On March 13th, I spoke on a panel at MIT with David Autor, Peter Diamond and Frank Levy (all from MIT) on inequality in the U.S.
The two hour discussion on inequality went over a broad range of issues: the alarming rise in inequality, the nature of the ‘religion of meritocracy’ that underpins the notion of the American dream, the role of childhood and early education in reducing inequality and the implications of inequality for distorting the way political decisions are made.
The facts about inequality are better known, due to the rise of the occupy movement as well as more careful work documenting the rise of top-income inequality. In 1980, the top 1 percent of U.S. households earned about 10 percent of the nation’s income; today that top percentile receives about 25 percent of income. The top 10 percent of households accounted for a bit more than 30 percent of income from World War II until about 1980, but now receives 50 percent of all income.
While there are many candidates to explain growing inequality—including skill biased technical change, globalization, the decline in unionization and the like, there is little understanding of the dynamics underlying the growth of the top 10 percent of households, for whom incomes have started to grow most rapidly since 1980. In my talk I focused mostly on the discussion of factor ownership underlying this distinction. For the top households, 70 percent of income stems from returns on capital — the assets they already own — whereas for all households, only 20 percent of income comes from capital, he noted. . Examining the returns to the activity of labor (an important and primary source of income for the vast majority of the population) versus returns to ownership (a more important source of income for the wealthy) provides another lens with which to examine how the benefits of economic growth and the losses from stagnation have been distributed. It is almost certain that some part of the rise in the top 1% can be simply explained by changing returns to factors and as such, it deserves to be considered in the mix of widely known and debated causes.
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