The Great Divergence

Timothy Noah “The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It,” Bloomsbury Press, 2012, 195 pp.

The Great Divergence describes the difference between how people lived during the fifty years preceding 1979 and how they lived during the thirty years after 1979.  It also describes Americans previous belief that they are exceptional—that they believed they lived in a society in which each man or woman is able to advance as far as their abilities enable them, regardless of the circumstances of birth.  And, before 1979 this was mostly true.  Ironically, it is now more true of all other developed countries other than America. This book is focused on the disappearing American middle class.  At my current age, I lived through both the before and after periods of the book's focus.

Karl Marx in the 19th century predicted that income inequality, made much worse by the Industrial Revolution, would continue to widen indefinitely and this ever greater disparity would ultimately undermine capitalism. Marx turned out to be wrong about income disparity continuing in his time; however, he is most likely correct if present-day income disparity continues today at ever-increasing levels. Income inequality had halted by the time of World War I and incomes and wealth inequality even began to lessen in America after the 1920s. The rich continued to live far better than the poor, but over the next 50 years, the gap between living-standards narrowed substantially.  Then around 1970, this reversed and inequality has been growing for the past 30 years in industrial countries, most prominently in the U.S.

The principal influences of inequality that the author examines include the failure of America’s schools to keep pace with the step-up in skills that advancing technology demands from our labor force; America’s skewed immigration policy, which inadvertently brings in more unskilled than skilled immigrants and thereby subjects already lower-income workers to greater competition for jobs; rising competition with China, India and other low-wage countries, as changing technology and globalization enables Americans to buy ever more goods and even services produced overseas; the failure of the federally mandated minimum wage to keep up with inflation; and the decline of labor unions, especially among employees of private-sector firms.

The author’s chief concern is that ever-widening inequality will undermine our democracy: “Americans believe fervently in the value of social equality, and social equality is at risk when incomes become too dramatically unequal".  He rightly emphasizes that while the potential for individuals to move up is essential to what makes inequality acceptable, at least to most Americans, economic mobility in the United States is now more limited than it appears to have been in earlier times and — contrary to the popular image — more limited than in many other countries. (It also matters that in America today incomes are becoming more unequal at the same time that most families’ incomes have been stagnant for more than thirty years after allowing for inflation — a point that Noah notes but does not emphasize.)

How much inequality can the Republic stand before the social and political fabric frays? Noah does not answer the question, in part because he doesn’t know, but mostly because he feels he doesn’t need to. “You’d have to be blind,” he writes, “not to see that we are headed in the wrong direction, and we’ve been heading that way for too long. . . . “The worst thing we could do is get used to it.”

My Notes:

Pg. 1:  During the past thirty-three years the difference in America between being rich and being middle class became much more pronounced.  During the previous five decades—from the early 1930s through most of the 1970s, known as the Great Compression—the precise opposite had occurred--the share of the nation’s income that went to the wealthy had either shrunk or remained stable. 

Pg. 3:  The US is not the only advanced industrialized democracy where incomes have become more unequal in recent decades.  The trend is global—income inequality has increased in two-thirds of the twenty-four OECD countries (Organization for Economic Co-operation and Development).  But the level and growth rate of income inequality in the US has been particularly extreme.

Pg. 21:  American incomes stopped converging around 1952.  But, although incomes ceased becoming more equal, they didn’t start becoming less equal.  The income ratios stayed more or less the same.  For instance, in 1952 the share of national income going to the top 10 percent was 33 percent.  In 1962 it was 34 percent, the same as in 1972.  The rich were getting richer, but not disproportionate to everyone else.

Pg. 29:  Only 6 percent of Americans born in the lowest fifth in income distribution ever make it in adulthood to the top fifth in income distribution.

Pg. 45:  The feminization of higher education is one of the more striking sociological trends of recent decades.  Starting in the early 1980s, female undergraduates began to outnumber male undergraduates at colleges and universities.  The female-to-male undergraduate ratio is currently 57 percent to 43 percent.  Starting in 2009, the majority of doctoral degrees awarded in the US went to women.  The female-to-male graduate-student ratio is now 59 percent to 41 percent.  (It is also important to note that unlike all industrialized nations, the US is undergoing a slowdown of educational attainment—high school graduation rates are now at 75 percent).

