Income inequality helped elect Donald Trump — and would grow wider under his policies
Some of the world's top researchers on income inequality — who presented a new paper on the topic Tuesday — say American economic anxiety and the growing gap between the rich and poor helped put President-elect Donald Trump on a path to the White House. Those same economists now warn that Trump will likely make the problem worse.
"The anti-establishment mood we have seen in this election — [Vermont Senator Bernie] Sanders on the left, Trump on the right — is in part the consequence of an economy that has stopped working for too many," said University of California at Berkeley economics professor Emmanuel Saez, who co-authored the paper with Capital author Thomas Piketty and economics professor Gabriel Zucman, also of Berkeley.
Saez, Piketty and Zucman's paper, presented at the City University of New York, found that income inequality has reached record levels: Since 1980, the average adult in the United States saw pre-tax income grow about 60% — but if you look at the poorer half of all pre-tax incomes, that growth virtually disappears. In fact, for those "bottom half" adults, pre-tax income has been flat at roughly $16,000 a year in 2014 dollars.
Put another way, in 1980, the richest 1% of Americans earned about 27 times more, pre-tax, than the poorest 50% of U.S. adults. Now, the top 1% makes 81 times what the bottom 50% makes.
The below tweet from left-leaning think tank Equitable Growth uses the study's data to illustrate how the income gap has widened since 1980.
Letting this trend continue unchecked could hinder growth in the U.S. economy, co-author Zucman said in an email to Mic.
"No one knows how far this can continue to go," Zucman wrote. "But above a certain point, extreme inequality is bound to destroy growth and lead to political instability."
"The scary thing is that, unlike Reagan in 1980," Saez said, pointing to the year that income inequality began to grow sharply, "we are starting in 2016 from an already record-high level of inequality."
Trump's tax plan, several economists argue, disproportionately benefits people who are already wealthy.
As MIT Professor Sinan Aral points out in the below tweet, the bottom 80% of income earners would get only 17% of the financial benefits of Trump's tax cuts.
Millionaires get nearly half of the tax cut benefits.
Regressive policies, Saez said, will only make the wealth gap wider — which could affect future generations.
"Very high inequality goes with low opportunity for children growing [up] in low-income families," said Saez.
To arrive at their conclusions, Piketty, Saez, and Zucman combined tax, survey and national accounts data going back to 1913, and looked at how the size of the overall pie grew. They then compared the growth of the overall economy to how big a slice of the pie different income groups got over time.
The underlying causes of growing inequality are complex, the researchers found. One big problem, Saez said, is that the government's biggest redistribution efforts — Medicare and Social Security — target the elderly, as opposed to the very poor.
Saez also pointed to the "Reagan revolution" of the 1980s, saying that "de-regulation, erosion of minimum wage, unions weakening and less progressive taxation," all made income inequality worse.
But a particularly worrisome factor driving the rise of inequality is the dominant role of capital appreciation, Saez said: The growth in the value of assets — as opposed to growth in salaries or productivity — has accounted for most of the rise in richer Americans' income since the early 2000s.
That could mean an uptick in family inheritances that calcify class divides.
"The boom in capital income is alarming because capital income is derived from owning assets, while labor income is derived from work," Saez said. "Furthermore, capital can be bequeathed to heirs so that self-made wealth can become inherited wealth within a generation."
Now, not everyone agrees that rising income inequality is bad for American society — or U.S. economic growth.
Ed Conard, author of the Upside of Inequality and a former managing director at Bain Capital, argues that inequality heightens the relative value of the financial incentives that lure growth-promoting entrepreneurs and investors into taking risks.
In countries with income redistribution, he explained, talented workers may be less likely to attempt entrepreneurship: Even more ambitious workers might prefer to make a living as a doctor or a lawyer than attempt game-changing inventions like the iPhone.
"Europe and Japan tried the experiment," Conard said. "All their smart people went on vacation, they didn't keep working hard and taking entrepreneurial risks."
That's why you need to offer large rewards — in the form of business-friendly policies — for those whom you want to gamble on innovation, Conard said: "When the Powerball gets large," he said, "everyone runs to play the Powerball."
Without a huge jackpot in the form of business-friendly policies, he argued, talented workers won't be incentivized to build new businesses and industries.
If you're in Conard's camp, you're probably feeling pretty good about the next couple of years, during which Trump's proposed regulatory and tax reform are likely to put more money into the hands of the wealthy.
The old GOP saw is that this is fine because rich Americans will take their tax breaks and pour their cash back into the economy; proponents of supply-side economics — like Ken. Senator Rand Paul — actually credit the boom years of the '90s to Reagan's tax cuts
But there's evidence to the contrary: Researchers on Reagan's legacy dispute the idea that big tax cuts were what led to big growth, pointing instead to factors like cheap stocks, high military spending and slashed interest rates.
Whether the Trump administration, comprised of millionaires, will fight for low-income Americans is yet to be seen. But if the U.S. is returning to the regressive policies of the 1980s, prepare for the Reagan era's other legacies — including homelessness and poverty.