial shift. Economic research shows that middle-skilled, routine jobs have disappeared from big cities, meaning that it’s now very hard to move to New York or Los Angeles and get a good job as an office drone or factory worker. That could be due to the rise of knowledge-industry clusters that push old-line industries out of cities. It could also be related to the general decline of manufacturing relative to services as the country’s main engine of job growth, and to the offshoring of routine work.

A third potential reason is the decline of private-sector unions, which really accelerated in the 1980s:

Weak or nonexistent unions could also exacerbate the changes from industrial shifts and changing technology by preventing workers in restaurants, shops and other local services from forcing companies to make sure their jobs are as good as the factory jobs they replaced.

So as the U.S. focuses on the fortunes of Bezos and Musk, it would do well not to forget this other kind of inequality. The 1980s left the U.S. an uncomfortable legacy that we’ve never dealt with. If we want to restore the ideal of a middle-class nation, we will eventually need to do something about it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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