Income disparities cast new light on American dream

Worldview: The share of aggregate income going to the highest-earning 1 per cent of Americans has doubled from 8 per cent in 1980 to more than 16 per cent in 2004. The amount going to the top 10th of this 1 per cent has tripled from 2 per cent in 1980 to 7 per cent today.

And the amount going to the top 100th of 1 per cent - the 14,000 taxpayers at the top of the income ladder - has quadrupled from 0.65 per cent in 1980 to 2.87 per cent in 2004.

These startling figures are taken from a study of top incomes in the US. Put differently, they show that the richest 1 per cent of households, numbering 719,910 with an average income of $326,720 (€254,000) in 2004, had 19.8 per cent of the country's pretax income - up from 17.8 per cent in 2003. But median or midpoint family income rose only 1.6 per cent between 2001 and 2004; when adjusted for inflation, the net worth is only 1.5 per cent. And workers with college degrees saw wages fall by 3.1 per cent between 2000 and 2005. Over the whole period from 1979, the real income of 90 per cent of the population has stagnated, while for the top 0.01 per cent it has quadrupled.

In more recent years there have been differential cycles affecting the lower and middle paid. Research shows they do better under Democratic administrations. And polling shows the voting intentions of these groups shifted strongly towards the Democrats and away from the Republicans this year compared to 2004. But it should be remembered that turnout in these midterm elections was only marginally up on the usual 40 per cent, with nearly 79 million voting. In 2004 only 35 per cent of those earning below $15,000 voted, whereas 75 per cent of those with incomes between $75,000 and $100,000 did so.

These inequalities - and especially the stagnation of middling incomes - played a significant role in the midterm elections. They seem to contradict US figures showing a growth rate of more than 3 per cent, higher productivity and low unemployment of 4.6 per cent. But they bear out the widespread feeling that economic conditions are getting worse.

Rising inequality means average income can continue to grow even though most workers are not better off. There is a great increase in insecurity, as many lose their jobs to overseas and internal outsourcing. While most of these get new jobs, they are on average 17 per cent less well paid.

Unionisation has declined from 23.3 to 12.6 per cent of the US workforce since 1980, although it still makes a difference of up to 25 per cent in take-home pay.

Polling shows lower and middle-income voters swung to the Democrats in the expectation that they would benefit from that party's programme, "Six for '06". It promises to raise the minimum wage from the $5.15 an hour struck in 1997 and not increased since then, boost tax reliefs for college tuition, bolster healthcare, and reverse the income-tax cuts introduced by the Bush administration since 2001, which have helped widen inequalities. There are pledges to "free America from dependence on foreign oil" by promoting alternative fuels and ending tax giveaways to big oil firms. It also promises to allow the government to negotiate lower prices with drug firms, promote stem-cell research and halt any plans to privatise social security.

Commentators point out that the Democrats' economic programme is incoherent, swinging between protectionists like Sherrod Brown, who won a Senate seat in Ohio where hundreds of thousands of industrial jobs have been lost since 2000, and east- and west-coast free traders committed to an open economy. In the same way, commitments to balance tax and expenditure will be difficult to achieve. These tensions will play into the party programme and candidate selection for the presidential elections in 2008.

Moderate Democrats tend to play down open talk of rising inequalities. Simon Rosenberg of the New Democrat Network told the Financial Times that "we talk of wage decline rather than inequality because Americans do not respond well to anything that could be portrayed as class warfare or the politics of envy".

But he agreed that the Clintonite approach of reducing the fiscal deficit, promoting free trade and encouraging greater educational opportunity "is no longer enough to address the economic problems facing America today". There is a fear of repeating Al Gore and John Edwards's message of a two-tier US in the 2004 campaign. In response to complaints about his 2003 tax reductions, Bush forcefully argued that "class warfare" is not the American way.

Conventionally this perception of the American Dream - a society open to social mobility and individual advancement - is assumed to counteract class division and associated political polarisation. The number of people who believe you can start poor and end up rich there has increased by 20 percentage points since 1980. And more than 70 per cent of Americans support the abolition of inheritance tax, although only one household in 100 pays it.

But comparative research shows that parental income is now a better predictor of whether someone will be rich or poor in the US than in Canada or much of Europe. In the US about half of the income disparities in one generation are reflected in the next, whereas the proportion is about one-fifth in Canada and the Nordic countries.

So the social structure underpinning upward mobility may have changed in the US over the last generation. If that is so, the political and social consequences could be far-reaching.

A speech this week by Janet Yellen, a member of the Federal Reserve's open market committee, attracted quite a lot of media attention. "Rising inequality is intensifying resistance to globalisation, impairing social cohesion and could, ultimately, undermine American democracy," she said.

She spoke at length about factors that have contributed to "feelings of discontent" among Americans, including perceptions that job stability has declined, the "dire consequences" of involuntary job losses, and rising yearly fluctuations in individual earnings and family incomes since the 1970s.

"The increased risk associated with these income fluctuations is likely to reduce perceived well-being quite substantially," she said. She noted that among the 30 countries that comprise the Organisation for Economic Co-operation and Development, the US ranks fourth from the bottom in gross public social spending as a share of gross domestic product (above Mexico, South Korea - and Ireland).