How Do We End the Inequality Feedback Loop?

Michael Stephens | April 7, 2015

“As Hyman Minsky argued, there are many varieties of capitalism, some more stable than others—and, we can add, some more equitable than others.” — Pavlina Tcherneva

Pavlina Tcherneva has revisited her (in)famous inequality chart, which showed an ever-rising majority of the income growth during post-1970s economic expansions being captured by the wealthy (specifically the top 10 percent of income earners). In a recently released policy note, “When a Rising Tide Sinks Most Boats: Trends in US Income Inequality,” she has updated the numbers through 2013 and broken down the top decile further (top 1 percent and 0.01 percent), compared the results of including or excluding capital gains, and looked at what happens to the distribution of income growth when we expand our scope to the entire business cycle (Tcherneva looks at NBER-dated GDP cycles as well as “income cycles” based on real income data from Piketty and Saez).

Here are some of the results:

  • The capital gains discussion yields a somewhat counterintuitive result: when you exclude capital gains, the distribution of income growth between the top 1 percent and bottom 99 percent appears more unequal. Tcherneva explains that this is because even though the bottom 99 percent have barely any capital gains income to speak of (2 percent of their income), their shrinking wage incomes meant that, from 2009-13, these meager capital gains were making the difference between declining (excl. cap gains) and merely stagnating (incl. cap gains) incomes for the bottom 99 percent.
  • When we look at entire economic cycles (peak-to-peak GDP or peak-to-peak income) rather than just the expansion periods, the picture doesn’t look any better. In fact, it’s worse. As Tcherneva notes, although the wealthy tend to lose disproportionately more of their income very early on during downturns, they recover faster and stronger than the bottom 90 percent: “Since the ’70s, when we look at the period beginning only one year after a downturn [and ending at the subsequent peak of the income cycle], the cycle delivers between 78 percent and 107 percent of the income growth to the wealthiest 10 percent of families.” In other words, she writes, “the way we grow recovers the incomes of the top 10 percent first.”
  • She also includes the chart below, which, though not quite as striking at first glance, becomes even more galling as you let it sink in. The chart shows the shares of income growth captured by the bottom 99.99 percent and the top 0.01 percent. By contrast with the other charts (90 percent vs. 10 percent and 99 percent vs. 1 percent), the blue bar is still bigger than the red, but keep in mind we’re talking about a tiny fraction of a fraction of the population in that red bar — around 16,000 families — and as you can see, they gobbled up practically one-third of all the income growth in the last full expansion period (2001-07), with the same worrying trend suggesting itself.

Tcherneva_Levy Institute_When a Rising Tide Sinks Most Boats_Fig3

Tcherneva also comments on the need to reorient our broader policy approach (such that it exists) to combating inequality. One of the points she makes is that we give up too much terrain when we focus disproportionately on raising top marginal income tax rates.

Rates on top earners were certainly much higher during the “Golden Age” of US capitalism, back when the majority of (pre-tax, pre-transfer) income growth went to the majority of people, but the more significant policy shift, Tcherneva argues, is not found in the tax code:

In the immediate postwar era, when government prioritized pro-employment and pro-wage policies, growth brought shared prosperity. Wages were rising in lockstep with productivity, public investment and public works were still a standard government response to downturns, the financial sector took only 7–15 percent of total corporate profits (compared to 30 percent today, after peaking at over 40 percent in the early 2000s), and long-term unemployment was a small share of total unemployment. The focus on pro-employment and pro-wage policies slowly weakened, but after the ‘70s the shift was decisive—away from labor markets and toward top marginal tax rates and financial markets.


Returning to a more equitable variety of capitalism requires far more than just rolling back regressive tax cuts; it requires resuscitating and modernizing those labor-market focused policies left behind by the shift to a trickle-down, financial-sector-driven policy regime.

Tcherneva places part of the blame for post-1970s inequality trends on this shift in the policy approach toward stimulating economic growth. Returning to a policy (and growth) model focused on tight full employment and decent wages, she argues—including creating mechanisms to tie productivity gains to wage increases, addressing the gender wage gap, and providing a robust employment safety net—would help lead to improvements in the pre-tax, pre-transfer inequality that’s on display in her charts by raising incomes at the bottom and middle of the income scale faster than incomes at the top.

Given that one of the more prominent economic policy discussions in this country these days hinges on the question of whether unemployment is (or will soon be) too low (such that, so the theory goes, we may need to throw more people out of work by raising interest rates), we’re likely quite a ways away from placing tight full employment back at the center of the debate.

And when the top 10 and top 1 percent (and now, increasingly, the top 0.01 percent) are securing a greater and greater share of the income gains from a growing economy, the need for tight full employment and rising wages at the bottom becomes both more pressing and ever-more difficult to (re)insert into the policy discussion. Here’s Robert Reich, focusing on one angle of the problem:

In the 2012 election cycle (the last for which we have good data) donations from the top .01 accounted for over 40 percent of all campaign contributions, according to a study by Professors Adam Bonica, Nolan McCarty, Keith Poole, and Howard Rosenthal.

This is a huge increase from 1980, when the top .01 accounted for ten percent of total campaign contributions.

One might note the similarity of this trend in campaign contributions to Tcherneva’s chart of the top 0.01’s share of income growth.


One Response to “How Do We End the Inequality Feedback Loop?”

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  1. Comment by David Chester — June 8, 2015 at 11:30 am   Reply

    There are 2 things that should be done to make our national economy more stable, that is to reduce the poverty gap and stop the rise and fall of businesses cycles. Firstly we need to better understand what macroeconomics is about and to greatly improve in the ways it is being taught. The answer to this may be seen in a new book that I have just written and seen published, which look more broadly at the big picture, so as to better assess the way it works. (The book is titled: Consequential Macroeconomics” and serious students and their teachers may obtain a reviewer’s e-copy by writing to me at
    Secondly we need to put in place a system of taxation which avoids the unfair advantage that wealthy land owners create when they speculate in the value of land and hold it out of use. Both of these actions tend to make living more costly and to place a heavier burden of the drain of a proportion of their incomes to the national purse. By taxing land values instead of production-related earnings, purchases and capital gains, there will be a greater equality of opportunity because entrepreneurs will find it easier to begin their businesses. This is due to more useful sites becoming available and for their competition for use becoming reduced. This means less rent per site and greater opportunities, lowers production costs, cheaper goods and more employment.

    The effect of land value taxation instead of taxing most other things is to stop the rising prices of sites from dominating the progress of the economy so that it will stabilize the macro-economy in the two ways mentioned above.

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