How Can We Address Income Inequality?

I know the gap is widening between the rich and the poor. But on the other hand, the poor are wealthier than they’ve ever been. Is the wealth gap an inevitable consequence of rising national wealth? Should it be addressed? If so, how? If not, why not?

In the past year, America’s top earners and her bottom earners split apart. Some worked from home, saved money on postponed activities and vacations, and watched their retirement portfolio jump up. Others lost jobs, or had to quit to stay home with kids who were e-learning, and watched their savings dwindle.

This isn’t a brand-new problem––just an accelerated version of what we’ve been seeing over the last few decades. So, how can we think about it?

When it comes to inequality, economists consider both the distribution of income and the distribution of wealth. These measures are not the same: income is how much people earn each year, whereas wealth is the net value of everything owned right now. Together, they provide a picture of how easily people can purchase what they need, or what they want. In other words, what resources will people have access to now and in the future?

There are three relevant questions.

1. Is a wealth gap the result of rising overall wealth?

Income inequality has been increasing for several decades. The incomes of rich Americans, especially the richest 10 percent and 1 percent, are going up at much faster rate than the incomes of poor Americans. They’re also going up faster than the growth of the economy. Controlling for inflation, the incomes in the bottom half of the income distribution have barely increased at all. The poor––at least in America––are not much better off than they were decades ago.

The poor––at least in America––are not much better off than they were decades ago.

Widening income inequality is not an inevitable consequence of growth. In the decades following World War II, the economy grew at a rapid pace—but income inequality did not increase. Instead, incomes rose for almost all Americans across the board—“a rising tide lifted all boats,” and the growth benefited everyone. In economic terms, everyone’s productivity rose together, and therefore their incomes rose together as well.

Things changed in the 1970s. As the U.S. economy grew, gains went primarily to top earners. In the 1970s, the top 1 percent earned 10 percent of income; today it is closer to 20 percent. There are lots of forces causing this change, and economists don’t agree on the relative importance of them all. The increased significance of computers and information technology (IT) seems to have changed the nature of productivity growth in a “skill-biased” manner: if your job requires “skill,” then better technology makes you more productive. Meanwhile, low-skill workers don’t see improvements.

Globalization has increased earnings for high earners, who can take advantage of access to new markets, whereas low-skilled workers have to compete with “cheap labor” abroad. There is also evidence that decreases in tax rates may have contributed to widening income gaps.

So while globally you are right––the poverty rate has been cut in half since 2000––in America the poorest people have actually gotten poorer. In 1983, the poorest 10 percent of American households owned $724 in wealth (in 2016 dollars), but in 2016 the 10th percentile of American households was $950 in debt.

Meanwhile wealth has become much more concentrated. In 1984, the top 0.1 percent owned 9 percent of total wealth. Today they own over 20 percent.

2. Should we address inequality?

There are good reasons we should address inequality. Widening income inequality decreases social mobility: when the gap between the rich and poor is large, the children of the poor are more likely to remain poor. By one measure, it is twice as easy for poor Canadians to end up rich than it is for poor Americans.

There is also evidence that widening gaps between rich and poor undermine political stability. History abounds with examples.

Widening income inequality decreases social mobility: when the gap between the rich and poor is large, the children of the poor are more likely to remain poor. By one measure, it is twice as easy for poor Canadians to end up rich than it is for poor Americans.

Most importantly, we care about human beings. As Brian Fikkert explains well, poverty is not just lack of resources, but also the shame and feelings of inadequacy that come with it. One study found that those who earn less than $34,000 a year were 50 percent more likely to commit suicide. Mother Teresa said the poverty in the South Bronx was worse than in Calcutta, since such tremendous wealth was just across the river in Manhattan.

3. What should be done?

There are very good reasons to address inequality, but economists do not have simple solutions. Combinations of taxation, job training, more equal education, financial support for low-income families, and expanded access to insurance and health care would help. Unexpected and uninsured health emergencies are among the greatest causes of bankruptcy.

Recognizing how unequal our society has become is crucial for working toward good solutions. People consistently underestimate how unequal the distributions of income and wealth are in America. The myth of the American Dream persists even though the data rejects it. In 1940, 90 percent of children went on to earn more than their parents. Today, only half do.

Recognizing how unequal our society has become is crucial for working toward good solutions.

Demonizing the rich will not do much good, nor will blaming the poor for their situations. Neither is at fault for the rise of globalization and skill-biased technical change since the 1970s. Nor should we villify globalization. While it contributes to inequality, it also does tremendous good, particularly for the global poor.

Instead, one thing the church can do is strengthen the country’s social fabric. Economic mobility is greater in communities with strong social ties, in which people have relationships across socioeconomic states.

Churches that invest social capital with the underresourced—and that means real relationships, not charity—can provide the poor with access to the types of opportunities that enable them to get better jobs and build wealth.