Emmanuel Saez of the University of California at Berkeley is the go-to guy for data on income inequality, and a guru for the Occupy Wall Street movement. His latest parsing of the recently released 2010 data shows that the top one percent of households is once again riding high. That small group took home 93 percent of all of society’s income gains in 2010, the first full year of the so-called economic recovery.
His explanation is simple. Rising corporate profits led to more dividends and more capital gains, while wage and salary income grew modestly. Though the “average” family saw income rise by 2.3 percent in 2010, the top 1 percent of families saw their income grow by 11.6 percent while the bottom 99 percent saw their incomes grow by only 0.2 percent, he noted in his latest paper, “Striking it Richer: The Evolution of Top Incomes in the United States.”
“Such an uneven recovery can help explain the recent public demonstrations against inequality,” he wrote. “It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.”
Since a larger share of national income today is derived from passive activity (dividends, interest and capital gains) than ever before in American history, returns from passive activity have become a big determinant of whether income inequality rises or falls. Capital gains, which disproportionately go to the well-off, fell to less than one-third of its pre-crash levels between 2007 and 2009, and the top ten percent’s share of total national income fell right along with it – from 49.7 percent to 46.5 percent.
In other words, the Great Recession reduced income inequality. Now the market’s rebounding, so is income inequality.
Only policy changes can change the dynamic, Saez claims. “Falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back,” he wrote. “Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration,” he noted.
The professor is rewriting history a bit. Passive income from dividends and capital gains were a much smaller share of national income during the Depression and the post-war boom years. And it wasn’t just tax and regulatory policies that changed income distribution in that era.
Just as important was the fact that the workforce became nearly one-third unionized during the Depression, a tumultuous era marked by sit-down strikes, popular support for unionization drives and mass demonstrations by the unemployed. From the 1940s through 1960s with the economy booming, unions became an institutional force for a fairer distribution of income, often won after long and bitter strikes. They largely succeeded in their quest.
Today, unions have largely disappeared from the private sector, and so has a fairer distribution of income.