Income Inequality Is Rising But It Can Be Stopped Says Author

The perpetual discussion about the ongoing battle between rich and poor, between the one percent and the ninety-nine percent, has generated a great deal of heat, but not much light. With The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It, New Republic columnist Timothy Noah brings a well-reasoned array of high-wattage spotlights.

Noah, who joined Henry Blodget and me this morning to discuss his book, traces the history of income inequality and synthesized much of the academic research on the topic into a highly readable extended essay. And the news isn't great. "There are various ways to measure income distribution, and by all of them the United States ranks at or near the bottom in terms of equality."

The data — and our personal experiences — tend to tell a widely accepted story. Between 1950 and 1980, a period economist call "the Great Compression," income inequality tended to decline. The rising tide of American economic growth lifted all boats, and people at the bottom and middle runs of the income ladders enjoyed rising incomes and standards of living. But starting in about 1980, the period of "The Great Divergence," things began to change.

Noah runs through the various explanations that pundits, economists and polemicists have put forward to account for the fact that the very rich have been getting richer while the poor, middle-class, and upper-middle-class struggle. He rules out some of the usual suspects. "The Great Divergence did not result from societal prejudice against women or blacks," he writes. The influx of low-skilled immigrants has played a role in undermining wages and benefits at the bottom of the income scale. But, as Noah notes, while immigration "has helped create income inequality during the past three decades, it isn't the star of the show."

Education helps explain a chunk of rising inequality — the U.S. educational system simply hasn't produced enough people with the skills required for high-paying jobs, which means competition for highly educated workers has tended to push their wages up more rapidly. Offshoring and trade with China also plays an important role. And while the U.S. tax code is still relatively progressive, it has become less progressive over time. In other words, the very rich have been able to alter the system so that they pay a smaller share of their income in taxes. And don't forget the declining power of labor unions.

This all makes intuitive sense. And yet even having a firm grasp on the socio-politico-economic developments of the past two generations doesn't fully prepare us for the stunning rise in inequality in recent years. For it's not simply a matter of the top 10 percent vs. the bottom 90 percent, or even the top one percent vs. the 99 percent. Noah notes that during the Great Divergence, the top five percent boosted their share of national income from 23 percent to 37 percent — up about 61 percent. But the top one percent saw their share of national income more than double, from 10 percent to 21 percent. The top .1 percent (people making more than $1.7 million) saw their share of national income triple, from 3 percent to 10 percent, while the top .01 percent (those making $9.1 million or more), saw their share of national income quadruple, from 1.4 percent to five percent. Or as he puts it, "the richer you are, the faster you expand the slice of your country's income."

Obviously, Wall Street, and the insane wealth that it manages to shower on its denizens, plays a role. But it's clear that turbo-charged finance needs favorable policy and globalization in order to supersize itself. In other words, as Noah argues, rising inequality doesn't merely stem from one or two isolated causes. Rather, it's a series of factors interacting with one another.

While many defenders of the status quo argue that income inequality is inevitable given the structure of today's markets and economy, Noah believes otherwise. There's plenty that can be done to give the merely rich, the middle-class, and the poor a better chance at taking home a piece of the economic pie. In a mixture of plans that should appeal to (and alienate) those on the left, right, and center, He echoes Warren Buffett's calls for higher taxes on the very wealthy, calls for the importation of more skilled labor, pushes for universal preschool, and argues that we should enact price controls to counteract the runaway cost of higher education. Above all, he argues, we should do something. "The worst thing we could do to the Great Divergence is get used to it."

Daniel Gross is economics editor at Yahoo! Finance

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