[2 articles count as 1 rdg. for papers and notes]Economic growth in the United States: A tale of two countriesby Thomas Piketty, Emmanuel Saez, Gabriel Zucman http://equitablegrowth.org/research-analysis/economic-growth-in-the-united-states-a-tale-of-two-countries/December 6, 2016

OverviewThe rise of economic inequality is one of the most hotly debated issues today in the United States

and indeed in the world. Yet economists and policymakers alike face important limitations when trying to measure and understand the rise of inequality.

One major problem is the disconnect between macroeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income while the study of inequality relies on individual or household income, survey and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60 percent of the national income recorded in the national accounts, with this gap increasing over the past several decades.1

This disconnect between the different data sets makes it hard to address important economic and policy questions, such as:

What fraction of economic growth accrues to those in the bottom 50 percent, the middle 40 percent, and the top 10 percent of the income distribution?

What part of the rise in inequality is due to to changes in the share of national income that goes to workers (labor income) and owners (capital income) versus changes in how these labor and capital incomes are distributed among individuals?

A second major issue is that economists and policymakers do not have a comprehensive view of how government programs designed to ameliorate the worst effects of economic inequality actually affect inequality. Americans share almost one-third of the fruits of economic output (via taxes that help pay for an array of social services) through their federal, state, and local governments. These taxes collectively add up to about 30 percent of national income, and are used to fund transfers and public goods that ultimately benefit all U.S. families. Yet we do not have a clear measure of how the distribution of pre-tax income differs from the distribution of income after taxes are levied and after government spending is taken into account. This makes it hard to assess the extent to which governments make income growth more equal.2

In a recent paper, the three authors of this issue brief attempt to create inequality statistics for the United States that overcome the limitations of existing data by creating distributional national accounts.3 We combine tax, survey, and national accounts data to build a new series on the distribution of national income. National income is the broadest measure of income published in the national

accounts and is conceptually close to gross domestic product, the broadest measure of economic growth.4 Our distributional national accounts enable us to provide decompositions of growth by income groups consistent with macroeconomic growth.

In our paper, we calculate the distribution of both pre-tax and post-tax income. The post-tax series deducts all taxes and then adds back all transfers and public spending so that both pre-tax and post-tax incomes add up to national income. This allows us to provide the first comprehensive view of how government redistribution in the United States affects inequality. Our benchmark series use the adult individual as the unit of observation and split income equally among spouses in married couples. But we also produce series where each spouse is assigned their own labor income, allowing us to study gender inequality and its impact on overall income inequality. In this short summary, we would like to highlight three striking findings.

Our first finding—a surge in income inequalityFirst, our data show that the bottom half of the income distribution in the United States has been

completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61 percent in the United States, yet the average pre-tax income of the bottom 50 percent of individual income earners stagnated at about $16,000 per adult after adjusting for inflation. 5 In contrast, income skyrocketed at the top of the income distribution, rising 121 percent for the top 10 percent, 205 percent for the top 1 percent, and 636 percent for the top 0.001 percent. (See Figures 1 and 2.)

Figure 1

Share This: Figure 2

Share This: It’s a tale of two countries. For the 117 million U.S. adults in the bottom half of the income

distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population aging. Quite the contrary: For the bottom half of the working-age population (adults below 65), income has actually fallen. In the bottom half of the distribution, only the income of the elderly is rising. 6 From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50 percent, while 32 percent went to the middle class (defined as adults between the median and the 90 th percentile), 68 percent to the top 10 percent, and 36 percent to the top 1 percent. An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.

Because the pre-tax incomes of the bottom 50 percent stagnated while average national income per adult grew, the share of national income earned by the bottom 50 percent collapsed from 20 percent in 1980 to 12.5 percent in 2014. Over the same period, the share of incomes going to the top 1 percent surged from 10.7 percent in 1980 to 20.2 percent in 2014.7 As shown in Figure 2, these two income groups basically switched their income shares, with about 8 points of national income transferred from the bottom 50 percent to the top 1 percent. The gains made by the 1 percent would be large enough to fully compensate for the loss of the bottom 50 percent, a group 50 times larger.

