The Great Divergence: America's Growing Inequality Crisis and What We Can Do about It [NOOK Book]

THE GREAT DIVERGENCE

BLOOMSBURY PRESS

Chapter One

In 1915, a rangy, soft-spoken statistician named Willford I. King, age thirty-five, published The Wealth and Income of the People of the United States. The United States was displacing Great Britain as the world's wealthiest industrial nation, but detailed information about how incomes were distributed was not yet readily available; the federal government wouldn't start collecting such data in any systematic way until the late 1930s. Though King is largely forgotten today, his book was recognized in its time as an important landmark. The Survey, a leading journal affiliated with the Progressive movement, called it "the best and the most comprehensive attempt yet made to state wealth and income conditions in the United States." Two de cades later, an analysis prepared by a Commerce Department official for the nonprofit National Bureau of Economic Research, then (as now) a leader in the study of income distribution (though better known today as the official arbiter of when recessions begin and end), would identify King's book as "the pioneer work" in the field.

"If there has been an increase in the riches of the nation as a whole," King asked in his book's first chapter, "has the increase been distributed to all classes of the population, or have the benefits been monopolized by a favored few?" Mostly the latter, it turned out. Incomes had risen across the board, but King calculated that as of 1910 the richest 1 percent possessed about 15 percent of the nation's income. A more authoritative contemporary calculation puts the figure slightly higher, at about 18 percent. This was the era during which public alarm at the accumulated riches of America's wealthiest families—the Rockefellers, the Vanderbilts, the Carnegies—prompted ratification, in 1913, of the Sixteenth Amendment to the Constitution, which created the modern income tax. The socialist movement was approaching its historic peak, a wave of anarchist bombings was about to terrorize the nation's industrialists, and President Woodrow Wilson's attorney general, A. Mitchell Palmer, would soon stage (after an anarchist bombed his own home) brutal raids on radicals of every stripe. In American history, there has never been a time when class warfare seemed more imminent.

That was when the richest 1 percent accounted for 18 percent of the nation's income. By 2007, their share would balloon to 24 percent, an increase of roughly a third.

Perhaps it strikes you as odd that the "pioneer work" measuring income distribution in the United States didn't appear until 139 years after Thomas Jefferson wrote into America's founding document that "all men are created equal." But it wasn't until the Progressive era that rigorous analysis of meticulously assembled statistical data came to dominate the study of economics, government, and sociology, all newly rechristened "social sciences." Nobody embraced the new zest for statistical research more wholeheartedly than King. "If you are curious to ascertain how many days of labor it took to build the pyramids," King wrote in 1917, "how many germs you consumed at this morning's breakfast, or how many times per page Shakespeare used the word 'and,' rest assured that the data are awaiting your examination."

Another reason why income distribution received little attention prior to the Progressive era was that egalitarians outside the labor movement seldom gave much thought to incomes as a mea sure of equality. In an agrarian economy, a man's dignity and economic worth weren't determined by his income; they were determined by whether he was free and able to own property. Property allowed families to live by the fruits of their labors; lack of property reduced families to servitude. In the early years of the republic a man couldn't even vote if he didn't own property.

Michael J. Thompson, an intellectual historian of inequality in America, identifies Langton Byllesby's Observations on the Sources and Effects of Unequal Wealth, published in 1826, as "the first sustained analysis of economic inequality in America." But Byllesby didn't write about income. He wrote about property, the just distribution of which was, in Byllesby's view, being corrupted in the cities by the first stirrings of industrialism. Farmers resented bankers because they substituted an intangible and, they believed, illegitimate form of wealth (capital) for a tangible one (land). By the mid-nineteenth century, the American industrial revolution was well under way, creating unprecedented levels of income inequality (and simultaneously, we'll learn in the next chapter, extraordinary opportunities for upward mobility). But reformers and even radicals, Thompson argues, continued to frame the issue as one of unequal distribution of property. Their dissent was against industrialization itself. As late as 1907, President Theodore Roosevelt denounced not "malefactors of great income" but "malefactors of great wealth."

Only in the Progressive era were reformers finally ready to make peace with industrial production as a permanent reality. Urban workers didn't feed their families with crops grown on plots of land. They fed them by buying food. "Income is the best single criterion of economic welfare," King wrote in The Wealth and Income of the People of the United States. In 1915 this still required explanation.

