The Great Wealth Transfer

The widening gulf between workers and executives is part of a stunning increase in inequality throughout the U.S. economy during the past thirty years. To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income — the richer they are, the taller they are.

Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line — representing those Americans living in extreme poverty — is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet.

Now take 2005. The average height has grown from six feet to eight feet, reflecting the modest growth in average incomes over the past generation. And the poorest people on the left side of the line have grown at about the same rate as those near the middle — the gap between the middle class and the poor, in other words, hasn't changed. But people to the right must have been taking some kind of extreme steroids: The guy at the end of the line is now 560 feet tall, almost five times taller than his 1973 counterpart.

What's useful about this image is that it explodes several comforting myths we like to tell ourselves about what is happening to our society.

MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY.
According to this view, most Americans are sharing in the economy's growth, with only a small minority at the bottom left behind. That places the onus for change on middle-class Americans who — so the story goes — will have to sacrifice some of their prosperity if they want to see poverty alleviated.

But as our line illustrates, that's just plain wrong. It's not only the poor who have fallen behind — the normal-size people in the middle of the line haven't grown much, either. The real divergence in fortunes is between the great majority of Americans and a very small, extremely wealthy minority at the far right of the line.

MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION.
This view — which I think of as the eighty-twenty fallacy — is expressed by none other than Alan Greenspan, former chairman of the Federal Reserve. Last year, Greenspan testified that wage gains were going primarily to skilled professionals with college educations — "essentially," he said, "the top twenty percent." The other eighty percent — those with less education — are stuck in routine jobs being replaced by computers or lost to imports. Inequality, Greenspan concluded, is ultimately "an education problem."

It's a good story with a comforting conclusion: Education is the answer. But it's all wrong. A closer look at our line of Americans reveals why. The richest twenty percent are those standing between 800 and 1,000. But even those standing between 800 and 950 — Americans who earn between $80,000 and $120,000 a year — have done only slightly better than everyone to their left. Almost all of the gains over the past thirty years have gone to the fifty people at the very end of the line. Being highly educated won't make you into a winner in today's U.S. economy. At best, it makes you somewhat less of a loser.

MYTH #3: INEQUALITY DOESN'T REALLY MATTER.
In this view, America is the land of opportunity, where a poor young man or woman can vault into the upper class. In fact, while modest moves up and down the economic ladder are common, true Horatio Alger stories are very rare. America actually has less social mobility than other advanced countries: These days, Horatio Alger has moved to Canada or Finland. It's easier for a poor child to make it into the upper-middle class in just about every other advanced country — including famously class-conscious Britain — than it is in the United States.

Not only can few Americans hope to join the ranks of the rich, no matter how well educated or hardworking they may be — their opportunities to do so are actually shrinking. As best we can tell, pretax incomes are now as unequally distributed as they were in the 1920s — wiping out virtually all of the gains made by the middle class during the Great Compression.

There's a famous scene in the 1987 movie Wall Street in which Gordon Gekko, the corporate predator played by Michael Douglas, tells a meeting of stunned shareholders that greed is good, that the unbridled pursuit of individual wealth serves the interests of the company and the nation. In the movie, Gekko gets his comeuppance; in real life, the Gordon Gekkos took over both corporate America and, eventually, our political system.

Oliver Stone didn't conjure Gekko's "greed" line out of thin air. It was based on a real speech given by corporate raider Ivan Boesky — and it reflected what many corporate executives, conservative intellectuals and right-wing politicians were saying at the time.

It's no coincidence that ringing endorsements of greed began to be heard at the same time that the actual incomes of America's rich began to soar. In part, the new pro-greed ideology was a way of rationalizing what was already happening. But it was also, to an important extent, a cause of the phenomenon. In the past thirty years, right-wing foundations have devoted enormous resources to promoting this agenda, building a far-reaching network of think tanks, media outlets and conservative scholars to legitimize higher levels of inequality. "On average, corporate America pays its most important leaders like bureaucrats," the Harvard Business Review lamented in 1990, calling for higher pay for top executives. "Is it any wonder then that so many CEOs act like bureaucrats?"

Although corporate executives have always had the power to pay themselves lavishly, their self-enrichment was limited by what Lucian Bebchuk, Jesse Fried and David Walker — the leading experts on exploding executive paychecks — call the "outrage constraint." What they mean is that a conspicuously self-dealing CEO would be forced to moderate his greed by unions, the press and politicians: The social climate itself condemned executive salaries that seem immodest.