To understand how unequal the United States is today, consider the following fact. In 1980, adults in the top 1 percent earned on average 27 times more than bottom 50 percent of adults. Today they earn 81 times more. This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi. Another alarming trend evident in this data is that the increase in income concentration at the top in the United States over the past 15 years is due to

a boom in capital income. It looks like the working rich who drove the upsurge in income concentration in the 1980s and 1990s are either retiring to live off their capital income or passing their fortunes onto heirs.

Our second finding—policies to ameliorate income inequality fall woefully shortOur second main finding is that government redistribution has offset only a small fraction of the

increase in pre-tax inequality. As shown in Figure 1, the average post-tax income of the bottom 50 percent of adults increased by only 21 percent between 1980 and 2014, much less than average national income. This meager increase comes with two important limits.

First, there was almost no growth in real (inflation-adjusted) incomes after taxes and transfers for the bottom 50 percent of working-age adults over this period because even as government transfers increased overall, they went largely to the elderly and the middle class. Second, the small rise of the average post-tax income of the bottom 50 percent of income earners comes entirely from in-kind health transfers and public goods spending. The disposable post-tax income—including only cash transfers—of the bottom 50 percent stagnated at about $16,000. For the bottom 50 percent, post-tax disposable income and pre-tax income are similar—this group pays roughly as much in taxes as it receives in cash transfers.

Our third finding—comparing income inequality among countries is enlighteningThird, an advantage of our new series is that it allows us to directly compare income across countries.

Our long-term goal is to create distributional national accounts for as many countries as possible; all the results will be made available online on the World Wealth and Income Database. One example of the value of these efforts is to compare the average bottom 50 percent pre-tax incomes in the United States and France.8 In sharp contrast with the United States, in France the bottom 50 percent of real (inflation-adjusted) pre-tax incomes grew by 32 percent from 1980 to 2014, at approximately the same rate as national income per adult. While the bottom 50 percent of incomes were 11 percent lower in France than in the United States in 1980, they are now 16 percent higher. (See Figure 3.)

Figure 3

Share This: The bottom 50 percent of income earners makes more in France than in the United States even

though average income per adult is still 35 percent lower in France than in the United States (partly due

to differences in standard working hours in the two countries).9 Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the United States would be even greater after taxes and transfers.

The diverging trends in the distribution of pre-tax income across France and the United States—two advanced economies subject to the same forces of technological progress and globalization—show that working-class incomes are not bound to stagnate in Western countries. In the United States, the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage.

ConclusionGiven the generation-long stagnation of the pre-tax incomes among the bottom 50 percent of wage

earners in the United States, we feel that the policy discussion at the federal, state, and local levels should focus on how to equalize the distribution of human capital, financial capital, and bargaining power rather than merely the redistribution of national income after taxes. Policies that could raise the pre-tax incomes of the bottom 50 percent of income earners could include:

Improved education and access to skills, which may require major changes in the system of education finance and admission

Reforms of labor market institutions to boost workers’ bargaining power and including a higher minimum wage

Corporate governance reforms and worker co-determination of the distribution of profits Steeply progressive taxation that affects the determination of pay and salaries and the pre-tax

distribution of income, particularly at the top endThe different levels of government in the United States today obviously have the power to make

income distribution more unequal, but they also have the power to make economic growth in America more equitable again. Potentially pro-growth economic policies should always be discussed alongside their consequences for the distribution of national income and concrete ways to mitigate their unequalizing effects. We hope that the distributional national accounts we present today can prove to be useful for such policy evaluations.

We will post online our complete distributional national accounts micro-data. These micro-files make it possible for researchers, journalists, policymakers, and any interested user to compute a wide array of distributional statistics—income, wealth, taxes paid and transfers received by age, gender, marital status, and other measures—and to simulate the distributional consequences of tax and transfer reforms in the United States.

