Even if we act to erase material poverty, there is another greater task, it is to confront the poverty of satisfaction – purpose and dignity – that afflicts us all. — Robert F. Kennedy

Everyone knows that the United States is a highly unequal country. But what does that really mean? Since the Occupy Wall Street protests of 2011 and a raft of books on inequality that began appearing as the Reagan Revolution unfolded, the conventional wisdom has been that the economic divide between the rich and everybody else has been inexorably widening. When Representative Alexandria Ocasio-Cortez wore a gown emblazoned with “Tax the Rich” at the super-elite 2021 Met Gala, The New York Times’s Maureen Dowd drily remarked that the self-styled radical was expressing an opinion already held by a solid majority of the public.

Once only the focus of left-wing activists and economists, inequality has emerged as a mainstream issue. Republicans have always struggled to gain electoral traction simply by appealing to business interests and arguing – correctly, when accurately expressed – that increased investment in the economy can and often does benefit many, not just the investors. Recently, they have gained office by capturing working-class voters through what is essentially an “inequality” appeal: that they have been left behind by the “elitist” Democrats.

However, talk about inequality is cheap and often superficial. Politicians, pundits and even researchers frequently only present the data that best supports their arguments. We must sift through the misdirection to clarify what we know and what we don’t about different forms of inequality and why those differences matter.

Compared to many other periods in our nation’s history, the years since 1980 have seen regression in the share of both societal wealth and income held by the poor, working class and middle class. This is particularly true for market wealth, such as stocks and homes, as well as market incomes, primarily cash wages.

In our Re-Gilded Age, the top 1 percent of U.S. households in 2022 could claim to hold nearly one-quarter of the nation’s market wealth. Correspondingly, rising wealth and market income inequality have coincided with a decline in social mobility. Children from families with low or moderate wealth are less likely to exceed their parents’ earnings and ascend the social ladder when compared to their ancestors a half-century ago – or to their counterparts in other wealthy nations.

These decades have also coincided with what labor economists, demographers, journalists, historians, evolutionary biologists and policy analysts describe as a multi-decade increase in low-wage, economically insecure jobs, a transition from a “we” to an “I” society, a focus on the individual and individualism, and growing stress within society.

People with even modest amounts of market wealth face much less risk in life. They have the means to ride through bad periods, whether accidental or not. Unemployment and lack of income are less of a threat. They are much less likely to borrow and get sucked into the high interest rates – not to mention the outrageous fees – lenders typically charge low-wealth, low-income borrowers.

While above-average market income can provide a steady source of support, a family with equity in a home of $400,000 typically will need about $20,000 less annually that would have gone to pay for renting an equivalent place. Put another way, the family will have $20,000 in extra “income” provided by that housing wealth.

That’s a nice base on which to rely, a type of insurance that both adds to income and reduces the risk of getting evicted from a rental when unemployed or facing humongous medical bills. The equity can also be tapped for emergency loans, starting a small business or supporting a better retirement. Moreover, affluence begets affluence. Individuals with above-average net worth or market income typically reside in neighborhoods with superior schools. They frequently associate with others who are aware of job or business opportunities that offer them further income gains. They can afford to take risks in moving to new jobs or choosing to retire early. They pass on their net worth and skills to their children, extending a cushion to the next generation.

Market Versus Total Wealth and Income

Although effective policy design requires making crucial distinctions about various forms of inequality, progressives at times seem to suggest that anything that makes the income distribution more equal must be good policy. Rather than engage the issue, the second Trump administration has one-upped them and banned the discussion by penalizing civil servants and government contractors for even using terms like “equity.”

In addition to market wealth or net worth – such as ownership of homes, retirement plans businesses and other assets – employers, social scientists and economists frequently emphasize the importance of another type of wealth: human capital.

This encompasses a broad range of abilities and opportunities that allow us to thrive and contribute more effectively in the market, community and at home. Human capital involves not only the capacity to earn money from work but also the social, cognitive, teamwork, and empathy skills that typically lead to greater success in both school and the workplace. Just as market returns from wealth, such as stocks and bank accounts, appear in the form of dividends, interest and capital gains, the market returns to human capital primarily manifest as wages and other types of labor compensation, including employer-provided health insurance.

I generally use the terms, “wealth” or “asset ownership” to refer to both market wealth and human capital. And for the most part, I consider wealth accumulation synonymous with the attainment of upward mobility and the creation of greater opportunity. There are no measures of this concept of total wealth per se. What we can examine, however, are both market wealth and market incomes. The former entails real and financial capital (excluding human capital), while the latter refers to the combined market returns from both market wealth and human capital.

Just as market wealth differs from (unmeasurable) total wealth, market income also differs from (measurable) total income. Total income equals market income plus income from government benefits, like Social Security, less taxes paid. Note that the degree of income inequality varies considerably depending on whether government transfers and taxes are included.

