2.THE DANGEROUS INEQUALITY

WE GATHERED AT OUR cottage in western New York State on a Friday afternoon, had a meal, got some sleep, and met at our dining-room table the next morning with coffee, tea, and cereal. Andrew had provided us with copies of his findings the night before, but none of us had really studied them. So Andrew took us through the charts he’d created. He’s good company: still boyish but frighteningly informed, with a quick wit, wonkish black eyeglasses, and a shock of brown hair over his brow.

“Okay, gents. Income is what’s at the top of our minds, so let’s start there,” Andrew said. “All the numbers in these charts include transfer benefits. All government support: food stamps, unemployment insurance, state and local supplemental income, and more.”

He showed us a chart on how income is distributed across the American population. It confirmed what many have been saying about income inequality, so it wasn’t a surprise.

“If you check this column over on the right,” he said, “that’s more dramatic.”

It revealed the percentage of total personal income in the United States that each group receives. People in the top 5 percent of earning power in our country receive almost 25 percent of all personal income. The lower two-fifths of the population earn only about 17 percent of all personal income in America. Again, I’d heard this before.

Yet Andrew’s next chart was something else altogether. It broke down household cash flow for ten levels of income in America: it showed immediately how well Americans are able to pay their bills and factors consumption into the economic picture. I remembered that Bill Gates had zeroed in on consumption as a key indicator of the income gap in his review of Thomas Piketty’s Capital in the Twenty-First Century. He was right. Consumption tells a far more alarming story. Spending alone can be used to paint a rosier picture of our economic health—if you consider it a gauge of “consumer confidence.” But, in fact, consumption numbers for households show the real crisis.

At a glance, the chart in figure 1 shows how ten income groups, from bottom to top, fare after they’ve paid all their monthly bills. This is simply a measure of what income arrives in the household every month, including transfer benefits (federal, state and local government assistance, Social Security, food stamps, unemployment insurance, and so on), against what monthly bills, of any kind, have to be paid, including taxes.

Here you can see that nearly 60 percent of the population stays afloat through deficit spending. In other words, to put food on the table and pay their other bills, they have to borrow money. Which is to say they aren’t really afloat. They are either treading water or going down. They pay bills with credit or borrow money in some other way each month. For example, the average household in the bottom decile needs to borrow $1,386 each month to get by. They get more deeply into debt each year. The bottom 10 percent find themselves in a state of inescapable debt, with the other, slightly higher earners close behind.

FIGURE 1: After-tax monthly surplus income by decile, 2014

Let me restate what the chart shows: nearly 60 percent of the US population—more than half of all American households—add thousands of dollars to their debt load every year. Many of these households are headed irreversibly toward default. If they all get there, our free-enterprise capitalist system shudders to a halt. Mounting debt is the flip side of the wealth accumulation among the top 20 percent. It can lead eventually to one form of bankruptcy or another.

Andrew leaned back in his chair, letting this chart sink in. He had achieved his goal for the morning already: Dave and I were stunned.

“This isn’t being reported anywhere,” Dave said. “This is completely new to me.”

“It’s incredible,” I said.

“It’s all there in the data, if you take a look. But nobody is taking a look,” Andrew said.

The key insight is clear. Granted, 50-plus percent of America is not poor by the standards in Africa. We don’t have “extreme poverty,” but we have half our population sliding toward insolvency. They cling to a minimum and decent standard of living, yet, in the end, to put food on the table, they need to borrow. Even if you asked people to stop spending on what they feel they need—to limit spending to mere survival—that would tip the economy toward recession again.

“The point is that the system is failing, and the system itself needs to be saved,” I said. “You see what I mean? We’ve driven ourselves into this dead end, and we can’t turn around. We need to push through this impasse and move forward.”

“It’s pretty sad,” Andrew said.

“It is, but not the way you think. It’s sad how the system itself isn’t working. Not what these households are doing individually or as a group,” I said.

“How many more years can this continue?” Dave asked.

At the current rates, the bottom tenth of the population will dig itself a staggering $15,000 deeper into debt every year. The next decile up adds more than $9,000 to its debt in that same period. The third decile from the bottom gets nearly $8,000 deeper into debt each year. At this rate, roughly a third of the nation’s households will eventually default. Not only can these households not save or invest, they are clinging to whatever they have by using whatever is left of their lines of credit, or by falling back on usurious loans.

