The Top 0.1% Vs. Rest of Us Throughout the 20th Century

Following up on yesterday’s post about the Global Top Incomes Database, I thought I’d give an example.  Here’s what I created:

So what are we looking at?  The blue line shows almost a century of the average income of the bottom 90% of American earners (in constant, real 2008 dollars – scale on right side).  This represents the typical American worker and the fate of the working/middle classes.  Basically it shows nine different trends or periods.

  • From 1917 until 1929, there was no improvement at all (actually a dip in the 1920-21 depression).  Despite all the talk about “roaring twenties”, it wasn’t for the average American worker.
  • 1929-1933, incomes really drop precipitously as the nation falls into the Great Depression.
  • 1933-1937, incomes begin to recover based on the government spending programs of the New Deal and correction of the banking/financial crises of 1932-33.  But the progress stumbles in 1938 as Roosevelt and Congress switch course and try to balance the budget before we’re back to full employment (are you listening Obama?).
  • 1938-1943 incomes really grow dramatically as the nation regains full employment and unions gain power.  The driver of the recovery is the near unlimited willingness to spend to arm for World War II and the demand for food and other items by warring allies.
  • 1944-1949, incomes stagnate again, partly as a result of demobilization of the war effort.
  • 1949-1973 brings the Golden Age. Real economic growth in the U.S. is the strongest it’s ever been and thanks to Keynesian government policies, a productivity-sharing social contract between managements and unions, and strong world demand, the workers get their share of it.  This is the period of fastest U.S. growth.
  • 1973-1993 brings twenty years of declining real incomes for most workers.  Part of it is driven by slower growth brought on by two oil price supply shocks.  Part is inflation (although only until the mid-80’s). Part is driven by a major political shift towards conservative free market policies (“Reaganomics”).  And part is driven by a weakening of unions and union membership.  The economy, while it grows, doesn’t grow near as fast as it did in the Golden Age.
  • 1994-2000 shows a slight recovery in incomes during the Clinton administration.
  • 2001 starts another decline and it’s been pretty much downhill ever since.  Note that the graph ends in 2008 (last available data), but other more recent data indicates the time series has continued to decline significantly.

So what can we conclude from the typical worker incomes, the blue line of average incomes for the bottom 90%,?  Well, yes, as some conservatives and libertarians have been pointing out, today’s incomes are historically high – around $32,000 per worker.  And consumption by household is even higher.  But consumption has risen despite incomes stagnating recently. It’s because many, many more households now depend on two workers for incomes.  Yes today’s incomes are dramatically higher compared to 76 years ago – roughly 6 times higher. But all of the increase happened in the first 38 years after 1932.  Today’s incomes per worker are actually lower than they were in 1973 – 38 years ago.

Now let’s consider the red line.  This shows the percentage share of the national income earned received by the top 0.1%, the top one tenth of one percent.  These are the really, really rich.  There are really only three periods here.  The period before the Great Depression.  Observe that it really was a roaring twenties for the really rich.  In the decade of 1920-1929 their share of national income rose from around 3.5% to over 6.5% – all while the average American worker stagnated. The game was rigged.  As the U.S. economy grew in total GDP terms in the 20’s and as productivity soared, the benefits of that improved productivity went to the rich, not to workers.  The rich lost ground in the Great Depression because the stock market crashed and the banking system imploded.

From 1936 until 1979, the share of income taken by the top 0.1% declines rather steadily and significantly.  Why?  A dominant factor is that income tax rates were rather progressive with high rates on the very high top end.  Now this simply means that the share declined – they took a slightly smaller slice of the pie each year.  But the pie was growing very, very fast, so in dollar terms their incomes were still rising too.  Do not take away the idea that the rich suffered income declines during this period.  On contrary, they did well in absolute terms.  They just didn’t do well at the expense of others.

But in 1979 the rich strike back.  Their share of income starts rising steadily until it reaches the same very high levels today that are reminiscent of the late 1920’s.  What happened?  Well the same forces that hurt the working/middle classes during the last 30+ years worked to the rich’s advantage.  But another important shift was changes in income tax policies.  Initially Carter, but then Reagan and Bush all cut tax rates for the top end.  Reagan did even more.  He eliminated several top end brackets.  This resulted in people in the top 0.1% (multi-millionaires) now paying the same rates as people making $250,000 per year.  That didn’t happen in the Golden Age.  Back then there were special brackets for the very, very rich top end.

So what can we conclude overall?  Well, for one thing, we should definitely bury any idea of “trickle-down” tax cuts helping average workers.  When the economy grew the fastest and typical workers did best was when tax rates on the rich were high.  When tax rates on the rich are lower, the economy grows more slowly and average worker incomes stagnate.  We might also conclude that the OccupyWallStreet movement (#OWS) has a point.  The system isn’t fair and it isn’t working for average workers.  This isn’t a call for socialism, it’s a call for the vibrant capitalism we had in the mid-20th century. That Golden Age of the middle of the 20th century is the only time when we really didn’t have “class warfare”.  We had a social contract that called for sharing the gains from improved productivity. But a little over 30 years ago the really rich declared war on the rest.  It’s class warfare and the middle class has been losing. 

