Rising Income Inequality May Threaten US Democratic Stability

Last week, the World Inequality Lab released its first report based on the World Wealth and Income Database (WID). Constructed in part by famous economist Thomas Piketty, the report released at the Paris School of Economics. Titled World Inequality Report 2018, it detailed conditions of high economic inequality within U.S. society. Historically, both ancient and modern nations fell into destabilization following such periods. Some analysts warn U.S. democratic institutions may deteriorate should the pattern of highly disproportionate wealth distribution persist.

U.S. Exhibited High Income Inequality

The World Inequality Report 2018 ranked the U.S. among the highest of wealthy nations for income inequality. For example, earned income among the nations wealthiest members disproportionately outpaced other earners. In 2014, the share of the national wealth earned by the top 1 percent hit 20.2 percent. By contrast, the nation’s bottom 50 percent earned 12.5 percent of the national income in the same year.

Furthermore, the U.S. experienced a boom for the nation’s top earners in both the 1980s and 1990s. This increase resulted from capital-income.

Image By WID. world / Via YouTube

Two distinct patterns of distribution arose within U.S. historical economic data. Within the post-WWII period ranging from 1946 to 1980, national growth grew strongly. During that time period, the income of the bottom 90 percent grew by 102 percent. Comparatively, the income of the top 10 percent grew by 72 percent within the same time frame.

The post-Reaganomics period (1980-2014) showed different results. During that time, total growth reduced from 95 percent to 61 percent. Distribution became unbalanced. While post-tax income growth for the bottom 50 percent fell from 129 percent to 21 percent, growth for the top 10 percent doubled. Growth for the top 1 percent tripled. Notably, growth for the top 0.001 percent rose from 163 percent to 616 percent.

The Growth Of National Income Since WWII In US, 1946-2014
Piketty, Saez, and Zucman (2018) US National Income Growth (1946-2014). World Inequality Report 2018.

Historical Patterns Of High Income Inequality Preceded Societal Destabilization

Historian and author of The Great Leveler, Walter Scheidel, posited an analysis based on cyclical historic patterns. In his study, he argued ancient elites successfully claimed the vast majority of their society’s surplus economy. Accordingly, the producer’s minimum survival needs set the limitations of said extraction. Scheidel gave two examples of ancient societies that neared such limits: Ancient Rome and Byzantium. Both empires suffered subsequent societal destabilizations, which led to their ultimate demise.

Scheidel warned of four levelers to this pattern of highly unbalanced wealth allocation. All of them are apocalyptic. In his book, Scheidel’s “Four Horsemen” of leveling are: war, revolution, state collapse, and plague.

Walter Scheidel At LSE Event
Image By London School Of Economics And Political Science / Via YouTube

Similarly, examples of high inequality correlated to national decline are not limited to the ancient world. For instance, the 20th century brought the fall of several major nations. The Financial Times Martin Wolf stated that both the Soviet Union and China are key examples. While the post-world war era brought some degree of equitable distribution, the memory of conflict eventually faded, and the elites reengaged in old patterns of behavior.

Policy Tools And Counterbalance

In modern societies, policy tools provided some relief. To this end, Piketty’s report showed taxes reduced inequality. Specifically, taxes for the top 10 percent of U.S. earners reduced inequality from 47 percent to 39 percent of national income in 2014. While policy methods provided some alleviation, they must be enacted in order to be effective.

Current U.S. tax legislation ran counter to this goal. While all social segments received tax cuts, individual tax cuts were set to expire. Corporate tax cut were made permanent. Because of this, a disproportionate share of national wealth will go the upper echelons of U.S. society in the long run.

Without effective policy tools, the U.S. may follow the pattern of deterioration set by history. In his analysis, Wolf warned that the U.S. may fall into a form of “plutocratic populism” or an outright dictatorship. He said,

“The future could then consist of a stable plutocracy, which manages to keep the mass of the people divided and docile. The alternative might be emergence of a dictator, who rides to power on the back of a faux opposition to such elites.”