Solving Wealth Inequality: Is Mandatory Saving the Answer?

It should come as no surprise when members of the business elite argue in favor of their own economic interests, narrow as these might be. More frustrating are the comments of seemingly well-meaning liberals who claim to want to address the issue of economic inequality, but haven’t taken the time to understand it, and end up making real solutions sound like impossible, utopian fantasies.

Derek Thompson, senior business editor for The Atlantic, admits that wealth inequality in the U.S. has grown tremendously and refers to it as a problem. Yet, he assumes that wealth inequality is due mainly to differences in the ownership of property and other valuable assets: rich people were able to acquire assets, those assets appreciated in value, and the rich grew richer.

It is true that since the middle of the 20th century, the U.S. personal saving rate has declined:

saving

What Thompson misses, however, is that workers began saving less in the 1980s and 1990s because their incomes stagnated, not vice-versa. In 1980, the average corporate CEO earned 42 times the pay of the average worker. By 2011, the average corporate CEO was earning 380 times what the average worker made. That massive increase in income didn’t come from the acquisition of assets. This becomes clearer when you examine the trends in income distribution since the 1950s:

historical income

This shows exactly the opposite of what Thompson would predict. At the same time that the personal saving rate was increasing, the richest households saw their shares of national income decline. As the saving rate fell, those rich households grew richer.

What Thompson fails to account for in his analysis of economic inequality is an issue I have discussed before: the widening gap between wages and productivity. Since the early 1980s, business owners have successfully held down wage growth, but continued to drive up worker productivity. Those uncompensated productivity gains were the source of the massive expansion in wealth held by business owners and their favored elite executives and managers.

Thompson dismisses the idea of capping compensation for the business elite, suggesting that if faced with the prospect of a reduced salary, executives would decamp for countries with markets unfettered by such restrictions on income. Instead, his proposed solution to increasing economic inequality is to regulate the spending of the poor and the middle class:

“If we found ways to make poor and middle class families save more, they could invest that money in assets that got more valuable over time, and this would increase their wealth.”

Here, again, is the cumulative difference between wage and productivity increases between 1980 and 2010:

 prodwage

I think it would be fair to ask why workers should be “made” to save more of their wages when, over the past three decades, sixty-five percent of their productivity gains have gone into the pockets of business owners. Beyond the question of justice or fairness in such a proposal, what about its practical effect? If wages continue to be held down while productivity expands, “making” workers save more money might give them more future assets, but it won’t guarantee any reduction in the relative inequality of employers and employees.

So, what can we do to reduce economic inequality? If it had never been done before, we might reasonably conclude that a solution was beyond our means. If it had never been done in the U.S. before, we might reasonably conclude that a solution was outside the range of our social or political culture. But, as the income chart above shows, we have reduced income inequality in the U.S. By the 1970s, the U.S. became a more economically equal society than it had been before. How did we do it?

  1. Progressive taxation and the use of tax revenue to fund job creation, public education, and public housing
  2. Strengthening of workers’ bargaining power through collective bargaining

Reducing economic inequality is neither beyond our comprehension, nor beyond our means. It is, for the moment, beyond our will.

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