Income Inequality in the United States

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Income inequality in the United States has become a pertinent issue due to the economic developments that have transpired over the last three or four decades. Statistics indicate that levels of income inequality in the United States have shifted to favor families that earn significantly higher incomes.

The situation surrounding income inequality levels in the United States is further complicated by the country’s taxation regime. It was not until 1915, when the issue of income inequality began being explored, measured, and documented through verifiable statistics.

Overall statistics indicate that income inequality has only been an issue of major concern in specific periods in the history of the United States (Heathcote, Perri, and Violante 24). Furthermore, it is apparent that among the world’s most developed countries, the United States has one of the worst levels of income inequality.

Several economists, researchers, and policy makers have attempted to investigate the issue of income inequality in relation to past and current statistics. Most of the available statistics indicate that over seventy percent of developed countries have better income distribution levels than that of the United States.

Experts and analysts have often debated about the best methods of measuring levels of income inequality in the United States.

This essay conducts an analysis of income inequality using the views that are expressed through various articles that address this economic phenomenon.

In the first article, Gregory Mankiw presents a critique of the book “Capital in the Twenty-First Century”.

According to Mankiw’s article, the author of “Capital in the Twenty-First Century” argues that the rate of ‘return on investment (r) in the United States is greater than the rate of the country’s average economic growth (g).

Consequently, the article’s author finds that the economic trend where r>g is favorable to capitalists and higher income individuals (Mankiw 3).

On the other hand, when r>g, workers will earn significantly less than capitalists will. Mankiw takes issue with the argument that it is easy to sustain the high levels of income inequality as long as r>g. Wealth is a good indicator of income inequality tendencies in the United States.

Most of the commentaries that touch on income inequality within the United States point out the fact that most of the country’s wealth is held by only a few individuals. I have encountered the issue of income inequality in the political arena where it is almost a divisive issue.

According to one group of individuals, taxation should be the main tool of bridging the income gaps between citizens. Most countries in Europe have mastered the art of using taxes to bridge the gap between high and low income citizens.

However, I am aware of the statistics that indicate that while income inequality levels of most developed countries are high before taxation, they are often corrected by good tax regimes. Another school of thought argues that taxes should not be used to target a few successful individuals in an unfair manner.

It is important to note that most observers have blamed the tax regime of the United States for the increasing levels of income inequality.

Mankiw argues against the premise that estate tax is a sure method of curbing intergenerational income inequality. According to the author, there is no guarantee that families can continue to hold on to inherited wealth even when r>g (Mankiw 4).

Therefore, the rate of economic growth has to be more than seven percentage points for families to be able to maintain their inherited wealth. The article claims that the seven percentage points can easily reverse the effects of the current estate tax rates.

The author of “Capital in the Twenty First Century” claims that the rate of return on investment has to exceed that of economic growth by about one or two percent for dynastic wealth to be maintained (Piketty and Goldhammer 59).

The issue of social inequality also features in the debate about wealth in America. Capitalists are often vilified for allegedly oppressing their workers. Observers have also claimed that capitalists enjoy a ‘good life’ at the expense of their workers.

Mankiw explores this issue in the article “Yes r>g, So What”. According to Mankiw, there are various variables that affect the dynamics of wealth transfer from capitalists to workers. The inequality between workers and capitalists has also been attributed to governments’ unwillingness to correct this economic anomaly.

In my opinion, there is no universal agreement about how the gap between capitalists and workers should be bridged. According to Mankiw’s article, inequality should not be resolved by targeting one group and explicitly benefiting the other.

Consequently, inequality should be addressed by encouraging consumption among both capitalists and workers. In addition, encouraging a progressive tax on consumption has the capacity to equalize the economic welfare of workers without having to wage a policy-war against capitalists (Ray 48).

Mankiw’s article points our attention as readers to the recent “Occupy Wall Street” protests. During these protests, it became clear that most people are unaware of the role that capitalists play in the grand economic scheme.

Most of the protests that have been instituted against income inequality have more to do with social factors than economic considerations. Income inequality also acts as a threat to democratic processes.

Mankiw’s main idea is that income inequality should not be addressed from an economic perspective but also from social and political angles.

In an article that is titled “Is the United States Still a Land of Opportunity?”, authors explore income inequality from an intergenerational perspective. According to the authors of this article, there are inconsistencies when gauging the income levels of children in relation to those of their parents.

Consequently, intergenerational disparities in income levels can be used to explore trends of income-inequality in the United States. The data that is analyzed by authors in this study can also be used to gauge the levels of economic mobility among people of various generations.

The article begins by identifying viable means of measuring intergenerational mobility. According to the authors, the main objective of this study is to explore the distribution of income among parents and their children, a concept that the authors refer to as ‘intergenerational mobility’ (Nathaniel et al. 1).

The authors successfully use two forms of measurement to gauge income inequality between parents and their children. Other than this article, several other researchers have found out that it is possible for children from low and middle-class families to find their way to the upper class society.

