We already posted about the recent history of income inequality in the US. Lets have a look at the big picture and see what happened about 100 years ago.
Before the industrial revolution social mobility was basically zero and a small group of feudal sovereigns ruled over the mostly peasant population. The only exception was the New World. In Colonial America the 13 colonies formed where more equal than any other place on the planet. Then came the industrial revolution and the income gaps increased tremendously. For example in England the gini coefficient (a measure for income inequality) shot up from 0.4 in 1823 to 0.63 in 1871. However, with the growing industrial workforce came growing political pressure for redistribution and so in the 1880s Germany pioneered with pensions and unemployment insurance. America even changed its constitution to introduce income tax in 1913! In the 1930s the New Deal introduced Social Security, disability and unemployment insurance. Remember, in 1944 the income tax rate was 94% in the US as a reaction to the great depression. Now just think what we are discussing these days…
All this meant that for decades the incomes at the bottom and middle of the income distribution grew faster than at the top. All this changed from the 1980s: deregulation, globalization and the advent of information technology changed the playing field. As a result, the integration of 1.5 billion workers of emerging-countries increased return on capital and made sure the top gained ever more profit on investements, while worker’s wages came under pressure. Simultaneously, the unions got busted.
The national income of the top 1% has now reached again the same level as in 1923. Then and now this can not be sustainable. A lot of the inequality is inefficient and reflects market and government failures that also reduce growth as it is reducing social mobility and future prosperity. It is not only about higher taxes and more handouts, it is about investing in the young for future innovation in a world of global competition.