—Thomas Piketty is a professor of economics at the Paris School of Economics. Emmanuel Saez is a professor of economics and director of the Center for Equitable Growth at the University of California-Berkeley. Gabriel Zucman is an assistant professor of economics at the University of California-Berkeley. They are co-directors of the World Wealth and Income Database, together with economists Facundo Alvaredo at the Paris School of Economics and Anthony Atkinson at Oxford University.

1. Many important forms of income, such as fringe benefits of employees, retained profits and taxes paid by corporations, or imputed rent of homeowners, are part of U.S. national income but are not

included in individual survey or tax data. 2. Official U.S. Census Bureau household income statistics are based on money income. Money

income does not subtract individual taxes but adds back cash (but not in-kind) transfers. Hence, it is a mixed concept in between pre-tax and post-tax. It is conceptually sounder to focus separately on pre-tax and post-tax income. The U.S. Congressional Budget Office evaluates the federal tax burden by income groups but does not factor in state and local taxes (U.S. Congressional Budget Office, “The Distribution

of Household Income and Federal Taxes, 2013”, 2016, Washington DC: U.S. Congressional Budget Office)

and does not try to assign the benefits of federal government spending back to individuals. 3. Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts:

Methods and Estimates for the United States”, Cambridge MA: NBER Working Paper, December 2016,

http://gabriel-zucman.eu/files/PSZ2016.pdf. 4. National income is gross domestic product minus capital depreciation plus net income received

from abroad. Capital depreciation is not income and income from abroad is important, particularly

among top earners.

5. All our data are expressed in constant 2014 dollars, using the national income deflator. 6. Our pre-tax income series are based on income after the operation of private and public

pensions so that pension and social security income is included in pre-tax income (and the corresponding contributions are deducted). We also estimate series for factor income (before the operation of pension systems). Factor income series also display stagnation of bottom 50 percent of incomes since 1980. We prefer using pre-tax income series which give the elderly reasonable incomes so

that aging has little impact on our inequality series. 7. This 9.5 points increase in the top 1 percent of the pre-tax U.S. national income share is similar

in magnitude to the increase estimated in the Piketty-Saez series, where the top 1 percent income share (when including realized capital gains) increases by 11.4 points from 10 percent in 1980 to 21.4 percent in 2014. The Piketty-Saez series are based on a fiscal income concept, which captures only about two-thirds of total national income, and they use the family tax unit instead of the adult unit (see Thomas Piketty and Emmanuel Saez “Income Inequality in the United States, 1913-1998,” Quarterly Journal of

Economics, 118(1), 2003, 1-39.) 8. The results for France are presented in Bertrand Garbinti, Jonathan Goupille, and Thomas

Piketty, “Inequality Dynamics in France, 1900-2014: Evidence from Distributional National Accounts

(DINA),” 2016, Paris: Paris School of Economics working paper. 9. In these calculations, we apply the 2014 Purchasing Power Parity exchange rate of 0.819 Euros

per US dollar estimated by the Organisation of Economic Cooperation and Development.

Pay gap between college grads and everyone else at a recordBy CHRISTOPHER S. RUGABER Associated Press HTTP://WWW.STARTRIBUNE.COM/PAY-GAP-BETWEEN-COLLEGE-GRADS-AND-EVERYONE-ELSE-AT-A-RECORD/410514335/JANUARY 12, 2017 — 10:09AM

WASHINGTON — Americans with no more than a high school diploma have fallen so far behind college graduates in their economic lives that the earnings gap between college grads and everyone else has reached its widest point on record.

The growing disparity has become a source of frustration for millions of Americans worried that they — and their children — are losing economic ground.

College graduates, on average, earned 56 percent more than high school grads in 2015, according to data compiled by the Economic Policy Institute. That was up from 51 percent in 1999 and is the largest such gap in EPI's figures dating to 1973.

Since the Great Recession ended in 2009, college-educated workers have captured most of the new jobs and enjoyed pay gains. Non-college grads, by contrast, have faced dwindling job opportunities and an overall 3 percent decline in income, EPI's data shows.

"The post-Great Recession economy has divided the country along a fault line demarcated by college education," Anthony Carnevale, director of Georgetown University's Center on Education and the Workforce, said in a report last year.

