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Wealth Inequality in the United States

The problem of wealth inequality is one of the most pressing issues in the present-day United States. It is not easy to measure considering that the Orshansky threshold tied to food expenses is outdated, whereas a new, more up-to-date system is yet to be developed. Nevertheless, it is evident that the United States is far from such relatively egalitarian countries as, for instance, Norway, Finland, and the Netherlands. At the moment, numerous social programs aiming to protect economically vulnerable Americans manage to decrease the gap between the poorest American population and the lower middle class. At the same time, the scales of inequality between the wealthiest minority and the overall majority have increased. Thomas Piketty argues that the most significant factor contributing to inequality is the concentration of capital in a few selected families and its constant growth that exceed the economic one.

Recently, wealth inequality in the United States has transformed: while the gap between the majority and the few extremely poor has decreased, the one between the elites and the majority is constantly growing. Due to a relatively effective system of social anti-poverty policies that include targeted income transfers and subsidized healthcare, the number of Americans below the Orshansky poverty threshold is less than it was several decades ago. At the same time, the income gap between the top ten percent and especially the top one percent, ‘upper centile’ in Piketty’s words, is increasing to the point that as much as one-fifth of overall United States income belongs to one percent of the population (2014). The United States differs from relatively egalitarian leftist countries notably. In Scandinavian states, which traditionally top the ratings by the Quality of Life Index, the top ten percent earn less than twice as much as forty percent in the middle; contrastingly, in the United States, they make almost four times as much (Piketty, 2014). Moreover, despite the fact that the overall wealth of the population seemingly increases, in reality, it does not: the improvement concerns only those at the very top, while the living conditions of the majority remain the same.

Even though some believe that wealth inequality is no longer topical because of anti-poverty policies, they ignore the gap between the upper centile and those in the middle, which appears the most alarming at the moment. The situation is unlikely to improve because of returns on education that define one’s earnings. Since unlike many European countries, higher education in the United States is expensive and unaffordable to many, the chances of getting it are incomparably higher for those coming from wealthy families. With the earnings depending on one’s university degree (or a lack of such), it is difficult for people from economically vulnerable households to break the cycle of poverty. Besides, marital choices following the principle of assortative mating further exacerbate the family income gap. As a result, the elite possesses the opportunities that are unattainable to many, which creates agency problems that are evident, for instance, in election funding. With individual supporters being able to fund their chosen candidate, they have the power to affect the outcome of the elections, at least to some extent. Contrastingly, ‘regular’ Americans, those who belong to neither top one nor ten percent, do not have the same degree of authority. Taking into account the well-known Big Business-politics alliance that exists in the present-day United States, the problem of income inequality concerns every American citizen as it robs him/her of his/her agency.

Piketty’s First Fundamental Law of Capitalism proves that the returns on capital affect the economy and, therefore, economic inequality. Piketty’s law (formula: α = r × β) links the capital stock to the flow of income from capital; “the capital/income ratio β is related in a simple way to the share of income from capital in national income, denoted α, and r is the rate of return on capital.” (2014, p. 42). The third variable is the one that Piketty focuses on. What the economist aims to illustrate is that the three variables, capital/income ratio (β), capital’s share in income (α), and the rate of return on capital (r) are interdependent (Piketty, 2014). Consequently, returns on capital affect the state’s economic growth and the wages of ‘average’ workers in the labor market: the owners of the capital get the income that would otherwise go to people who depend on income from labor. The bigger the capital, the more rapidly it grows, and the economy cannot always catch up. Moreover, the slower the economic growth at the given moment, the higher the return on capital as opposed to income from labor, for r and g (economic growth) are inversely proportional. As a result, those with the biggest share of income from capital enrich themselves, whereas those with little or no share of income from capital grow poorer; the wealth gap increases.

As evident from the First Fundamental Law of Capitalism, when analyzing the forces of divergence that push the United States toward greater inequality, Piketty focuses primarily on the two factors, income and capital. First of all, according to the theorist, “top earners can quickly separate themselves from the rest by a wide margin.” (Piketty, 2014, p. 22-23). He believes that there could be two possible reasons why the salaries of those who already earn more than most laborers do continue to grow: with time, market recognizes their value. In other words, the market’s perception of top executives is that the work they do is more demanding and challenging than that of lower-level employees. Consequently, they get the larger share of income, and their wages grow, whereas others’ remain relatively stable. As a result, as it was mentioned above, the gap between the top ten percent and the majority increases. Moreover, Piketty argues that these top high-paid executives, unlike the rest of workers, are capable of regulating their income because of the share of authority they have in the market. In a way, it is similar to the case with the elite funding their chosen candidate and affecting the outcome of elections. Being in the position of power in the labor market, top executives basically determine how much they earn; therefore, their incomes grow.

Another valuable factor that contributes to inequality in the United States is related to capital and, according to Piketty, is more significant than the previous one. The theorist notes: “There is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital is high” (Piketty, 2014, p. 23). Piketty argues that the most serious problem in the United States is that the return of capital exceeds its growth. This idea relates primarily to those people whose income depends on returns of capital more than labor. They are less dependent on the market forces, which are impossible to control for an average American, and the majority of their income comes from capital investments, not labor. Once again, Pickety refers mostly to those who come from the top one-top ten percent households. Frequently, they inherit the capital that exceeds the lifetime wages of an American who belongs to the lower middle class and lives on income from labor. They invest the capital and get the return on it that is higher than their actual earnings; naturally, over time, their capital grows faster than the economy. It appears that the only possible way to tackle this problem is by establishing a new adequate wealth tax that would redistribute the capital.

To conclude, inequality in the United States is constantly increasing, which, according to Piketty, is a result of the concentration of wealth. Despite the fact that the wealth gap between the poorest population and those in the middle has decreased over the recent decades, inequality in general has aggravated since the top ten percent who constitute the ‘elite’ of the United States have become significantly richer. Moreover, the rate of economic growth is relatively slow, which results in the growing returns on capital. While the income of the wealthiest constantly increases (because it comes primarily from the returns on capital), that of average Americans depending on wages does not change. Consequently, the wealth gap increases. Pickety suggests progressive wealth and income taxes that would equalize the incomes of those who rely on labor and the capital holders. Nevertheless, their implementation does not appear possible any time soon.

Reference

Piketty, T. (2014). Capital in the twenty-first century (A. Goldhammer, Trans.). The Belknap Press of Harvard University Press.