Wealth is a better safeguard against disaster. It sometimes is a more effective source of power. But, in every day experience, no other quest is carried on so assiduously as that for the maximum income. Income will obtain the necessities, comforts, and luxuries of life. It will, if saved, lead to the added advantages of wealth.

King's book grew out of research he performed as a graduate student under the supervision of Richard T. Ely, a nationally prominent economist. Ely wasn't just King's academic mentor; he was the reason King had become an economist. As an undergraduate at the University of Nebraska, King would later recall in an autobiographical sketch, he found economics "mildly interesting, but by no means thrilling." He took only a single class in the subject. But after graduating, King taught high school science in Iowa and was asked to teach a class in economics. Boning up at the public library, King discovered Ely's books and was bowled over by "the simplicity of presentation and the clarity of the style." King decided that economics was his own true calling and enrolled in the graduate program at the University of Wisconsin, where Ely chaired the economics department.

Ely was an influential figure in the Progressive movement. (Among his admirers were Roosevelt and Wisconsin governor—later senator—Robert La Follette.) Ely was a founder of the American Economic Association and one of the originators of "the Wisconsin Idea," which called on the university to contribute its expertise wherever possible to improve governance at the state and federal levels. It was Ely's view, King recalled in his informal précis of his life, that "if the University was to serve the State, its actions must be based, not upon emotions, but upon knowledge. It was this program of action, based upon research, that made Wisconsin famous as the leader among the progressive states of the union."

Ely favored a larger role for government in the regulation of business. But although sometimes identified as a socialist, Ely opposed socialism, and so did his protégé King. Redistributing income to the poor, King wrote in The Wealth and Income of the People of the United States, "would merely mean more rapid multiplication of the lowest and least desirable classes," who remained, "from the reproductive standpoint, on the low plane of their four-footed ancestors." Also like Ely, King was a Malthusian who believed in population control. Income inequality in the United States could be addressed, King wrote, by limiting immigration (King deplored "low-standard alien invaders") and by discouraging excessive breeding among the poor ("eugenists are just beginning to impress upon us the absurd folly of breeding great troops of paupers, defectives and criminals to be a burden upon organized society").

King's casual embrace of nativism and eugenics, plainly abhorrent today, put him well within the mainstream of Progressive thought at the time. The Progressives resented the support that immigrants gave to urban political machines and worried that they were taking low-wage jobs away from native-born Americans. Less loftily, they convinced themselves that southern and eastern Europe an stock was genetically inferior to that of northern Europe. The Progressive movement produced numerous pseudoscientific studies "proving" the undesirability of these darker-skinned Europeans as U.S. citizens, and with a few exceptions (the settlement-house leader Jane Addams was one) they sought to keep them out. In 1917 they would successfully push through Congress an immigration literacy test, passed over President Woodrow Wilson's veto. When that failed to do the job, they would, during the 1920s, get Congress to enact two successive bills imposing strict quotas on southern and eastern Europeans that persisted into the 1960s. One of the Progressives' leading lights on this issue was the sociologist Edward A. Ross, who coined the term "race suicide" to describe how undesirable stock would outbreed and crowd out the superior Anglo-Saxon race. Ross, too, taught at the University of Wisconsin.

Although King shared the Progressives' crude prejudices, he was too careful a researcher to pretend that the inflow of immigrants or the fecundity of the poor played much role in skewing income distribution.

The greatest force in the last three de cades making for income concentration has been the successful organization of monster corporations. The promoters and manipulators of these concerns have received, as their share of the spoils, permanent income claims, in the shape of securities, large enough to make Croesus appear like a pauper.

King's only solace for readers (and himself) was that incomes in the United States were more equal than in Prussia, France, and the United Kingdom. A century later, such comfort is no longer available. Today, incomes in the United States are more unequal than in Germany, France, and the United Kingdom.

Two years after publishing his book, King left Wisconsin for Washington, D.C., to become a government statistician, but in 1920 he left that job to continue his research into income distribution in New York City at the newly created National Bureau of Economic Research. The NBER was a perfect embodiment of the Progressive era's conviction that rational expertise was the best tool to address social problems. It owed its existence to a friendly dispute about income distribution in the United States that arose in 1916 between a conservative named Malcolm Rorty, who worked as a statistician for the American Telegraph and Telephone Company, and a liberal economist named Nahum Stone, who worked as a labor arbitrator. Stone had written about income distribution for a socialist monthly, and Rorty, who disagreed with Stone's conclusions but admired the quality of his scholarship, invited him to lunch. "Would it not be a great step forward," Rorty proposed, "if we had an organization that devoted itself to fact finding on controversial economic subjects of great public interest?" Funds were secured from the Carnegie Corporation and the Commonwealth Fund, and an Episcopal seminary set aside office space in lower Manhattan.

