Trickle-Up Economics?

If you're in Asheville, N.C., stop by Biltmore, the vast estate that George Vanderbilt III--heir to a railroad fortune--constructed between 1889 and 1895. You can tour most of its 250 rooms, including 43 bathrooms and an indoor swimming pool. When few Americans used electricity, Biltmore had its own generators. To take the tour is to grasp one of the great advances of the 20th century: the gap between the superrich and most Americans has narrowed enormously. In Vanderbilt's time, most Americans lived in filthy slums or on modest farms. Now even the wealthiest among us live more like ordinary people than George Vanderbilt ever did.

We like it that way. Although Americans are not hugely envious of the rich--especially if their wealth seems honestly earned--we also think that prosperity should be broad-based. Trickle-up economics, with most gains flowing to the top, seems un-American. But is that what we now have? Good question. Just last week Forbes magazine reported that the 400 richest Americans are now all billionaires. And the government's recent release of household income and poverty figures for 2005 has sharpened the debate.

Let me try to make sense of it. Superficially, the news was not encouraging. Median household income of $46,326, though up slightly from 2004, was still below its record of $47,671 in 1999 (the median household is the one exactly in the middle). The poverty rate was essentially unchanged at 12.6 percent, well above its recent low of 11.3 percent in 2000 (the poverty rate is the share of people below the official "poverty line," about $20,000 in income for a family of four). But the annual numbers are less important in addressing the trickle-up question than long-term trends. Here are three that I think matter.

Living standards aren't stagnating. Over any realistic period--say a decade--they've risen for almost everyone. From 1992 to 2002, ownership of microwave ovens by the poorest tenth of Americans went from 39 percent to 77 percent, reports one Census Bureau study. VCRs went from 22 percent to 56 percent, computers from 4 percent to 21 percent. Households, when adjusted for their size, uniformly have higher incomes. From 1995 to 2005, the median income of four-person households rose 10.5 percent to $69,605; for three-person households, the increase was 9.6 percent to $58,917. These are real gains, though modest.

The rich are getting an ever-bigger piece of the economic pie. In 2005, the richest 5 percent of households (average pretax income: $281,155) had 22.2 percent of total income, reports Census. In 1990, the share was 18.5 percent; in 1980, 16.5 percent. These figures exclude capital gains--profits on stocks and other assets--that have most benefited the richest 1 percent. With capital gains, their pretax income averaged about $1 million in 2003. That was about 20 times the average income of households in the middle of the economic distribution. In 1979, the ratio was 10 to 1.

The inflow of poor Hispanic immigrants and their (often) American-born children have increased poverty. From 1995 to 2005, the rise in the number of Hispanics in poverty--by 794,000--more than accounted for the entire increase in the U.S. poverty population. Poverty among blacks, though still high, declined. Among non-Hispanic whites, it held roughly steady. Health-insurance coverage has also been affected. Since 1995, Hispanics account for about 78 percent of the increase in the uninsured.

The bottom line: productivity gains (improvements in efficiency) are going disproportionately to those at the top. We do not really understand why. Globalization, weaker unions, increasingly skilled jobs, the frozen minimum wage and the "winner-take-all society" (CEOs, sports stars and movie celebrities getting big payouts) have all been cited as reasons. Costly employer-provided health insurance is also squeezing take-home pay in the middle.

My sense is that intensified competition has simply made employers stingier. Jared Bernstein of the Economic Policy Institute, a liberal think tank, says that only "in supertight job markets do employers have to bid up wages and compensation to keep workers from leaving." Bernstein isn't sure that the present jobless rate (4.7 percent in August) makes it tight enough.

What might government do? The Bush administration's enthusiasm for tax cuts for the rich could be tempered; to reduce the budget deficit, their taxes could be raised without dulling economic incentives. (For the record: I supported the first Bush tax cut and opposed his cuts on capital gains and dividends.) Equally, liberals and others who support lax immigration policies on our Southern border should understand that these policies deepen U.S. inequality.

But many familiar proposals would be mostly symbolic or hurtful. Raising the minimum wage might directly affect only about 5 percent of workers and might destroy some jobs. Protectionism might save a few well-paid jobs but would inflict higher prices on those least able to afford them. Still, no one should be happy with today's growing economic inequality. It threatens America's social compact, which depends on a shared sense of well-being.