In 1980, the median American household brought in an income $16,017. At the time, the US GDP was 2.79 trillion dollars. In 2010, the median household income is $47,022, and the GDP is 14.53 trillion. There is something teribly wrong with these numbers, and it is something that is likely at the root of many of our current problems as a nation.
To illustrate why these numbers are so wretched, it helps to convert to percent. In those thirty years, median household income increased 193% before accounting for inflation. Meanwhile, the overall economy grew by a staggering 421%. After inflation the difference is even starker; controlled for inflation, median household income has risen a mere 29%, while the overall economy has grown a still quite respectable 257%. The reason for this is, as is well known, a startling growth in income inequality, illustrated very starkly here. What seems to have happened is that the rising tide lifted relatively few boats.
Many will protest that bemoaning this situation amounts to greed on the part of bottomfeeders leaching off of the beleagered wealthy. Not so. Concentration of wealth in the hands of an increasingly super-rich and increasingly small cohort has significant negative effects on both the economic and social health of the country.
On the economic front, the reality is that while capitalists are needed to fund the creation of new firms (espeically in capital-intensive fields), ultimately new firms live, die, and hire based on consumer demand – which outside of a tiny few industries is something driven by the middle class. That is to say, all the free capital in the world will do nothing at all to create jobs unless there is a middle class big and healthy enough to purchase the goods and services that new firms propose to provide. The middle class, however, is struggling more and more, with less and less disposable income as wealth becomes more and more concentrated in the upper reaches of the US economy.
We can see the effects of this in the current economic doldrums. Though lending contracted violently in 2008 with the collapse of the housing market, essentially everything that can be done to make corporate borrowing easier has been done, resulting in extremely low interest rates despite the dearth of active lending. American companies have more cash on hand than ever, and profit margins in most industries are at very high levels relative to history. High profit margins, readily available capital, and cheap loans should result in a rapid expansion of the economy – but they aren't. The obvious culprit is that disparity at the top of the article; simply put, not enough people have enough money to create meaningful consumer demand.
It isn't just the economy that is hurt by this large and growing gap between rich and poor, however. Though the reasons are less well understood, there are many alarming correlations between inequality as measured by the GINI index (which forms a scale from zero to one, with zero being a perfectly equal economy and one being a feudal serfdom) and markers of societal well-being. To take but one example, among the top 30 or so economies of the world, there is no relationship at all between GDP per capita and life expectancy. Even though the United States (with the highest GDP per capita) has almost twice as much money per head than Greece, the life expectancy between the two countries is virtually identical. If, however, instead of GDP per capita you compare the GINI index to the life expectancy, it forms a striking correlation; high GINI index (that is, high inequality) correlates to worse life expectancies. The same holds true for child well-being, trust in others, mental illness, crime, education, and a litany of other measures of a society's health.
To the right is a screenshot from Google Finance; it shows the S&P 500 stock index over the course of its history. You see that the growth is exponential for most of it, from 1972 up to about 1998. Were the graph to go further back, the exponential nature would extend to the early 1900s. Starting in the late 1990s, and early 2000s, the pattern becomes cyclical. It is my hunch that what has happened is that wealth has become so concentrated in the upper echelons of the economy that the vast majority of consumer demand, the middle classes, can only finance big purchases by taking on debt. Increases in debt cause what are essentially analogues of margin trading, leading to huge inflationary runs up the stock index, and then terrible wretched crashes back down.
Redistribution of wealth is often derided as socialist. It seems, however, that adopting mild socialism actually helps capitalist systems remain stable; progressive taxation, heavy investment in education and infrastructure, and a certain degree of government oversight all help otherwise capitalistic systems to flourish, and flourish steadily. That exponential growth can come back; however, before it can there needs to be a restoration of the middle class and the huge amount of consumer demand that it can generate.
If the median income had grown in pace with the overall economy, median income would be not $47,000, but closer to $67,000. Picture if you can the effect that would have on our economy; the average middle class household having $20,000 extra to spend each year. Direct redistribution is foolhardy, though – time after time economic studies show that simply giving people money to spend rarely ends well. The better route is to bring taxes back to a truly progressive level, and use the revenue to pay for increases in education and infrastructure, giving the US the educated workforce and efficient transportation, power and communications networks that can let us remain competitive with the world. Then, eventually, there might be a return to prosperity that is available for all.