The NBER's first project, published in 1921, was a two-volume survey of the distribution of income in the United States. King and three other staff economists, using significantly better data than had been available to King six years earlier, concluded that in 1918 the richest 1 percent received 14 percent of the national income—one percentage point less than King's earlier calculation for 1910. A contemporary recalculation puts the figure at about 16 percent, down from 18 percent in 1913. The Great War had made incomes somewhat more equal, as wars tend to do. In a follow-up analysis, published in 1930, an NBER report listing King as sole author carried the analysis forward to 1926. Here King found that the richest 1 percent, after seeing its share of the national income decline during the war and in the years immediately following, had subsequently rebounded and in 1926 received 13 percent of the national income. King underestimated that rebound, remembered by history as the Roaring Twenties. We now know that the richest 1 percent's share of the national income in 1926 was about 20 percent. By 1928 it was about 24 percent.

In his 1931 book Only Yesterday, the popular historian Frederick Lewis Allen described vividly the country's mood at the height of the 1920s bull market.

The American could spin wonderful dreams—of a romantic day when he would sell his Westinghouse common at a fabulous price and live in a great house and have a fleet of shining cars and loll at ease on the sands of Palm Beach. And when he looked toward the future of his country, he could envision an America set free—not from graft, nor from crime, nor from war, nor from control by Wall Street, nor from irreligion, nor from lust, for the utopias of an earlier day left him for the most part skeptical or indifferent; he envisioned an America set free from poverty and toil.

To embrace the fantasy of a poverty-free America, one had to be unaware that during the 1920s the bottom 95 percent saw its proportion of the nation's income drop from 72 percent to 64 percent. The bigger problem, of course, was that economic catastrophe loomed for just about everyone. Why did people believe otherwise? Partly because financial experts told them to. In August 1929 the investor and Democratic National Committee chairman John J. Raskob published, in the Ladies' Home Journal, an article titled "Everybody Ought to be Rich." In mid-October Yale's Irving Fisher—the most eminent economist of the era—pronounced, "Stock prices have reached what looks like a permanently high plateau." Mere days later, the stock market crashed and the Great Depression began.

By this time King had left the NBER for a professorship in economics at New York University. Although he was initially sympathetic to President Franklin Roosevelt, King tacked steadily rightward in his politics as FDR expanded Washington's role in the economy. One reason may be that King was in demand to provide research to businesses and business-oriented groups like the National Association of Manufacturers. "If the W.P.A. and the labor [unions] remain strong enough to keep control of the Government," King confided in private correspondence in 1939, "I suspect that we may just as well reconcile ourselves to the advent of a fascist dictatorship in due course of time." King railed against top income tax rates (too high); the capital gains tax and corporate income tax (shouldn't exist); and the minimum wage ("dangerous"). Upon retiring from NYU in 1945, King became chairman of the Committee for Constitutional Government, an anti–New Deal organization originally founded to oppose Roosevelt's 1937 court-packing scheme, which outraged King.

Well before he died in 1962 at age eighty-two, King saw his legacy eclipsed by the work of a Russian émigré who in 1927 had succeeded King at the NBER and in 1971 would win the Nobel Prize in economics. His name was Simon Kuznets, and among his many lasting contributions to economics was the creation of the analytic foundation for the study of income in e quality. Kuznets had (and continues to have) legions of admirers in the economics profession. King was not one of them. In a 1940 letter to one of the NBER's directors, King quarreled with what he termed Kuznets's "assumption ... that environment and luck are the principal determinants of a persons [sic] success or failure in life." He concluded, "It is a shame that the Bureau is putting out such twaddle." The outraged tone carried more than a whiff of professional jealousy. Kuznets was already sufficiently eminent that the Commerce Department had invited him to create the government's official yardsticks for national income, a discipline that King had virtually invented. Kuznets ended up formulating, among other indicators, the most widely used measurement of all—what we call today "gross domestic product."

(Continues...)

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Excerpted from THE GREAT DIVERGENCE by TIMOTHY NOAH Copyright © 2012 by Timothy Noah. Excerpted by permission of BLOOMSBURY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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