You could argue that this snapshot includes people who have temporarily lost income between jobs or have taken on debt they will pay back quickly in succeeding years—skewing the figures. Yet the way to look at this data is the way you look at a balance sheet for a company. It’s a static picture at one point in time, even though individuals are constantly moving in and out of these deciles as their job situation and personal income fluctuate. Some people find ways to pay their debts with the help of family and friends; some rely on charity or philanthropic assistance. Not everyone who is underwater at this moment will default on his or her debts. Individuals may move up or down in the economic strata, certainly, but the overall picture—the larger reality itself—remains the same.

The reality is that just over half of American households are technically insolvent. They are at risk of sinking deeper into debt every year on a path that too often leads to personal bankruptcy. And even if it doesn’t, they can’t spend and make a significant contribution to the need for growth in our economy. A major health issue, a transmission breaks down in a diligently paid-off car, a second child is born, requiring a college fund—and they are set back in ways they can’t make up. As Janet Yellen pointed out in a recent speech: “An unexpected expense of just $400 would prompt the majority of American households to borrow money, sell something, or simply not pay at all.”

There is another serious outcome. Being poor is actually very expensive. It’s economic quicksand. The compound interest rates these folks must pay to borrow enough to keep up can range from 100 to 400 percent per year. Tragically, this rapidly multiplies their debt and sinks them even more deeply underwater. So the data is clear. In fact, America has ceased to have a viable middle class.

And it gets worse. If you averaged the sixth and seventh deciles, you would be talking about what we have left of an upper middle class. Right now, that group is hardly what it used to be. A few decades ago, these deciles would have been set for life. They would own two good cars, put their kids into private schools from kindergarten through grad school, and likely have a cottage on a lake or the ocean. Yet today, the “upper middle class” has an average annual household surplus of around $8,500. Even if these families saved that surplus, where would it get them? It’s been established that four out of every five Americans will at some point sink beneath the poverty line throughout their lifetimes. This chart supports that claim. Except for the top 20 percent, almost no one has the ability to save; almost no one has an emergency fund for an unexpected drain on the budget.

Step back and think about what this means in terms of the core American pursuit of happiness, which was first proposed by Thomas Jefferson as the pursuit of “property.” The rising level of household debt is a key indicator of the most dangerous problem in American life: the lack of upward social mobility. In other words, it’s nearly impossible now for someone here to repeat what F. Scott Fitzgerald’s protagonist Jay Gatsby did during the Gilded Age—rise from the bottom to the top of the economic ladder.

Figure 2 shows how America fares compared with other major countries of the developed world in the Great Gatsby Curve, unveiled by Alan Krueger in 2012, not long after he became chairman of the White House Council of Economic Advisers. The Gini coefficient indicates the intensity of economic inequality in a given nation, and the chart shows how this correlates with a lack of social mobility from one generation to the next. One can only imagine how the immobility has intensified since 2010.

Four decades ago, America offered the greatest social mobility in the world. Now, it’s bringing up the rear of the developed nations. People now have few chances to move up the social ladder. Put simply: we have become the Land of Lost Opportunity.

Aside from the debt figures, this measure is probably the most troubling for our economic pulse: it shows in stark terms that the core American hope for a better life based on individual initiative is on life support. The vertical axis in the Great Gatsby Curve shows social immobility from one generation to the next: the likelihood that someone born into an economic stratum will remain there for a generation. The higher the number, the greater the likelihood of remaining in place without being able to move up. The net reality, as the chart shows, is that we rank highest for immobility and inequality, which is exactly the opposite of what America is supposed to offer its people, and the opposite of what America provided at its best.

FIGURE 2: The Great Gatsby Curve of social immobility for several developed nations

The media has been focusing more and more on the issue of the gross income gap and the national debt (not the debt incurred by individuals); yet the public and even some business leaders still have only a vague notion of how imbalanced wealth is, as the next series of charts demonstrate.

Based on a study in 2011 by researchers at Harvard Business School and Duke University, figure 3 shows what people think is the ideal share of wealth among the American adult population. The first bar at the left indicates what most think should be the ideal share for the top 20 percent.