Where is Inequality Most Pronounced?

If you conduct a quick review of news coverage on inequality, you will observe that Democrats cite measures of growth in any sort of economic inequality as a justification for a larger government, while Republicans defend the status quo by praising alternative measures that suggest inequality has increased less, if at all. Even academics debate over who has measured the growth in inequality most accurately. The question, however, should not be, “What is the right measure?” A more pertinent question is, “What are the implications of the alternative measures for individual well-being and policy?”

To clarify matters:

• Net worth or market wealth usually refers to holdings of financial and real assets, less debt.
• Market income refers to labor income plus the returns to market wealth. Note that federal income tax returns capture wages, dividends, interest and other items of market income, but still exclude a number of other items such as employer-provided benefits and the implicit returns (rents) to owner-occupied housing. Because gains from assets are hard to measure, most measures include only gains realized when assets are sold.
• Labor income refers to earnings from work. (Another confusion here is that much business income includes returns to both labor and capital, both of which are captured in measures of total income even if they can’t easily be separated.)
• Wages refers to cash wages.
• Total income refers to the combination of market incomes from labor and capital, plus transfers less taxes from the government. It excludes benefits from public goods like defense and toll-free roads.
• Consumption refers to measures of goods and services that people consume.

I’ve organized this list hierarchically according to the degree of measured inequality, ranging from highest to lowest. Net worth inequality is significantly greater than inequality in market income, labor income or wages, and all measures of market income show greater inequality than measures of total income inequality that include government transfers and taxes. Consumption inequality can be useful in some contexts, such as determining whether individuals have adequate food and shelter. It sometimes receives support from economists who further assume – and it is entirely an assumption – that individuals’ well-being can be approximated solely by their consumption.

Yes, the rich and the poor likely add the same amount of milk to their cereal. High-income Americans are more prone to pay for it with after-tax earnings, while low-income Americans are more inclined to use Supplemental Nutrition Assistance Program benefits. However, when comparing the houses for sale in East Hampton or Montecito to those in rural Kentucky or North St. Louis, or examining the clientele of Sotheby’s versus that of Dollar General, one can see the limitations of this perspective in assessing social mobility and opportunity. Though President Jimmy Carter faced ridicule for his speech in 1979 on national malaise, he was not incorrect when he stated that “consuming things does not satisfy our longing for meaning.”

Market Wealth Inequality and Its Growth

Almost all studies of generational mobility concentrate on market wealth and income, not consumption. No one assesses upward mobility by evaluating whether we receive more government-provided food stamps, health care or years of retirement support than our parents did. Consumption also does not fully capture the opportunities available to individuals. The influence of Warren Buffett is hardly measurable by his consumption – he lives the lifestyle of his upper-middle-class neighbors in Omaha.

Data on net worth and wealth inequality derived from the Federal Reserve’s Survey of Consumer Finances every three years from 1983 to 2022 provide perhaps the best comparative snapshots of how wealth has grown for different classes of the population over recent decades. Families in the bottom 25 percent of the wealth distribution had an average net worth that was negative in 1989 and thereafter. The net worth of the next two quartiles did roughly double from 1983 to 2022. Still, even in the second-highest quartile, average net worth had increased to only about $400,000 in 2022. Meanwhile, the net worth of those between the 75th and 90th percentiles nearly tripled, while those in the 90th to 100th percentiles saw their average net worth more than quadruple to over $8 million.

The growth and concentration of net worth within the top quintile conceal the degree to which it is concentrated at the very top. Using a slightly more comprehensive measure than the SCF, Jesse Bricker and his colleagues at the Federal Reserve found that the wealthiest 1 percent of Americans held about one-third of the country’s wealth in 2019, up from roughly one-quarter in 1989. In contrast, the top 1 percent in Japan held about 11 percent of that country’s wealth, while the comparable figure for Germany’s top 1 percent was around 19 percent in the mid-2010s.

Surveys indicate that about half of Americans lack sufficient liquid assets to cover three months of expenses. In addition to the negative net worth of the lowest-income quintile mentioned above, over one-fourth of households were either unable to pay their monthly bills or were just one $400 financial setback away from being unable to pay them in full.

The data can mislead depending on the periods over which comparisons are made (the 1983 figures also use a slightly different methodology than those from 1989 to 2022). Additionally, from around 1990 to the end of 2021, the nation experienced an extraordinary bubble in the valuation of market wealth well beyond the creation of more wealth for more people in the form of equipment, housing and other capital. As of this writing, the bubble has remained inflated, despite a couple of small and brief sags. The long-term impact of this bubble remains uncertain.

Income Inequality

Measures of income inequality can be more confusing than those of wealth inequality. Even esteemed researchers disagree on what is included and how to measure it. A prime focus within the income inequality debate is over whether total income inequality has grown as much as often asserted.

