A newcomer to the United States, after reading the newspaper or watching television for a few days, might conclude that every family in America was huddled around their computers, watching their stocks and mutual funds rise and fall. Even the gloomier news reports of recent weeks ("How to Survive the Slump" blared a recent Time magazine cover) take for granted the triumph of a "people's capitalism"--the idea that the rising stock market of the 1990s lifted all ships--and imply that the average American's main concern as the economy lands is waiting out a temporary contraction in his or her technology portfolio.
The reality, as any regular American Prospect reader well knows, is quite otherwise: Most American families have seen their level of well-being stagnate over the last quarter-century--and that's even before the current economic slowdown. Between 1973 and 1998, the real hourly wages of the average American worker fell by 9 percent. (This contrasts with the preceding quarter-century, 1947 to 1973, when real wages grew by 75 percent). Indeed, in 1998 the average inflation-adjusted hourly wage was about the same as in 1967. As workers' wages have stagnated, economic inequality has worsened. In 1974 the richest 5 percent of American families earned 14.8 percent of total U.S. income; by 1998 their share had risen to 20.7 percent.
But if everyone now owns stocks, shouldn't inequality in wage income have been offset by the market gains of the last 10 years? Not at all. In fact, when both wealth and income are taken into account, the growth in inequality becomes worse. While it is true that the share of households that own stock either outright or indirectly through mutual funds, trusts, or various pension accounts has risen from about 24 percent in 1983 to 48 percent in 1998 (see table 1), much of the increase was fueled by the growth in pension accounts such as IRAs, Keogh plans, and 401(k) accounts. Indeed, while direct stock ownership declined somewhat between 1983 and 1989, probably as a result of the 1987 stock market plunge, the share of households with pension accounts nearly doubled, from 11 to 23 percent, thus accounting for the overall increase in stock ownership during that period. Between 1989 and 1998, the direct ownership of stocks grew by only 6 percent, while the share of households with a pension account again doubled, thereby accounting for the bulk of the overall increase in stock ownership.
Despite the overall gains in stock ownership, fewer than half of all U.S. households had any stake in the stock market by 1998--and many of those had only a minor stake. In 1998, while 48 percent of households owned some stock, only 36 percent had total stock holdings worth $5,000 or more and only 32 percent owned stock worth $10,000 or more. Moreover, the top 1 percent of households accounted for 42 percent of the value of all stock owned in the United States; the top 5 percent accounted for about two-thirds; the top 10 percent for more than three-quarters; and the top 20 percent for almost 90 percent (see table 2).
Far from offsetting inequality in wages, stock ownership tracks income class (see table 3). Unsurprisingly, people with the highest salaries tend to own the most stock. Whereas 93 percent of households in the top 1 percent of income recipients (those who earned $250,000 or more) owned stock in 1998, only 52 percent of the middle class (those who earned incomes between $25,000 and $50,000), 29 percent of the lower middle class (incomes between $15,000 and $25,000), and only 11 percent of poor households (incomes under $15,000) reported stock ownership. And 92 percent of the richest 1 percent--versus 27 percent for the middle class, 13 percent for the lower middle class, and 5 percent for the poor--reported large holdings ($10,000 worth or more). Three-quarters of all stocks were owned by households earning $75,000 or more (the top 16 percent of income earners); 88 percent of all stocks were held by the top third of households in terms of income.
Clearly, substantial stock holdings have still not penetrated much beyond the reach of the rich and the upper middle class; the middle class and the poor have not seen sizable benefits from the bull market. "People's capitalism" is a myth.
The inequality generated by the wealth and income gaps is exacerbated by the fact that during the boom of the last eight years, corporate profitability has been rising. In general, when real wages rise at the same rate as overall productivity, the wage and profit shares of income remain fixed over time. For example, during the golden age of American capitalism (1947 to 1973) wages kept pace with productivity: U.S. labor productivity grew by 2.4 percent per year and inflation-adjusted wages by 2.6 percent per year. After that, however, productivity slowed--and wages slowed even more. Since 1979, productivity has recovered somewhat, but wages have failed to keep up. It is this very rise in corporate profitability--which comes at the expense of workers' wages--that has fueled the record boom in the stock market, an expansion whose primary benefits (as noted above) have not gone to low- and middle-income workers. In other words, as the returns to work have atrophied, returns to capital have climbed, shifting ever more power to the rich and contributing to the rising inequality of income in this country.
W hat can be done to help American workers? Here are some remedies that could help alleviate disparities in both income and wealth.
Restore the minimum wage to its 1968 level. Adjusted for inflation, the minimum wage in 1998 was down 32 percent from its peak in 1968. Restoring the minimum wage to its golden-age level (when, I should point out, the unemployment rate was only 3.6 percent) will help increase the earnings of low-wage workers.
Extend the Earned Income Tax Credit (EITC). The EITC provides supplemental pay to low-wage workers in the form of a tax credit on their federal income tax return. An expansion of this credit will further raise the (after-tax) income of poor working families.
Make tax and transfer policies more redistributional. Comparisons between the United States and other advanced industrial countries (including Canada), which face similar labor-market conditions, indicate that tax and capital-transfer policies can be effective in reducing inequality and increasing after-tax income.
Re-empower labor. Cross-national evidence suggests that the greater level of inequality in the United States relative to other advanced economies is attributable to our low level of unionization. A rejuvenated labor movement in the private sector would help reverse the trend toward greater inequality. A first step to rejuvenation would be labor-law reform.
Curtail the Fed. With U.S. labor productivity now reaching 5 percent per year (according to the latest Bureau of Labor Statistics numbers), the Federal Reserve should curtail its exuberance in cracking down on wages whenever "wage inflation" appears.
Tax wealth directly. Almost a dozen European countries--Denmark, Germany, the Netherlands, Sweden, and Switzerland, among others--have a wealth tax in place. A very modest tax that affected only households with more than $500,000 in assets, at marginal tax rates running from 0.05 to 0.30 percent, would have a minimal impact on the tax bills of 90 percent of American families--yet would raise $50 billion in additional revenue. While this is not a large amount (about 3 percent of total federal tax receipts), the additional revenue could fund capital-transfer programs for the poor and middle class.
Promote asset ownership. Finally, we should further develop mechanisms that promote asset ownership [see J. Larry Brown and Larry W. Beeferman, "From New Deal to New Opportunity," on page 24]. Individual development accounts (IDAs), for example, would allow a portion of the money set aside by eligible low-income families to be matched by public funds. (In his 1999 State of the Union address, Bill Clinton proposed a similar program, which he called universal savings accounts.) Such accounts would earn interest, and IDA holders could withdraw funds to pay for schooling or training, to purchase a home, or to start a business. IDAs can be complemented by subsidized home-ownership programs for the poor. And developing asset ownership among middle- and low-income families will mitigate both wealth and income inequality: Helping the needy to build their assets will not only increase their economic security but will also restore their participation in the community and reverse their political disenfranchisement. ?