Pg. 76:  Middle Class defined:  If the range of US annual income is evenly divided into seven categories, the middle class can be defined as those people who fall into the middle three (households earning incomes between $25,000 and $74,999 in 2008 dollars; (multiply each by 1.166 to get 2018 numbers).  In 1980 about half of the US population comprised the three middle divisions of the income distribution.  By 2008 the middle class by this definition had shrunk, now only 14 percent were in these three middle divisions.  However, it was offset by a near-equivalent increase in the proportion of households at higher incomes (roughly between $95,000 and $250,000), while the proportion of households that were poor and near-poor remained about the same.  Still, a thriving middle class is rightly judged as an important indicator of a society’s overall health.  The alternative is extremes of wealth and poverty, mutual alienation, and, at some point, political instability. 

Pg. 98:  As recently as 1975, America’s top ten trading partners had included Italy, the Netherlands, and Belgium, all high-wage nations.  By 2005, the three European nations had all been misplaced by Asian nations, of which the biggest player by far was China.  China placed third in the 2005 rankings, after Canada (then as now the US top trading partner) and Mexico, which since 1975 had moved up from fifth to second.  As of 2005, Mexico and China paid their workers 11 percent and 3 percent, respectively of what US workers received.

Pg. 106:  Trade with low-wage nations, which was negligible until the twenty-first century, is responsible for 12 to 13 percent of the Great Divergence, and perhaps more.  The complexities of offshoring make it difficult to know with much certainty, but in manufacturing, trade’s impact is likely increasing.  In the future offshoring of service-jobs is likely to occur on a much larger scale than offshoring of manufacturing jobs (if only because there are fewer and fewer manufacturing jobs left to send abroad).

Pg. 110:  Before Reagan’s election in 1980, the top income-tax bracket stood at or above 70 percent, where it had been since the Great Depression.  In the 1950s and early 1960s, the top bracket exceeded 90 percent.  Throughout the Great Compression, as the economy boomed and income inequality dwindled, the top bracket remained at a level that even most Democrats would today call confiscatory.  Reagan dropped the top bracket from 70 to 50 percent, and eventually pushed it all the way down to 28 percent.  Since then, it has hovered between 30 and 40 percent. 

Pg. 111:  However it is not the marginal tax rate that is most important, it is the effective tax rate.  In 1979, when the top marginal rate was 70 percent, the effective income-tax rate on households in the top 0.01 percent (a group that today encompasses everyone making $9.1 million or more) was 21 percent.  George W. Bush dropped the top marginal rate down to 35 percent, the effective income tax rate on the top 0.01 percent dropped to 17 percent in 2005. 

Pg. 127:  The age of inequality has coincided with a dramatic decline in the power of organized labor.  Today (2012) only 12 percent of workers are unionized.  When you exclude public-employee unions (more than half of all union members today work for the government), union membership has dropped to about 7 percent of the private-sector workforce. (P. 128): Harvard’s Richard Freeman in 2007 calculated that about 20 percent of the Great Divergence among all workers can be attributed to the decline of unions.  (I don’t agree: the decline of unions is a byproduct of the decline of manufacturing due to globalization).

Pg. 146:  Classification of Rich in (2012) money terms:

Sort of Rich:  making between $109K and $153K (this is the bottom half of the top 10 percent.

Basically Rich: making between $153K and $368K (this is the bottom threshold for the top 1 percent.

Undeniably Rich: making between $368K and $1.7m (this is the bottom threshold for the top 0.1 percent)

Really Rich: making between $1.7m and $9.1m (the bottom threshold for the top 0.01 percent.

Stinking Rich: making $9.1m or more.

Pg. 152:  American CEOs now typically get paid two to three times what their European counterparts earn.   This wasn’t always the case.  In 1973 CEOs in large companies in the US were paid twenty-seven times more than the average worker.  By 2005 that had risen to 262 times.

Pg. 177:  Even though we now have IRA’s and 401k’s, only about half of all households in America are in the stock market either directly through owning stocks or indirectly through mutual funds.  Only about one-third of these have holdings worth $7K or more.  Eighty-one percent of all stocks are owned by the top 10 percent.

Pg. 182:  In 2010 there were fewer federal employees (4.4 million) than there were in 1962 (5.4 million) even though the US government was serving a population that was nearly 70 percent larger.  (The civilian portion got slightly bigger, and the military portion got substantially smaller.)

Pg. 185:  Between 1981 and 2006 average tuition and fees at public and private universities, even factoring in inflation, more than doubled.  This has also happened with health care costs.