The Secret to Understanding Income Inequality

“Whenever we observe a massive compression of inequality in income and wealth, there are major shocks of violent disruption behind it.”

READ ON TO DISCOVER:

  • The four major events that reduce inequality
  • Which crucial economic policy both Republicans and Democrats support
  • How a small Wisconsin community stayed resilient after losing 9,000 jobs

Amy Goldstein has been a staff writer for thirty years at The Washington Post, where she shared the 2002 Pulitzer Prize for national reporting. Her first book, Janesville, explores what happens to people and to the texture of a proud community when good work goes away. Walter Scheidel is Dickason Professor in the Humanities, Professor of Classics and History, and Kennedy-Grossman Fellow in Human Biology at Stanford University. His latest book, The Great Leveler, dives into how cataclysm and violence have reduced inequality throughout history. Both shortlisted finalists for the 2017 Financial Times & McKinsey Business Book of the Year Award, Amy and Walter recently sat down to discuss the catastrophic events, both local and global, that drive and diminish income inequality.

Amy: It strikes me that you and I have both written books about changes in people’s economic standing, which boils down to writing about income inequality. But we did this in very different ways. I told this story through a microcosm, taking a close-up of a single community—Janesville, Wisconsin—that went through an economic trauma during a terrible recent time in our nation’s economy. The Great Recession ended an auto plant that had, for nearly a century, provided the best working class jobs in town.

You do this over the very long run, looking at the persistent effect of violence on haves and have-nots in many places across history. What gave you the instinct that there might be some relationship between violence and wealth and income concentration?

Walter: A couple years ago, Thomas Piketty made a strong case that inequality in the middle of the 20th century did not go down just because of economic development and democracy, but was really driven by the violent dislocations of the World Wars and the rise of Communism.

When I read this, I wondered whether there might be a pattern all throughout history. So, since I am a pre-modern historian, my plan was to survey history across hundreds and thousands of years. And I found that the argument he had developed for the 19th and 20th centuries held true for all of recorded human history—that whenever we observe a massive compression of inequality in income and wealth, there are major shocks of violent disruption behind it.

I was focused on the factors that reduce inequality, but for the last 40 years or so, especially in the U.S., we have been witnessing a steady rise in income and wealth inequality. Do you have a sense of what has driven those developments in the more recent past?

Amy: Yes. I became interested in this work towards the end of the Great Recession, when there was a lot of job loss going on in this country. There was a great deal of focus on how bad the unemployment numbers were, and there wasn’t much focus on what it was actually like to lose work, for yourself, your family, or the community in which you lived. I wanted to understand what really happens when work goes away, and I thought that focusing on one place that had lost a lot of jobs would be a good way to illustrate this.

“Whenever we observe a massive compression of inequality in income and wealth, there are major shocks of violent disruption behind it.”

I picked the community of Janesville, which had lost what was the oldest operating General Motors plant in the country. It closed down two days before Christmas of 2008, right smack in the middle of this very bad recession. My story spans five years, exploring what happened to a number of people during that span.

You talk about high inequality having an extremely long pedigree. What do you mean by that?

Walter: That’s a really good question, because I think people often confuse inequality and poverty. If you have the same degree of inequality thousands of years ago and today, being at the bottom of the distribution back then would be a much worse fate than it is now. So it is possible to apply the same measures of inequality across time, but they mean very different things.

Amy: You make an interesting point about relative versus absolute income, wealth, and inequality.The people about whom I’m writing, the auto workers who lost their jobs, had had very stable, middle-class lives. They weren’t wealthy, but they were making $28 an hour, which were good working-class wages in this Midwestern community. They didn’t all fall into absolute poverty, but they tumbled downhill, and that was quite a shock.

One of the things I learned is that falling out of the middle-class is very different from having been poor all along. When they fall into economic trouble, people who were accustomed to middle-class lives were, for the most part, reluctant to seek or accept outside help from non-profits and government programs. They really just wanted good jobs again.

Walter: That’s right. I think that’s actually a very unusual situation in world history. Because for hundreds and thousands of years, people would take the established order, the established distribution of resources, pretty much as a given. If you were poor, your parents had been poor, so that was your outlook on life. But the situation we face now is rather unusual in that people look back at their parents’ generation and grandparents’ generation, and they observe correctly that something has been going wrong for some time. They can’t hope to aspire to the same standard of living as previous generations did.