College grads have long enjoyed economic advantages over Americans with less education. But as the disparity widens, it is doing so in ways that go beyond income, from homeownership to marriage to retirement. Education has become a dividing line that affects how Americans vote, the likelihood that they will own a home and their geographic mobility.

The dominance of college graduates in the economy is, if anything, accelerating. Last year, for the first time, a larger proportion of workers were college grads (36 percent) than high school-only grads (34 percent), Carnevale's research found. The number of employed college grads has risen 21 percent since the recession began in December 2007, while the number of employed people with only a high school degree has dropped nearly 8 percent.

Behind the trend is a greater demand for educated workers, and the retirement of older Americans, who are more likely to be high school-only graduates.

The split is especially stark among white men. For middle-age white men with only high school degrees — the core of President-elect Donald Trump's support — inflation-adjusted income fell 9 percent from 1996 through 2014, according to Sentier Research, an analytics firm. By contrast, income for white men in the same age bracket who are college graduates jumped 23 percent.

Long after the recession ended, many young college graduates struggled to find well-paying jobs in a slowly recovering economy, and stories about graduates working as coffee shop baristas abounded. But data collected by the New York Federal Reserve suggests that trend has faded as the economy has improved.

Yet few experts think the solution is simply to send more students to four-year colleges. Many young people either don't want to spend more years in school or aren't prepared to do so. Already, four in every 10 college students drop out before graduating — often with debt loads they will struggle to repay without a degree.

Rather, labor economists say, many high school grads would benefit from a more comprehensive approach to obtaining skills, especially involving technology, that are increasingly in demand.

"If the only path you offer them is a traditional college path, they're not going to be successful," says Harry Holzer, an economist at Georgetown University.

Helping lift high school graduates' skill levels is critical, given the many ways they are lagging behind their college-educated peers:

— They're less likely to have a job. Just two-thirds of high school-only grads ages 25 through 64 were employed in 2015, down sharply from 73 percent in 2007. For college graduates in the same age group, employment dipped only slightly from 84 percent to 83 percent.

— They're less likely to be married. In 2008, marriage rates for college-educated 30-year olds surpassed those of high-school-only grads for the first time. And women with college diplomas enjoy an 8-in-10 chance of their first marriage lasting 20 years, according to the Center for Disease Control's National Center for Health Statistics. That's double the odds for women with just high school degrees.

— High school-only grads are less likely to own homes. Sixty-four percent are current homeowners, down from 70 percent in 2000. By contrast, three-quarters of bachelor's degree holders are homeowners, down slightly from 77 percent in 2000, according to real estate data firm Zillow.

— A college-educated worker is now more likely to belong to a labor union than a high-school-only worker is, according to Pew Research Center. Unions have played a key role in raising pay for members. Yet just 6 percent of workers with only a high school degree now belong to one. Public employee unions, which often represent teachers and others with college educations, have generally maintained staying power while large industrial unions have deteriorated.

— College grads are more likely than high school-only graduates to contribute to a 401(k)-style retirement plan, according to research by Christopher Tamborini of the Social Security Administration and Changhwan Kim, a sociology professor at the University of Kansas. College grads contributed 26 percent more even when members of both groups had similar incomes and access to such plans, their research found.

Participation in 401(k)-style plans requires decisions — whether and how much to contribute and how to invest — that can become barriers for the less educated. That contrasts with traditional pensions, which automatically enrolled everyone eligible and provided defined benefits. But traditional pensions have been rapidly phased out.

— College graduates are more likely to move to find work than high-school-only workers are, says Enrico Moretti, an economist at the University of California, Berkeley. Companies tend to recruit more broadly for high-skilled jobs than for low-skilled work.

"College graduates are essentially in a nationwide labor market," Moretti said.All of this contributed to a sharp political split in the presidential

election. College graduates favored Hillary Clinton by 9 percentage

points. Non-college grads chose Donald Trump by 8 points, according to exit polls. That was the largest disparity between the two groups on record since 1980, according to the Pew Research Center.

