The Shrinky-Dinkying of America’s Middle Class: What Does It Mean?

A lot of you liked our book review and excerpts on Joseph Stiglitz’s, “The Price of Inequality.”  The growing inequality of income in America is not a very comforting bedtime story.

This new article breaks it out down pretty simply and starkly:

In terms ordinary people like me can grasp, here’s what this means: America can kiss both its ass and its consumer economy goodbye in roughly 60 years unless there are big changes in public policy, none of which seem particularly forthcoming in the deepening binary schism of our politics.

To understand the terminal collapse of American consumerism, you first need to know about the Gini index. It is the most broadly used measure of income inequality and runs, theoretically, from 0 to 100 (or 0 percent to 100 percent or 0.0 to 1.0). Zero on the Gini scale represents Lenin and Marx’s fantasy, where all family incomes are perfectly equal; every household earns exactly the same share of GDP. A score of 100 on the Gini index is the opposite. That’s what economists call “perfect inequality” or “total concentration.” Imagine a future America where we all huddle in tin and canvas shacks, earning nothing, while Sam Walton’s or Larry Page’s dozen surviving heirs enjoy annual earnings, including capital gains, of several trillion dollars, equal to the country’s total GDP. That’s Gini 100.

Low Gini scores are completely compatible with uniformly low or high incomes. Niger, with GDP per capita of $800 and a Gini score lower than the US’s is a good example of the former—equal but poor. It is impossible, on the other hand, to have a high Gini without deep, widespread poverty and a handful of rich people holding staggering percentages of a country’s total wealth and income.

The absolute extremes of the Gini scale cannot be reached or even approached very closely, as a practical matter. Current Gini scores worldwide range from the low-to-mid 20s (economically egalitarian places like Sweden, Denmark and Norway) to the low 60s (extremely unequal places like South Africa, Botswana and Sierra Leone).

Comparing income inequality in different countries is difficult because there is no data to use in comparing all countries at the same time. Existing ranking lists, like the one maintained by the CIA(which omits the US, interestingly enough) give a ranking and then qualify it with the year the data was collected.

In a new working paper published last month, the Congressional Budget Office (CBO) found that in 1984 the US Gini score was 34. (You can read summaries of the study in the Washington Post blogand this post from Demos.) That made America one of the more equal countries in the world in terms of income distribution, roughly equivalent to Ireland in 2010 (33.9), Niger in 2007 (34.0) or Taiwan in 2011.

By 2000, US income inequality had risen 18% to 40, putting us even with the UK’s 2009 score. Bear in mind when you think about this that the UK was in the depths of the global economic collapse. Also, the UK in the best of times is described by American politicians as a country of social and economic stagnation, where the class you are born into is your destiny.

Now the CBO working paper projects that the US’s Gini index will continue to rise through 2035, when it will hit 46. This score would place us squarely in the top three-dozen most unequal countries on the CIA’s current ranking of 136 nations (not including us, remember). In other words, a US score of 46 would today put us in the top 25% of the world’s most unequal nations, along with places like Peru in 2010 (46.0), Malaysia in 2009 (46.2) and Rwanda in 2000 (46.8).

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