Amy: That’s right, at least in my microcosm. The Janesville Assembly Plant started turning out tractors in 1919, and it started making Chevy’s in 1923. So if you think about the number of generations of local people for whom these were the best working-class jobs, people had reason to have quite strong expectations that this work would persist, except it turned out that it vanished.

You talk about what you call the “four horsemen” of violence. What are those horsemen, and why are they so powerful in diminishing inequality?

“Falling out of the middle-class is very different from having been poor all along.”

Walter: I’ve identified four major driving forces behind great reductions in economic inequality—the mass mobilization of warfare, transformative revolution, state collapse, and severe epidemics.

Those factors have been more or less common over time, depending on what period you’re looking at. The last two, state collapse and epidemics, were primarily phenomena of the more distant past, affecting the distribution of wealth in agrarian societies. Whereas the other two, like WWI, WWII, and the big Communist revolutions in Russia and China, are very much a manifestation of modernity that only occur in the 20th century.

If a great plague strikes an agrarian society, there are fewer workers, the poor are less poor because they can command higher wages, and the rich are less rich. When states collapse, the entrenched elites lose power. Everybody loses in that scenario, but the rich have more to lose, which compresses disparities in income and wealth.

Whereas, in order to fight the enormous, industrial-scale World Wars, governments had to raise taxes to extremely high levels and intervene in the private sector. Capital lost value. There was inflation, physical destruction, any number of things that made the rich less rich and the poor less poor. And once you look at the Communist revolutions, it’s very straightforward. If you have Bolsheviks or Maoists who expropriate or kill the rich and impose a planned economy, inequality can drop to very low levels.

So the mechanisms are very different, the environments are very different, but what all those historic occasions have in common is that they involve massive, violent shocks. Often millions, tens of millions of people lost their lives. These are very grim episodes of human history. But the ultimate outcome was that inequality was reduced.

Amy: In some way, that’s the inverse of what I’m looking at—one shock to a community, the closing of an auto plant that people thought would last forever. Over several years, I came to think of it as two Janesvilles emerging. There were people who were affected by this, and people who were not affected by this. And those who were not affected didn’t always have a clear sense of what was going on among their neighbors.

For instance, one person the story follows is a social worker who was the school system’s liaison for homeless kids in the community. She and a social worker one town over began to notice a growing crop of homeless, unaccompanied teenagers. They started raising money to create housing for these kids, and when they first started to go out into the community to talk about this, they were met with disbelief. There were people in town who just had no sense that this was happening right in their midst.

Walter: Actually, one of the lessons that I took away from your book was the role of labor unions. It seems to me that what happened in Janesville was also connected to a decline in the power and the density of membership in labor unions. And that also came to the fore in my own work, when I looked at why inequality had gone down so far in the wake of WWI and WWII. It wasn’t just taxation, physical destruction, inflation, or other war-related effects. It was also an explosive increase in membership in labor unions in industrialized countries, which empowered people to take charge of their lives. To gain concessions from employers, organizing themselves to make sure that lower-skilled workers would not be left behind.

“Those who were not affected didn’t always have a clear sense of what was going on among their neighbors.”

That development seems to have abated, especially over the last few decades. In the United States, union membership peaked in the late 1940s, and has been sliding ever since. That’s something that I think also mattered in Janesville. Do you agree?

Amy: I do. In Janesville, the workers had been part of the United Auto Workers for a very long time. In fact, in what was called the General Motors Sit Down Strike of the late 1930s, which was the strike that cemented the UAW as the bargaining force for auto workers around the country, Janesville was one of the sites of that strike.

So that union history is embedded in the GM workforce. It was what meant that people were earning $28 an hour, and that, for a long time, allowed people to retire after 30 years’ seniority with very good pensions and health benefits. The union is what propped up that middle-class life.