This form of intergenerational mobility is known as “upward relative intergenerational mobility” (Nathaniel et al. 5). Studies have also indicated that the levels of this form of upward mobility are lower in the United States than in other first-world countries.

Lack of upward mobility is a leading contributor of income inequality in the United States. Intergenerational mobility as explained by this article reminds me of the ‘Great Gatsby Curve’.

The Great Gatsby Curve was formulated by the chairman of the White House Council of Economic Advisers in collaboration with Miles Corak, a leading authority in economic matters. The Gatsby Curve has valuable data on the likelihood of a person having different economic fortunes than his/her parents.

The Gatsby Curve has data on various countries across the world (Goldin and Katz 39). According to the authors of the article on Intergenerational mobility, statistics indicate that the United States’ trends on intergenerational mobility have remained unchanged over the last few decades (Nathaniel et al. 9).

The mobility of children in relation to the income levels of their parents is greatly affected by levels of income-inequality. Therefore, it is not easy for a child from a humble economic background to navigate through the income inequality levels of the United States.

Nathaniel and other authors use data sets that span over a period of several decades in their article (Nathaniel et al. 12). However, the authors reckon it was difficult for them to find ‘some forms of data’ when they were compiling this article.

It is also difficult to obtain data that is specific to intergenerational mobility because this concept only began becoming a pertinent economic issue a few decades ago. Tax data is an important tool of tracking intergenerational mobility. However, when tax records are unavailable simple wage-levels can be used to compute income inequality. The age of the studied children is another important aspect when collecting data on income inequality. It is common knowledge that the economic prospects of an individual are best measured when the subject is between the ages of thirty to forty years. However, the economic prospects of an individual can be assessed at the college level. Past trends indicate that college attendance is directly related to income inequality.

In another article, Raj Chetty and other authors explore the ‘geography’ of intergenerational mobility in the United States. In this article, the authors focus on how intergenerational income mobility varies from region to region.

In addition, there are substantial differences in the levels of income inequality between parents and their children depending on their areas of residence.

For instance, statistics indicate that there is a high probability that children will earn more or less than their parents if they are residing in California (Kennedy 918). Nevertheless, there are certain trends that feature prominently in regions that have higher levels of upward mobility.

Research indicates that areas that have higher upward mobility tend to have “less residential segregation, less income inequality, better primary schools, greater social capital, and greater family stability” (Chetty et al. 1554).

I have noticed that in this article, the authors do not dwell on causes and effects of income inequality. However, the article focuses on the available statistics in respect to upward mobility and income inequality.

The sentiment that America is a “land of opportunity” implies that income inequality is not an issue of concern in the United States. It is my understanding that the ability to garner economic success in the United States should not depend on an individual’s financial or familial background.

Furthermore, when addressing the issue of income inequality in the United States, it is important to remember that the country is theoretically ‘a collection of societies’. Therefore, some parts of the United States have significantly more opportunities than others.

The article on the geography of intergenerational mobility utilizes federal tax data that was available between 1996 and 2012 (Chetty et al. 1558).

The article measures the economic prospects of the parents when their children are between fifteen and twenty years old. The article then measures the income of the same children when they are approximately thirty years old.

I have come across various policy responses that have sought to reconstruct the image of the United States as a ‘land of opportunities’. Most of these policies have sought to address the increasing levels of income inequality within the United States.

One policy response to income inequality is making sure that children have an adequate level of resources at their disposal. Research indicates that children who have all the necessary educational resources during their upbringing have better economic prospects as adults (Heathcote, Perri, and Violante 24).

Education is an example of a resource that can be used to correct income inequality in the United States. In the United States, education is funded privately or publicly. The public school system in the United States is associated with relatively fewer resources because it depends on funds from state and regional taxes.

For instance, the government was forced to cut back school funding after the recession that hit the country between 2009 and 2012.

On the other hand, private schools have a stream of resources that guarantee smooth learning processes for their students. In my view, economic inequality and lack of upward mobility can be easily attributed to the fact that some children lack adequate educational resources.

Moreover, children who come from affluent families are likely to have adequate educational resources at their disposal. Policy makers have argued that making educational resources available to all individuals would reduce the current levels of income inequality in the United States (Keister and Moller 69).

Furthermore, affordable higher education can significantly reduce levels of income inequality and promote upward mobility. Chetty’s article has touched on how education affects the variables that are used to measure upward mobility.

Current statistics indicate that the United States ranks at number twenty-eight out of thirty-eight developed countries when it comes to the country’s ability to make adequate educational resources available to all children (Goldin and Katz 49).

The levels of a parent’s income as a variable also dictates the type of education that children will receive and this fact promotes or diminishes upward mobility.

In their article, Thomas Piketty and Emanuel Saez conduct a comprehensive study on trends of income inequality in the United States between 1913 and 1998 (Saez and Piketty 12).

The article focuses on economic events that have had significant impacts on income and wage earnings such as the World War II and the Great Depression. In addition, the authors of this article explain how major financial shocks in the history of the United States have impacted income inequality.

