by Michael Beaudet
This election cycle has seen significant focus on Trump’s ability to separate the Democrats from one of their historically important bases: non-college educated whites. Although there are many reasons for this shift of support, one that has received little attention is increasing income inequality. The rise of the top 1%, compared to the remainder of income earners in the U.S., has driven lifetime Democrats directly into Trump’s base of support. While the mainstream narrative has focused on blue collar workers suffering at the hands of globalization, a Gallup research paper examining polling data argues that the true motivations of Trump supporters are more complicated.
Vox and The Washington Post summarize the main argument of the Gallup study as this, although Trump’s supporters themselves are not more likely to be unemployed or disadvantaged they come from geographical areas that are suffering from globalization. Rothwell, the study’s author and an economist, offers the explanation that Trump supporters are less concerned about themselves and more focused on how their children will fare. The campaign’s attempts to capitalize on this anxiety is clear, their slogan Make America Great Again is one obvious example. Even though Trump supporters may not have been directly affected by increasing income inequality, their motivations are likely rooted in possible impact that it would have on their descendants.
Populism and Nationalism may have drawn them in with their promises to reverse the preceding trends of income inequality.
To understand the extent of income inequality in the United States it is necessary to examine trends and historical data. According to Piketty and Saez, influential scholars in the study of inequality and publishers of The World Wealth and Income Database, the top 10% of American’s currently take in close to 50% of the income share in the United States. To put this in perspective, the last time top income earners approached this level was on the eve of the Great Depression. These statistics have not occurred through sudden change either, income inequality has been steadily increasing since the 1970s. Another way that Economist’s measure income inequality is in terms of the Gini Coefficient. The Gini coefficient is more useful when comparing income inequality across countries due to differences in factors like standards of living. Compared to many other OECD countries, such as France and the United Kingdom, the U.S. ranks much higher. However it is measured, America has become increasing unequal in recent decades.
Economists have put forward many possible explanations for these increasing trends. The most likely culprits are, skill biased technological change (also known as SBTC), and increasing globalization. Increasing globalization means fewer trade barriers and increasing international cooperation. SBTC can be defined as any technological advancement that favors skilled labor over unskilled labor.
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An example of SBTC is a robot at an auto parts factory. Robots complement high skilled workers that are trained to service them but replace the low skilled workers who used to assemble the vehicles. In this case, skill level does not refer to innate ability, instead it refers to education level.
The current theory of SBTC suggests that advances in technology cause the demand for skilled workers to increase relative to the unskilled.
Higher demand causes an increasing number of high skilled workers to enter the workforce and drives up their wages relative to unskilled workers. That being said, some about income inequality does not align with the current theory of SBTC. SBTC may explain some of the rise in income inequality but it is certainly not the only factor that has shaped the long term trend.
While globalization has many positive effects, it also may have contributed to rising income inequality. Globalization has a greater impact on industries that are exposed to offshoring and employ a large number of low skilled workers (i.e. manufacturing). A report by the World Bank summarizes explains that globalization and offshoring generally lead to “higher job turnover in the short run” which makes the low skilled suffer in the long run. While the empirical data is not definitive for either cause, it is likely that these two factors have had an impact on increasing income inequality. Now that we know the why and the how, it is time to figure out an answer to the most important question, what should we do about it?
A Gallup interview with Angus Deaton, (the Dwight D. Eisenhower Professor of Economics and International Affairs Emeritus at Princeton University), discusses some of the negative and positive aspects of high inequality. One surprising positive aspect of inequality has been increasing college enrollment. Deaton argues that increasing returns to education has caused more people to seek out higher education. A paper from the National Bureau of Economic Research argues that increased education promotes stable democratic governance. Unfortunately, it is clear that those attending college in greater numbers are not from lower income brackets. A study from the American Council on education enrollment rates for different income brackets showed a decrease of close to 10%. Although more people are attending college overall, those who stand to the benefit the most are not following the same trends.
Rising income inequality and persistent high levels of inequality have been linked to other problems as well. An IMF paper discussing the causes and consequences of rising inequality paints a grim picture. According to the paper rising income inequality can lead to, increased political instability and a concentration of power among a smaller group of citizens. The report continues stating that low levels of inequality are less of a concern, but high and persistent inequality is. If the high levels that the US currently experiences continue to rise or remain unaddressed there could be large scale societal consequences in the long term.
Income inequality has had a major impact on the presidential election as well.
Hillary Clinton’s campaign website focuses on creating what they describe as “making an economy that works for everyone”. The policies listed are designed to ensure that all American’s benefit form economic growth. Of the six provisions, the most applicable to income inequality is her plan to provide debt free college. Although it would have little impact on the factors that cause inequality, debt free college would allow a greater number of lower income Americans to benefit from the education premium created by SBTC. Also her plan to invest in infrastructure should more directly assist low skilled workers by providing a greater number of job opportunities. An analysis of Clinton’s tax plan by the Washington Post paints a picture of a comprehensive plan that benefits working families at the cost of upper income earners. The increased taxers would be utilized to pay for her infrastructure and debt free college programs. Together these policies would address the short-run job loss due to globalization and the long run impacts of SBTC. Hillary also has a clear plan on how to pay for these projects using tax increases on the highest income earners. That being said, these policies will require support from Congress as well as continued favorable economic conditions in order to be successful.
Trump’s stance on the issue of income inequality is less clear. His campaign website lists several economic policies that should help address income inequality. These include a “pro-growth tax plan” and an “America-First” trade policy. According to an independent analysis of his tax plan by the Washington Post, low income families will receive small income increases compared to top earners. The Trump campaign argues that this will create jobs and grow the economy. Infrastructure investment is a major part of Trump’s platform as well. Their campaign argues that their policies are in direct contrast to Obama-Hillary’s Globalization agenda. Unfortunately for Trump, large infrastructure spending projects do not align with large tax cuts. Even if a Trump administration slashed spending it would likely end up with huge increases to the national debt. Explaining away this paradox is avoided by the Trump campaign by claiming that their tax plan will produce high economic growth. Pundits at the Center on Budget and Policy Priorities argue that claims of high growth should be met with skepticism.
In regards to both plans, Hillary’s appear both more in line with predicted economic conditions and a better choice for directly addressing income inequality.
Economists believe that the growth rate for U.S. GDP will remain around 2% for the next 4 years. Nowhere near the amount Trump needs to make up for his tax cuts. Hillary’s policies are also more directed at dealing with the short term and long term consequences of rising income inequality. Trump’s tax policy complicates the reasoning of his non-college educated supporters. If they are truly worried about the effects of income inequality on their children, they shouldn’t vote for a tax plan that increases the incomes of top earners.
Overall, rising income inequality has had a major impact on the current election cycle. Candidates on both sides were able to use the issue to energize their base. Going forward if the trend is not addressed there could be major societal consequences, one example is an increased concentration of political power. Whichever candidate wins will be judged on their policies’ ability to reverse the trend or at the very least provide a cushion to low skilled Americans.
Michael Beaudet is a senior economics and foreign affairs major from the University of Virginia. He describes himself as possessing unquenchable ambition and limited knowledge, he hopes to make a difference in the world. His goals are to succeed, meaningfully impact the world in a positive way for others and be happy working hard.
The views expressed in this article are those of the writer. The Contemporary takes no position on matters of policy or opinion.
The picture above was taken by David Shankbone and is under a Creative Commons Attribution 3.0 Unported license and can be found here.