The changes in market income are what matter here for two key reasons. First, these market measures are essential for assessing the decline in upward mobility within society, an area where public policy has largely faltered. Second, the rise in market income inequality, regardless of gains in transfers of government health and Social Security benefits, helps explain the modern rebellion among many working-class individuals (regardless of race or ethnicity,) and the young.

My income analysis is based on Congressional Budget Office data, a notably impartial and authoritative source, but I believe my conclusions would not differ significantly from those drawn from other sources. These data reveal that individuals in households within the bottom 20 percent of the market income distribution earned only 2 percent of total market income in 2021 – a slight decline from 1979. Every other income group, except for the top quintile (i.e., fifth), whose share rose from 48 percent to 63 percent, experienced a significant drop in their share. One caveat: 2021 was a Covid-19 year, and the share of the top group still increased by 10 percentage points from 1979 to 2019.

Another way to illustrate this dramatic change is to look at the decline in the shares of quintiles other than the top and bottom ones. For instance, the middle quintile (between the 40th and 60th percentiles) witnessed a drop of 4.4 percentage points from a base of 16.1 percent, indicating a 30 percent decline in its share of total market income.

Although wages dominate market incomes, health insurance, 401(k) plans and other employer- provided benefits change the dynamics for many. These benefits significantly enhance the compensation of the top three quintiles of the workforce.

While some lower-wage workers are fortunate enough to secure jobs with employers that offer such perks, many lower-income and part-time workers do not receive employee benefits from what was once colloquially known as America’s “private welfare state.”

Furthermore, the rapidly rising dollar value of employer-provided health insurance – where a decent family policy can cost an employer well over $20,000 – does not improve workers’ perceptions of their compensation. Anne Case and Angus Deaton, who documented the increasing numbers of deaths of despair related to drugs, alcohol abuse and suicide, attribute these issues partly to how “the U.S. healthcare system … is needlessly eroding workers’ wages” while failing to provide preventive care. Meanwhile, Sylvester Schieber, a former chair of the Social Security Advisory Board, provides numerous examples illustrating how an employer-provided insurance policy that costs $20,000 or more can significantly limit the growth in cash earnings available to workers at nearly all earning levels, except for the very top.

At the same time, market income is an incomplete measure of total income because higher-income individuals pay a significant share of taxes and many receive transfers from a host of sources – indeed, lower-income and older individuals often receive transfers exceeding their market income. While what I call the “three Santas” of easy money – Democratic spending, Republican tax cuts and often zero borrowing costs – have likely alleviated a portion of the growth in inequality in total income, they’ve also contributed to increasing inequality in market income and wealth by increasing household reliance on government.

Work

Work, not just income, matters to individual well-being and how the historical debate over inequality has evolved from wealth to income. In particular, one cause of modern income inequality is the increasing divide between those with stable employment and those who have precarious work or are not working at all.

Changes in the unemployment rate tell us less and less over time about the impact of work on income and opportunity distribution. The most visible calculation of the unemployment rate – the number reported every first Friday of the month – only includes individuals actively seeking jobs during the previous four weeks. However, most nonworking Americans are not searching for jobs. Between 1950 and 2024, working-age male participation has almost continually declined from 86 to 68 percent, while female participation rose from 34 to 58 percent. Focusing only on the period from 2000 to 2024, the male participation rate dropped by six percentage points and the female by two percentage points. The United States, which likes to view itself as a nation of hard workers, has often lagged behind many other G7 countries.

So, who makes up America’s large nonworking class, what do they do and how do they get by? Setting aside the elderly, non-work has increased sharply since the 1970s among men with less than a four-year college degree. While some look for work or become active “house husbands,” time-use studies find that many spend no more time caring for their children or doing housework than men with full-time jobs. TV and the internet, drugs and alcohol loom large. Department of Defense surveys find that 77 percent of 17-to-24-year-olds cannot qualify to be Army recruits.

The major reasons? Outside of ever-expanding lives in retirement (mainly for those already well-off), ill health, drug dependencies, police records and a lack of high school education loom large. When it comes to making ends meet, record numbers of younger men (read: well into their 30s) and a smaller number of women live with their parents or other family members. Some are supported by spouses or partners, some drift in and out of the workforce and others rely on government benefits. However, most members of this modern-day alienated proletariat aren’t doing well by any measure, and their sizable ranks contribute to socioeconomic inequality and a rebellion against society that Richard Reeves and the American Institute for Boys and Men, and, earlier, Andrew Yarrow, so well document.

This is not a dismissal of the character of those left behind, but rather yet a further critique of how Republicans and Democrats uphold policies that fail to adapt to contemporary needs and conditions.

Unequal Opportunity and the American Dream

The shortcomings of previous efforts to enhance the distribution of wealth and market income should motivate all parties to explore better methods for ensuring that each individual gains what the Nobel economist Amartya Sen describes as “capabilities” to attain a form of personal freedom.