Walter: I think this takes us to one of the most pressing issues that we face right now, which is to identify policy measures that could actually make a difference. In the U.S. a wide range of policy measures are being proposed—fiscal measures, targeted taxation—to siphon off wealth from the famous one percent, hunting down wealth concealed in off-shore accounts, investing in education to make it possible for people who are hurt by globalization to improve their situation. Even reaching all the way to campaign finance reform, in order overcome the polarization in Congress that’s also related to inequality. So there is no shortage of measures being proposed. I just wonder which, if any, would actually make a difference in a place like Janesville?

Amy: Well I tried to take a look at job re-training, because it’s one of the few economic policies that both Democrats and Republicans tend to support. They have slightly different visions of how to do it, but both conservatives and progressives think that if people lose a job, they should try to acquire skills to do a different kind of job. A lot of federal money goes into job re-training efforts for what are called “dislocated workers.”

One of the reasons I picked Janesville was that it has a technical college in town, a small school that specializes in vocational training. I was interested in trying to figure out whether this training was doing any good, because the county’s Job Center, where people were referred when they lost their work, was encouraging people to go back to school and learn to do something else. And this college really knocked itself out trying to figure out how to help these traumatized, dislocated workers.

I did an analysis looking at what happened to a cohort of people who had gone back to school, versus a cohort of laid-off people who had not gone back to school. And contrary to the common wisdom, people who went back to school were not better off in terms of their pay or their likelihood of full-time work a few years afterwards. That’s not to say that job re-training has no efficacy anywhere, but I think it really depends on the climate and whether new jobs are becoming available.

“The union is what propped up that middle-class life.”

Walter: I was often accused of pessimism when I brought out my book because I emphasized the forces that push inequality even higher. Those forces are still out there. Globalization is still ongoing. There’s still heavy pressure on the kind of jobs that people lost in Janesville, there’s a great deal of competition. There’s tax competition among different countries. There is ongoing progress in automation, which is going to affect jobs that have previously been protected. There’s a secular aging of the population in rich countries that is going to put pressure on the welfare state. There are very powerful forces out there that will make it rather difficult for policy measures at the national, or even regional, level to make a real difference. Do you share my pessimism, or do you think there is some hope that we can find ways of making a difference?

Amy: Let me answer that with two contradictory thoughts. There’s a notion that, if jobs disappear in certain places, people should simply move their lives to where there are better opportunities for work. But I found in this community that people, for the most part, don’t want to leave. It’s a place where people have lots of family support, and multi-generational ties. Nearly a decade after the Janesville Assembly Plant closed down, there are people still commuting long distances to General Motors plants in other states to keep up their standard of living, and coming home every weekend or every month. That’s a lot of commitment to staying where you live. So that’s one economic truism that I don’t see playing out in this community.

On the other hand, and this is a slightly more optimistic view, I discovered that the people of this community have a lot of resilience. When 9,000 jobs disappeared in that area in 2008 and 2009, all kinds of non-profits came together and formed coalitions to figure out how best to help people.

And I’ve come to think that this is partly a function of this community’s identity. Janesville is also the home of the Parker Pen Company, which was founded by a local man named George Parker in the late 19th century. And there was another local industrialist who persuaded General Motors to come to town. So I think these economic foundations gave the community a real sense of self-determination that has prevented it from becoming a very angry or despondent kind of place, which easily could have happened with this many jobs that have gone away.

The local unemployment rate had shot up to over 13 percent in early 2009. It’s now down to around four percent, but the pay is nothing like people used to earn. It’s going to take years to find out whether this community can fully rebound or not.

The other thing that I’ve learned is that losing work is a very personal experience. About a third of the people in this one county said that they or someone in their home had lost a job during the Great Recession, or shortly afterwards. And in a survey that was part of my research, we asked them, “Are you embarrassed or ashamed to have lost this job?” Over half said yes.

And I found that so heartbreaking, because even when people are losing their work because of broad economic forces, in a place where thousands around them are losing the same kind of work, it still feels like a personal event.

Walter: There are many reasons to believe the future holds a great number of challenges—globalization, automation, aging. But at the same time, as you said, we should never underestimate human resilience: people’s ability to make the best of a bad situation, to find new ways of improving their condition. And we can only hope that this is going to play a major role in the future.

 

This conversation has been edited and condensed. To learn more, visit ft.com/bookaward and follow the conversation at #BBYA17.