We’ve Had Class Warfare Since 1980 – The Workers Lost

Whenever some politician, typically a progressive, begins to talk about redistribution of income,  the more conservative politicians, backed by “serious political pundits” counterattack by claiming “class warfare”.  It’s apparently one of the givens in Washington that any form of redistribution of income, be it by progressive taxes, measures to protect unions, help to the unemployed, or limits on the power of bank executives to pay themselves bonuses from bailout monies, is off-limits.  The problem with this self-censorship of the political debate is that it ignores reality. Class warfare was already launched 30 years ago in the early 1980’s.  The catch is that capital, that is the owners and managers of capital, declared the war and they’ve been winning.


As the graph shows, the share of non-farm income that goes to labor was relatively constant for the 30-some year “golden age” after World War II and until around 1980. It fluctuated significantly with the business cycle, but maintained a long-run relatively constant share. This was consistent with the institutional, cultural, and political economy arrangements of the period. There was essentially a social contract that said labor cooperated with capital to achieve productivity improvements with the understanding that gains would be shared: both workers and owners of capital would benefit. This is basis of the rising real median incomes that I’ve noted elsewhere for the period.

But starting in the 1980’s there was  a shift in American politics.  Initially it was with conservatives and Republicans, but it soon included Democrats. Capital came to be favored. Unions were disfavored. Income taxes were lowered on high incomes while payroll taxes (social security and Medicare) were raised on workers.  The result was a trend where workers found it difficult to keep pace.  In fact, their real incomes didn’t.  If workers were in the lower quintiles, their real incomes actually declined.  Starting in 2000 the trend accelerated.  Workers get less and less of the value of what’s produced.  Corporate profits and financiers get more and more.

Instead of false debates about debt ceilings based on provably false doctrines, I think this is the type of thing we should be debating in politics.  Is this good? I don’t think so. It feeds income inequality.  It’s part of what’s destroying the “American Dream” for hundreds of millions of Americans.

Observations on Wisconsin

I’m noticing that the media is being somewhat slow to pickup on the real story happening in Wisconsin and not spreading to Indiana and Ohio. It’s not about fixing state deficits or finances. It’s about busting unions, pure and simple.  As such, it’s part of an long-term effort that the right wing of American politics has been pursuing since the late 1960’s to increase the share of GDP that goes to profits and elite investors and to reduce the share of GDP/national income that goes to the middle class/working class.

Steven Pearlstein of the Washington Post is starting to get it, though:

The last time any elected leader made such a direct and brazen attack on the legitimacy of the union movement was when Ronald Reagan risked havoc in the skies by firing hundreds of striking air-traffic controllers and preventing them from ever getting their jobs back. This dramatic bit of union-busting became a turning point from which organized labor never really recovered – and, like the Wisconsin imbroglio, skillfully played off resentment of public employees whose pay and benefits exceed that of the average taxpayer.

But rather than playing Reagan to Wisconsin’s truant teachers, Walker overreached, refusing to give up his union-busting even after the unions agreed to his benefit-cutting demands. Now that he has allowed the unions to reframe the issue from one of greedy public servants to one of political revenge, Walker has single-handedly succeeded in bringing more attention, unity and sympathy to the union movement than it has had since . . . well, since Ronald Reagan took on the control tower. A mischievous columnist might even take this opportunity to speculate whether this is the beginning of the revival of labor’s fortunes

Pearlstein also observes how all the conservative talk about “running government like a business” is pure nonsense.  No sane business leader interested in building a long-term successful business would approach workers this way, something I can attest to from my own corporate and consulting experiences:

Back when I was working at Inc. magazine in the mid-1980s, we loved nothing better when approaching a public-sector issue than to ask how the private sector would handle it. Faced with the situation in Wisconsin, we would have called up Tom Peters or Peter Drucker and posed the example of a new chief executive brought in by the shareholders (i.e., the voters) to rescue a company suffering from operating losses (budget deficit) and declining sales (jobs). Invariably, they would have recommended sitting down with employees, explaining the short-and long-term economic challenges and working with them to improve productivity and product quality in a way that benefits both shareholders and employees.

Now compare that with how Wisconsin’s new chief executive handled the situation: Impose an across-the-board pay cut and tell employees neither they nor their representative will ever again have a say in how things will be run or get a pay raise in excess of inflation. A great way to start things off with the staff, don’t you think? Remember that the next time you hear some Republican bellyaching at the Rotary lunch about why government should be run more like a business.

This situation, both the efforts to bust the unions and the protests, which started in Wisconsin but has spread will, I think be a major turning point in U.S. political economy.  It’s too early to tell if which way things turn.  It could spell a determined u-turn back to the early 20th century and worse working conditions and wages share of GDP/GNI, or it could be the beginning of the reversal of the 1970’s-1980 conservative revolution (is that an oxymoron?)  and a return to progressive values.  Too early to tell.