Polarising prosperity

Income inequality has become a hot topic. Scarcely a day goes by without a commentator pointing out that since the 1970s, the fruits of economic growth in many developed countries have accrued to a relatively small fraction of the population. Politicians may like to talk about their desire to promote policies that benefit the many, not the few. But in truth, it is the few – perhaps the very few – that have done extraordinarily well over the past few decades.

And little wonder that mainstream politicians are so desperate to show – in their rhetoric, if not by their deeds – that they sincerely care about the many. After all, it is the many – those who feel left behind while the rich have become ever richer – that have provided the mainspring for anti-establishment movements on both sides of the Atlantic. Donald Trump’s populist agenda struck a chord with Americans who felt impoverished and excluded: the American dream for them was no longer achievable. Bernie Sanders tapped into a similar sentiment. And in Europe, Marine Le Pen in France and leaders of the Brexit movement also exploited the sense of resentment.

It is entirely understandable. Whether measured by wealth or by income, it is indisputable that those at the top have captured a far larger share of the economic cake than those further down the spectrum.

Look at figures for the US. There are various ways of cutting the data, but they tell broadly the same story.

The rich get richer

Take average pre-tax incomes adjusted for inflation. In 1980, the annual average for the bottom 50 percent of households was $16,000. By 2014, that had increased, but only marginally – to $16,200.

In 1980, the average income for the top 1 percent was $428,000 – already a very substantial sum. But by 2014, that had more than trebled to $1.3million. The gap between the lower half of the population and people at the top of the income scale had become a yawning chasm.

Now take a shorter time period – from 1993 to 2014. The US economy grew over that period and average wages went up by just over 25 percent.

But that average is virtually meaningless: it conceals huge differences.

Of the aggregate increase in the incomes of US citizens, more than half accrued to the top one percent. By 2014, the top one percent of households were receiving around one-fifth of the pre-tax incomes of the entire American population. The bottom half of the population were having to share less than 13 percent. (Even after taking taxes into account, the bottom half have still done badly in securing a decent slice of the economic pie: their share of total net incomes was less than 20 percent in 2014.)

All this is striking enough. But dig a little deeper, and the picture is even more dramatic. Certainly, those within the top one percent might consider themselves rich. But by the standards of those at the very pinnacle of the league table, they are little more than comfortably-off. Look at the one percent of the one percent – those who comprise the one in 10,000 at the top of the income ladder. Call them the ultra-rich, or the Ultras for short.

From the end of the Second World War until the mid-Eighties, the incomes that went into the pockets of this small group ticked along below one percent of the national whole. After that, the share of the total took off, and has continued to do so. By the middle of the current decade, this super-rich sliver of the population – just 16,500 families - was taking more than three percent of the entire national pie. Adding in capital gains, the share had grown to nearer five percent.

Not just rich; ultra-rich

By 2015 a family would need to have annual income including capital gains of at least $11.27million to make it into the 1-in-10,000 club. And even then, the family would scrape into the Ultras’ category only by a whisker. The average income of this one percent of the one percent was far higher - $31.6million.

Income equality in the US is not a new phenomenon. It was manifest in the 1920s, but was dented by the Great Crash of 1929, declined in the period of the New Deal, and remained low during and after the Second World War. Indeed, in the years from the end of the war to 1980, post-tax incomes for the top one percent of the US population actually grew more slowly than those of the remaining 99 percent.

It is only since 1980 that the rich – particularly the Ultras – have left everyone else behind. Between 1980 and 2014, post-tax incomes of the Ultras’ one percent of one percent club multiplied more than seven-fold.