According to the article, the working rich have taken the majority of income share from land barons in the course of the last century.

Kuznet has hypothesized that income inequality should follow a definite pattern where it peaks during the height of industrialization and continues to drop as more workers join the production process.

However, this hypothesis only worked until 1970. After 1970, inequality was on the rise again and this anomaly called attention to Kuznet’s theory of economic inequality. Economic experts have observed that the rise of income inequality in the 1970s does not necessarily discredit Kuznet’s inequality hypothesis.

The reversal of income inequality trends during the 1970’s has been explored by a number of economic scholars. In 1970, most stakeholders were not prepared for the high levels of income inequality that had only been witnessed during the 1930s.

Some economists have termed the period after 1970 as the era of “Great Divergence”. Interestingly, the trend that started during the 1970s was sustained during the next thirty years.

The period of ‘Great Divergence’ was only interrupted by other economically significant events such as “the economic recession of 1990, the dot-com bubble of 2001, and the real-estate bust of 2007” (Saez and Piketty 9).

There is a big difference between the income inequality of 1930s and that of 1970s. In 1930s, most of the people who were favored by income inequality obtained their money from capitalistic ventures. However, the top earners of the post 1970s’ period were mainly workers.

A recent trend in income inequality happened in 2011 when financial observers found that the income levels of the middle class had stagnated.

For instance, I am aware of statistics that reveal that the earnings “of households in the top 1 percent of earners grew by 275%, compared to 65% for the next 19 percent, just under 40% for the next 60 percent, and 18% for the bottom fifth of households” (Keister and Moller 70).

This perceived inequality prompted the Occupy Wall Street protests that took place in the United States. Capital gains were found to have been the biggest sources of income for households across the economic divide.

Thomas Piketty has authored a book about the state of capital in the United States. In a presentation about Piketty’s book “Capital in the 21^st Century”, the author presents economic analyses about wealth and income distribution beginning from the eighteenth century.

The author of the book uses data from more than twenty countries to catalog income and wealth issues. The presentation begins by exploring the nature of income and capital in the modern world (Piketty and Goldhammer 4).

Unlike most of the other articles that are addressed in this article, this presentation provides a ‘wholesome’ analysis of income inequality and wealth-related matters. For instance, the author explores how a wealth-based society contributes towards income inequality ratios in the country.

Furthermore, the author hypothesizes that in future wealth might be institutionalized as part of political and social policies. Extreme labor income is cited as one of the sources of modern inequality.

The authors of “Capital in the 21^st Century” acknowledge that labor, as a source of income inequality is a trend that is specific to the American economic landscape (Piketty and Goldhammer 28). Private capital versus public capital is another element of income inequality in the United States.

The United States has relinquished almost all of its public capital. Consequently, it is very hard for the United States government to influence or reverse income inequality. During the height of economic recession that hit the United States between 2007 and 2009, the government had a difficult time reversing its effects.

The government has limited jurisdiction when it comes to private capital. Income inequality in the United States is an important issue because it is a ‘make or break’ matter when considering the sovereignty of the United States.

Furthermore, most people disagree on which economic policies make America ‘the land of opportunity’. The issues of upward mobility and intergenerational wealth are also pertinent to the economic health of the United States.

Works Cited

Chetty, Raj, et al. Where is the land of opportunity? The geography of intergenerational mobility in the United States. No. w19843. National Bureau of Economic Research, 2014. Print.

Goldin, Claudia, and Lawrence F. Katz. “Decreasing (and then increasing) inequality in America: a tale of two half-centuries.” The causes and consequences of increasing inequality 3.1 (2001): 37-82. Print.

Heathcote, Jonathan, Fabrizio Perri, and Giovanni L. Violante. “Unequal we stand: An empirical analysis of economic inequality in the United States, 1967–2006.” Review of Economic dynamics 13.1 (2010): 15-51. Print.

Keister, Lisa A., and Stephanie Moller. “Wealth inequality in the United States.” Annual Review of Sociology 8.2 (2000): 63-81. Print.

Kennedy, Bruce P. “Income distribution, socioeconomic status, and self rated health in the United States: multilevel analysis.” Bmj 317.7163 (2008): 917-921.

Mankiw, Gregory. Yes, r> g. So what?, No. w9796. National Bureau of Economic Research, 2014. Print.

Nathaniel, Hendren, et al. “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility.” NBER Working Papers 98.3 (2014): 70-81. Print.

Piketty, Thomas, and Arthur Goldhammer. Capital in the twenty-first century, New York: Belknap Press, 2014. Print.

Ray, Debraj. “Uneven growth: a framework for research in development economics.” The Journal of Economic Perspectives 24.3 (2010): 45-60. Print.

Saez, Emmanuel and Thomas Piketty. Income Inequality in the United States, 1913-1998 (series updated to 2000 available). No. w8467. National bureau of economic research, 2001. Print.

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Income Inequality in the United States

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