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    4 Jul 2016

    Income inequality today may be higher today than in any other era

    A few years ago, economists Peter Lindert and Jeffrey Williamson uncovered a startling fact about the origins of inequality in America.
    We know, of course, that incomes are highly unequal today. We can trace the rise and fall of the 1 percent back to the early 1900s, when robber barons ruled and Jay Gatsby partied. But that’s pretty much where the data peter out.
    To go back further, Lindert and Williamson spent the better part of the last decade piecing together tax records, local directories and historical accounts in a painstaking effort to reconstruct an economic portrait of the nation’s past.
    What they discovered was that we started out from a remarkably egalitarian place. “Incomes were more equally distributed in colonial America than in any other place that can be measured,” Lindert and Williamson write in their new book, Unequal Gains, which traces how inequality surged and receded in American history.
    The book contains an unprecedented graph that goes all the way back to the eve of independence and charts how unequal people's incomes were, using a well-known measure known as the gini coefficient. 
    In the Revolutionary era, inequality in America was dramatically lower than it was in England or the Netherlands, in part because of the abundant opportunity (enjoyed at the expense of the Native Americans), and in part because of the kinds of people who immigrated.
    We get some impression of this from historical documents. George Washington predicted that the young nation would allow even the lower classes to prosper thanks to “the equal distribution of property, the great plenty of unoccupied lands, and the facility of procuring the means of subsistence.” In his chronicle of the young United States in the 1830s, Alexis de Tocqueville famously said that “nothing struck me more forcibly than the general equality of condition among the people.”
    The new data not only confirms these anecdotal accounts, but it also puts the past in perspective. According to Lindert and Williamson’s calculations, today’s income inequality may be the highest the nation has ever known.
    “We went from one of the most egalitarian places in the world to one of the least,” Williamson said. “What happened?”
    In their book, the pair of professors — one at UC Davis, the other at Harvard — attempt to explain how it all transpired. Their data reveal that today’s situation is not unprecedented; income inequality rose twice in American history, the first time in the 1800s. That period, the economists argue, holds lessons that may help us better understand the skyrocketing inequality of recent decades.
    This is as much a work of history as it is a work of economics. The conclusions depend on a tangle of assumptions, and the authors spend a good deal of time explaining their choices. The most controversial section involves how they accounted for the income of slaves, whom they included in the inequality calculations.
    It should go without saying that early America was a moral catastrophe. The genocide of the Native Americans and the enslavement of African Americans can’t be reckoned with in purely economic terms. But we also cannot talk about income inequality without somehow figuring in all the lives that were oppressed in service of the nation’s economy.
    The slaves were obviously not paid for their work, but they did receive food and shelter, which the economists considered a form of compensation. This represented a mere fraction of the value of their labor, but it wasn’t insignificant, either.
    Whether this was the right or the wrong way to calculate the situation of the slaves can be debated. But when the economists say that income inequality in the late 1700s was exceedingly low, they are making a claim that includes all Americans, enslaved or free. Through this narrow economic lens, America (with its slaves) distributed the rewards of its economy more equally than England (with its peasants).
    But as the economists emphasize repeatedly: “A society with slavery should not be viewed as egalitarian in any broader sense.” 
    Starting in the 1800s, the United States expanded rapidly, overtaking the European countries in nominal per capita income. (Thanks to lower living costs in America, it had already been ahead in real per capita income, which is another one of the book's surprises.) But the gains were not distributed evenly. Demographic factors were one cause — there was an explosion in the population thanks to high birth rates and high rates of immigration; this glut of labor, most of it unskilled, probably drove down wages for people lower on the bottom rungs of the economy, rural workers especially. 
    In the cities, meanwhile, wages for white-collar workers skyrocketed. People who could read and write — clerks, merchants, accountants, teachers, lawyers — saw their income increase. The early stirrings of industrialization also began to hollow out the middle class. Middle-skill artisans, such as weavers and shoemakers, were starting to be replaced by factories, which employed low-skill workers and high-skill engineers and clerks. And the wealthy, who were underwriting all of these investments, were starting to profit more and more from the nation’s increasingly functional financial system.

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