In a sense, this has embodied the American Dream, which, while defined in many ways, has consistently focused on the belief that anyone, regardless of their birth circumstances, can achieve success through hard work. This concept, alongside freedom, has arguably represented the most defining characteristic of the United States in the eyes of the world. Visitors like Lafayette and de Tocqueville, along with early American leaders such as Benjamin Franklin, celebrated the strength of the middle class and the absence of pretentious European social hierarchies.

Although Horatio Alger’s rags-to-riches stories were popular in the late 19th century, it was after World War II that strong, broad-based economic growth and an egalitarian, middle-class culture made the American Dream a spectacular reality. Most segments of society, including those not going to college and even Black Americans living under the legal racism of Jim Crow, achieved an increase in intergenerational social mobility.

We all know what has transpired since, both here and abroad. For American children born in the 1980s – the Millennials – the likelihood of surpassing their parents’ success by age 30 has decreased significantly. As MIT’s Raj Chetty and colleagues have noted, kids born at the start of World War II had a 92 percent chance of earning more than their parents, while those born when Ronald Reagan was re-elected had only a 50 percent chance. Similarly, if income growth had continued to be distributed as evenly as it was between the 1940s and 1970s, 70 percent of that decline in mobility would be reversed.

* * *

So much for the land of opportunity. Government policies, supported by both parties, have predominantly prioritized wealth accumulation for the affluent and consumption for the masses, making it increasingly difficult for many Americans to build wealth and earn market income. I don’t claim these are the only factors at play – racial discrimination and anticompetitive policies also require attention. Nor do I deny that various market forces, such as a more global economy, contribute to this issue. Rather, I’m convinced that government policy could have channeled those forces better to the benefit of the many.

The Tenuous Focus on Income

The focus on inequality in income terms is itself a relatively modern idea. For most of history, wealth or property and status received more attention. Two decades before the Declaration of Independence, Jean-Jacques Rousseau wrote in his Discourse on Inequality that beyond natural or physical differences among people, civil society is characterized by differences in “wealth, nobility or rank, power and personal merit.”

A few years later, Adam Smith also presented inequality in terms that knitted together social status, wealth, and moral favor. Distinctions of rank are maintained by a “disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect, persons of poor and mean condition,” Smith wrote in his Theory of Moral Sentiments.

Income inequality became a sharper focus in the 19th century, as the great British economist David Ricardo saw distribution between “rent, profit and wage” as the fundamental problem of political economy. Karl Marx, who juxtaposed the owners of the means of production and those who only owned their labor power, viewed inequality in terms of property and social class. For most economists, politicians, and activists even into the middle of the 20th century, the primary focus was on the conflict between owners and workers, not the broader economic distribution of income among individuals of different income and social classes.

The concept of human capital was expressed by Max Weber, the German social theorist, when he argued that power is based not only on the ownership of land and capital but also on status, physical strength, and knowledge – a concept that French social theorist Pierre Bourdieu expanded to include “cultural capital.”

Inequalities in education and health, along with different forms of human capital, also contribute to economic inequality. Similarly, the enduring legacy of past discrimination helps explain issues such as the significantly larger wealth gap than income gap between Black and white Americans, as well as how our retirement systems provide the most years of support to those with the highest incomes. Does anyone fail to see how the anger and attacks on elite colleges by individuals with privileged educations, like Vice President JD Vance, correlate with the findings of Harvard economists Raj Chetty, John Friedman and others, showing that 38 elite colleges have more students from the highest-income 1 percent of families than from the bottom 50 percent?

Social reformers from Charles Dickens to Jane Addams, Michael Harrington and more recently, Michael Desmond, cared more about fighting poverty than inequality. When Harrington’s The Other America was published in 1962, progressive social critic Dwight Macdonald even stated, “Inequality of wealth is not necessarily a major social problem per se; poverty is.” Most War on Poverty initiatives under President Lyndon Johnson focused on alleviating poverty through government transfers.

There is a significant danger here, especially if poverty is defined merely in income terms. Means-tested programs aimed at the poor are relatively inexpensive, representing only a modest portion of total social welfare spending. An excessive focus on poverty often justifies neglecting how well the government serves all citizens. Some wealthy individuals prefer supporting research institutions that combine arguments for low tax rates with a government narrowly focused on poverty relief and a few public goods, such as defense.

To top it off, in the U.S., the official measure of poverty has not been adjusted since the early 1960s for growth in real income. The poverty level for an individual has decreased to about one-quarter of what a full-time worker at the median wage would earn. It continues to decline further in relative terms as per capita real income grows. Means-tested, annually appropriated programs aimed at alleviating poverty tend to fail politically compared to programs such as Social Security that grow automatically and without appropriations as fast as or faster than per capita real incomes.