Rising Economic Polarization in the United States: Truth and Facts

February 2023

Contents

Introduction

I. Deterioration of Economic Polarization in the United States

II. Multiple Factors Driving U.S. Economic Polarization

III. Serious Negative Implications for American Society

Conclusion

Introduction

Being the largest economy in the world, the United States is also the most economically polarized among Western countries. It has long been stuck in the conundrum where the rich get richer and the poor become poorer. Since the onset of COVID-19, the United States has adopted massive fiscal and financial stimulus measures. However, these measures fail to address the fundamental difficulties facing the have-nots, but rather offer billionaires a chance to expand their wealth. Economic inequality has become even more prominent.

Through facts and figures, this report aims to reveal the current state of wealth disparity in the United States, the entrenched political and social causes behind it, and the implications of the problem.

I. Deterioration of Economic Polarization in the United States

Since the 1970s, income inequality and wealth disparity in the United States have continually deepened. The rich keep getting richer, the poor keep getting poorer, and the middle class is squeezed. Today, these perilous trends continue.

The Gini coefficient, which measures inequality in income distribution, has kept rising in the United States. According to the World Bank, the U.S. Gini coefficient has gone up from 0.353 in 1974 to 0.415 in 2019, exceeding the alarming level at 0.4 indicating a large income gap. During the same period, other developed countries have largely kept their Gini coefficient below 0.35, or even 0.3 in some cases.

In the United States, the wealthy population have enjoyed much faster income growth than the low-income group. According to the U.S. Census Bureau, between 1970 and 2020, the average income of the top fifth of families increased by 182 percent to 253,000 U.S. dollars, while the middle-income households and the bottom fifth saw their average incomes grow by just 133 percent to 72,000 dollars and 113 percent to 15,000 dollars respectively. In 1975, the average income of the top fifth was 10.3 times that of the bottom fifth. The gap widened to 17.4 times by 2020.

The share of national income held by upper-income households has risen markedly. According to the U.S. Census Bureau, the income shares of the top fifth and top 5 percent have both been climbing. Standing at 43.3 percent and 16.6 percent respectively in 1970, their shares rose to 52.2 percent and 23.0 percent in 2020. In the meantime, the shares held by middle- and low-income households have both declined. The share of the middle-income group dropped from 52.7 percent in 1970 to 44.7 percent in 2020, and that of the low-income group in the bottom fifth fell from 4.1 percent to 3 percent. Since 1993, the income share of middle-income families, who make up 60 percent of total households, has remained lower than that of the top fifth, and is becoming increasingly disproportionate.

The income share of the ultra-rich has reached its highest level since World War II. According to the World Wealth and Income Database, after an initial fall in the early 20th century, the income share of the ultra-rich, or the top 1 percent, in the United States had kept rising, and hit 22.3 percent in 1928. After World War II, a prevailing call for equal opportunity and economic equality, along with the introduction of economic systems such as progressive tax, inheritance tax, strong trade unions and financial regulation, helped restrain the concentration of wealth. By 1970, the income share of the top 1 percent had fallen to 10.7 percent. But it has since risen gradually, and reached 19.1 percent by 2021, almost doubled in 50 years.

A main cause for the widening income disparity is the huge pay gap. According to Equilar, the median income of CEOs of listed companies in 2021 was 20 million dollars, up 31 percent from 2020, while that of average employees increased from around 69,000 dollars to some 72,000 dollars, up about 4 percent. According to a study by the Economic Policy Institute, CEO pay had skyrocketed by 1,322 percent between 1978 and 2020, while typical worker compensation had risen just 18 percent.

The economic divide is also reflected in wealth inequality. According to Federal Reserve statistics, the richest 1 percent of U.S. households hold more than 20 percent of national household wealth, a share that has continued to grow sharply in recent years. According to Fed statistics in 2021, the top 1 percent held a record 32.3 percent of the country's wealth, up from only 23.6 percent in 1989, while the bottom 50 percent (about 63 million households) held only 2.6 percent, down from 3.7 percent in 1989.

The middle class is shrinking. A "middle-class America" was formed in some 20 years from the end of World War II to 1970. Afterward, however, despite the continued growth of the U.S. economy, the middle class has not expanded, but shrunk significantly. The share of American adults who live in middle-income households fell from 61 percent in 1971 to 51 percent in 2019. The share in the upper-income tier rose from 14 percent to 20 percent over the same period. Meanwhile, the share in the lower-income tier increased from 25 percent to 29 percent. The size of middle-income families has continued to shrink.

Social stratification is severely rigid. According to a paper by Raj Chetty and other American economists, the percentage of Americans earning more than their parents fell from more than 90 percent in the 1940s to about 50 percent in the 1980s, with the largest declines for families in the middle class. The opportunities for young people to increase their incomes are fading. Most of the decline is driven by the more unequal distribution of wealth rather than the slowdown in aggregate growth rates. Alan Krueger, chairman of the White House Council of Economic Advisers in the Obama administration, believes that high inequality in American society has resulted in a low level of inter-generational mobility and formed a "Great Gatsby Curve" where one's economic standing is more dependent on the wealth of the parents.

The poverty issue in the United States has never been effectively addressed. The overall poverty rate in the country dropped by more than 10 percentage points from 1959 to 1969, but has lingered around 12.5 percent ever since. According to the U.S. Census Bureau, 46.2 million American people were living in poverty in 2010, and the poverty rate reached up to 15.1 percent, the highest in 52 years. In 2020, the poverty rate climbed by 0.9 percentage points to 11.4 percent from 10.5 percent in 2019. Currently, 37 million American people are still living below the poverty line.

The COVID-19 pandemic has intensified economic inequality in the United States. The economic recession triggered by the pandemic has led to massive job losses and further deterioration in the economic situation of low-income earners. At the same time, excessive money supply and large-scale fiscal spending drove up stock and housing prices, bringing enormous benefits to wealthier asset owners. According to a Fed report on household wealth, the total wealth of the richest 1 percent reached a record 45.9 trillion dollars at the end of the fourth quarter of 2021, and their fortunes increased by more than 12 trillion dollars, or more than a third, during the course of the pandemic.