"These are some of the largest (demographic) shifts in recent years," said Jocelyn Kiley, an associate director at Pew.

The gap is most pronounced among whites: Nearly two-thirds of white non-college grads voted for Trump, compared with just 45 percent of whites with college degrees.

Some of these trends might eventually reverse themselves if more high school grads acquire the skills needed for higher-paying work. Though many middle-income jobs don't require college, nearly all require some post-high school education or training.

What Holzer calls the "new middle" includes such health care jobs as X-ray technicians and phlebotomists, as well as computer-controlled manufacturing and some office occupations, like paralegals.

A typical X-ray technician, for example, earns nearly $60,000 a year and needs only a two-year degree, according to government data.

And these "new middle" positions are typically the same jobs for which employers have complained that they can't find enough qualified people to fill. Labor experts say the U.S. educational system is failing to help young people acquire such skills.

If they know where to look, high school graduates can choose from among numerous options for vocational skills training — from two-year programs to online courses to for-profit schools. Yet many aren't likely to get much help from high school guidance counselors.

Joseph Fuller, a professor at Harvard Business School, says counselors increasingly focus on things like substance abuse, discipline and standardized testing, rather than on career advice.

Nor do U.S. high schools funnel students into the kind of on-the-job apprenticeships that exist in some countries. Instead, Fuller says, U.S. apprentices are typically older workers upgrading their skills in areas like construction. The average age of an apprentice in Germany is 17, he notes; in the United States, it's 27.

"We have a very limited vision of how to get people from their graduation in high school onto a path that's going to lead them to have a successful, independent life," Fuller said.

Asia Howard, 26, of Jacksonville, Florida, is navigating that path right now. She was stuck in mostly retail and fast-food jobs after graduating high school, unable to get a job in banking, a profession she prized for its steady hours. A friend told her about a nonprofit called Year Up, which teaches such career skills as resume writing, interview techniques and time management.

Year Up participants also typically receive internships, which Howard spent at Everbank. She also took classes to upgrade her computer skills. Early last year, she began a job in mortgage lending at PNC Financial that pays nearly twice what she earned in previous jobs. She saw many people lose homes during the financial crisis. Now, she helps people buy them.

"It gives me a chance to see what that side of life is like," Howard said. And unlike in her previous jobs, "I can see a lot of room to grow." She is also studying for

an associate's degree in business administration at Florida State College at Jacksonville.

The driving force for many of these changes was the recession, which reshaped the job market in ways that left far fewer opportunities for workers like Howard. Many routine jobs were replaced by computers or robots or were outsourced overseas.

There are nearly 1.5 million fewer office administrative and clerical jobs now than there were before the recession, according to an analysis by Georgetown's Center on Education and the Workforce. That narrowed a long-time path to the middle class for high school graduates, particularly women.

Manufacturing employment is also 1.5 million lower than when the recession began in 2007. The construction industry had offered a lifeline to many high-school educated workers, particularly men, during the housing boom in the 2000s. Yet construction now employs 840,000 fewer people than it did nine years ago.

Since the recession, the fastest-growing industry for high school-only grads has been a mostly low-paying sector that includes restaurants, hotels, and amusement parks, according to Georgetown's analysis.

Those are the types of jobs that Crystal Thompson, 35, of Seattle, has held since she finished high school. She has worked at Domino's Pizza for seven years.

"The only jobs that are out there are pretty much minimum wage jobs — coffee shops, restaurants, things like that," she said. "I'm pretty much stuck in fast food for now."

Her raises have come from minimum wage increases. She went on strike twice during Seattle's recent "Fight for $15" campaign, which led the City Council to approve a citywide $15 minimum wage.

Thompson, who has three children, wants to return to school to become a translator. She is mostly fluent in Spanish. Yet she has found it hard to do so in part because her work schedule can fluctuate and is typically distributed just a day in advance.

The closest community college lacks the classes in medical and legal translation she needs. Those classes are offered at another community college a half hour away, so she needs to buy a car to attend them.

"It's definitely one of my goals, to get some kind of career going," she says. "I want to be a productive member of society."