FIGURE 3: The assumed ideal is that the top 20 percent should own 30 percent of wealth

From the same study, figure 4 shows how most people imagine wealth is actually apportioned by income group. They understand that in today’s world, wealth is distributed in a less-than-ideal fashion.

And figure 5 shows the actual reality, which comes as a real shock to most people.

As I mentioned, in America, the gap between rich and poor wasn’t a problem in the recent past. So why worry now? If you step back, it comes into focus. On a global basis, the world has made extraordinary strides in reducing poverty. This has been a phenomenal accomplishment for humankind—and for free-market capitalism, which has driven the rise in the quality of life almost everywhere. Think of what capitalism has done to transform life for the populations of China, India, Brazil, and so many other developing countries.

FIGURE 4: People believe that the top 20 percent own almost 60 percent of wealth

FIGURE 5: The top 20 percent actually have more than 80 percent of wealth

But for us here in America, at the moment, this engine has slowed to a crawl. This extraordinary creator of wealth—free-market capitalism—isn’t working for anyone but the people at the very top. In times past, it offered the rest of the world a beacon of hope for a better life. It built the strongest, most affluent middle class in world history. We boasted the world’s strongest economy and military. The most urgent question we face now is why we no longer play those roles.

The emerging poor represent a larger and larger portion of our citizenry. The problem is not North vs. South or East vs. West; within our borders, rich and poor are woven together throughout nearly every city and county now. The invisible Poor Next Door can have an address in an upper-middle-class neighborhood, but they won’t be keeping it. Their net worth may have been nullified already, in real terms, as many are still living in their “underwater” homes—where the mortgage exceeds the home’s value—by virtue of their underwater budgets.

It’s a politically and socially explosive juxtaposition of a losing economic struggle for many in a country that publicizes, through advertising and entertainment, how the lucky few are still realizing their dreams. Watch Jennifer Aniston in her commercial for Emirates Airlines, waking from a “nightmare” of flying in a jet that doesn’t have a bar and a shower for her. Anyone with a television can feel the taunt embedded in that commercial—when was the last time you, mere commoner, took a shower at 30,000 feet?

The Brookings Institution found that income inequality rises in the most economically vital cities, such as New York and San Francisco. In other words, the greater the income growth, the greater the inequality. The growth is all at the top. And this is where diverse zip codes are packed most closely together. There are clear sight lines between the richest and their neighbors who may be living at the edge of solvency. In those cities, the gap is everywhere visible to those who are struggling simply to stay off the street.

Most people in this country, with or without justification, feel they are being left behind. That top layer of earners is now claiming a slightly higher percentage of the nation’s income than it did in 1927. (Note the date. While the parallel may not show a causal link between income inequality and the likelihood of a market collapse, the similarity between that time and our own is troubling.)

The Economic Policy Institute reports that during the past three decades, CEO pay has been growing 231 times faster than the average worker’s salary. Compensation in the executive suite grew 725 percent in that period, while a typical worker’s wage rose only 17 percent. Some CEO pay is a multiple of a thousand more than the average wage.

Here is the most dramatic “number behind the numbers”: the Bureau of Labor Statistics has shown that the number of unemployed Americans age sixteen and older—those who want to work but can’t find a job—is an eye-popping 92 million. The only numbers you tend to hear about are the so-called unemployment numbers. The 9.5 million Americans considered unemployed are those who are actively seeking work but not finding it. That’s all. They represent around 5 percent of the 156 million who are considered able participants in the labor force, who are either employed or looking for employment. These numbers completely obscure the enormous level of structural unemployment. Put another way, only 63 percent of those able to work actually have a job or are looking for one—a third of the employable population is out of work. With only a modicum of training, a good many of that structurally unemployed third of the population could well be engaged in some economically productive activity.

So far, we have discussed the tragic reality of income inequality. But the real impact on society is what income inequality helps to produce. The real inequality that results from this income disparity is the resultant inequality of opportunity. That is the human tragedy in America today. I hope the pages that follow show the link between income inequality and the loss of opportunity, the loss of hope, and the loss of the American dream. These are a serious threat to our democracy and our way of life.