According to the Federal Reserve, in 1990 the richest 1 percent of America owned 40 percent of its wealth -- the greatest level of inequality among all rich nations, and the worst in U.S. history since the Roaring Twenties. Furthermore, the richest 20 percent owned 80 percent of America -- meaning, of course, that the bottom four-fifths of all Americans owned only one fifth of its wealth.

Another revealing way of expressing this statistic is that the top 1 percent owned more than the bottom 90 percent combined.

What caused this growing inequality? The most underlying reason may be that it takes money to make money. This is why many call for a progressive tax system: to redistribute at least a percentage of the wealth back to the middle class, thereby avoiding modern serfdom. We will explore the tax cuts for the rich in detail in the next section. But tax cuts are not the only way to polarize wealth. There are several others, and they can all be lobbied through Congress. A complete list follows in More.

Tax progressivity was highest in the decades after World War II, when the rich were taxed a stratospheric 88 percent for nearly two decades. This was also an era in which the U.S. economy was a juggernaut, and the American Dream was indisputably alive and well. Because of this, most economists do not believe that high tax rates on the rich are bad for the economy.
Personal income tax rate for top bracket1

Years      Percent
1945       91%
1946-63    88
1964-81    70
1981-86    50
1988       28
1991       31

The following chart shows the effectiveness of a progressive tax system. When the top rates were truly high from 1950 to 1978, American income at all levels grew at about the same pace. But when progressivity was lost in the 80s, the income of the poor began falling, while that of the rich continued growing.

Income Growth by Quintile2

Quintile       1950-1978     1979-1993
Lowest 20%     138%          -15%
2nd 20%         98            -7
3rd 20%        106            -3  
4th 20%        111             5
Highest 20%     99            18

Economists have a standard measure of income inequality, called the Gini Index. In this index, the higher the number, the greater the income disparity between the rich and the poor. (0 = perfect equality, 1 = only one person in the economy has all the income.)

Gini Index of Income Inequality3

        Before   After 
        Taxes    Taxes
1979    0.403    0.352
1980    0.401    0.347
1981    0.404    0.350
1982    0.409    0.359
1983    0.412    0.368
1984    0.413    0.372
1985    0.418    0.381
1986    0.423    0.404 
1987    0.424    0.380 
1988    0.425    0.384
1989    0.429    0.387 
1990    0.426    0.381 
1991    0.425    0.379
1992    0.430    0.381

As mentioned earlier, the U.S. economy slowed in 1973 for reasons still not completely understood. The average weekly earnings of nonsupervisory workers -- about four-fifths of the civilian workforce -- peaked in 1973, and have been falling ever since:

Average weekly earnings of nonsupervisory workers, total private industry, 1982 dollars4

1965  $290   
1970   297 
1973   315  (Peak)  
1975   292  
1976   297
1977   299
1978   301
1979   291
1980   274
1981   271
1982   267
1983   272
1984   274
1985   271
1986   271
1987   269
1988   266
1989   263
1990   259
1991   255 
1992   255  (Nadir)

The above chart is especially useful in rebutting supply-siders who use other measures to argue that everyone's incomes rose during the 80s. For detailed refutations of these other measures, see More.

Average hourly earnings also fell over the 80s:

Average hourly earnings, total private industry (1982 dollars)4

1973  $8.55
1980   7.78
1985   7.77
1990   7.52
1993   7.39

Presidents Reagan and Bush froze the minimum wage for 9 years, essentially giving those workers a pay cut each year as inflation bit into their paychecks. In 1992 dollars, the 1963 minimum was $5.74 -- or 35 percent more than it is today.

Raises in the Federal Minimum Wage5

                  Percent of average
Year   New rate   production earnings
1950*  $0.75      54%
1981    3.35      43
1990    3.80      35
1991    4.25      38
1994      --      35

*For brevity's sake, this chart omits the 15 minimum wage increases between 1950 and 1981. No newly introduced minimum wage has ever been lower than 35 percent of the average wage, although old minimum wages have certainly gone below this. For a fuller chart, see More.

Economists previously believed that raising the minimum wage would cost jobs, especially among teenagers. However, recent research suggests that the truth might be a bit more complicated than this, and that when the minimum wage falls too low (due to inflation), it can be raised safely. For more on the controversy stemming from the Card/Krueger study, see More.

On the other hand, the salaries of executives skyrocketed during the 80s:

Salaries and benefits of corporate CEOs as a multiple of the average factory worker's6

1980   30 times
1991   130-140 times

And these super-salaries did not come primarily from greater profits, but from a larger slice of the profits: (More)

Executive Compensation as a Share of Corporate Profits7

1953   22%
1987   61

The following chart shows the growth in the number of millionaires and billionaires during the 80s. Notice that their numbers skyrocketed in the years 1985-87.

Approximate number of millionaires and billionaires in the U.S., 1978-19888

Year  Millionaires  Decamillionaires  Centamillionaires  Billionaires 
1978    450,000                                            1 
1979    519,000 
1980    574,000                                            ? 
1981    638,000                                            ? 
1982                  38,885              400              13 
1983                                      500              15 
1984                                      600              12 
1985    832,000                           700              13 
1986                                      900              26 
1987   1,239,000      81,816            1,200              49 
1988   1,500,000     100,000            1,200              51

Percent Increase of Combined Salaries by Income Bracket, unadjusted for inflation (1980s)9

Income Bracket       Percent Increase
$20,000 - 50,000          44%
200,000 - 1 million      697
Over $1 million        2,184

Viewing the above chart more broadly, the total wages of all people who earned less than $50,000 a year -- about 85 percent of all Americans -- increased an average of 2 percent a year from 1980 to 1989, which did not even keep pace with inflation. By contrast, the total wages of all millionaires shot up 243 percent a year.

Defenders of the Reagan era claim that income mobility in the U.S. is great enough to overcome income inequality. That is, if people move up and down the income scale to a significant degree, then, over a lifetime, your average income is going to match my average income. However, there are a few flaws with this argument. First, income mobility in the U.S. is not even close to making this a reality. (More.) Second, one could hardly justify slavery on the basis that, for 1 percent of your life, you, too, will be the master.

So who gets ahead, and who gets left behind? The single most decisive factor is education:

Education, Experience and Wages10

                                        Percent change in earnings
New Workers (1-5 years experience)      from 1979 to 1987
Less than 12 years of school             -15.8%
High school degree                       -19.8
16 or more years of school               +10.8

Old Workers (26-35 years of experience)
Less than 12 years of school             -1.9
High school degree                       -2.8
16 or more years of school               +1.8

Some people claim that if the poor want to get ahead, they should just return to college. However, the job market can bear only a limited percentage of educated professionals, and there is already a glut of college grads in most fields. This makes competition the hallmark of today's meritocracy, which critics call destructive in its extreme form. (More)

Although the following chart is one of the largest, it is also one of the most important. This chart shows how the incomes of most American families stagnated or fell during the 80s, with gains posted only by the top 20 percent. It also reveals how supply-siders lie with statistics, but more on this in a moment. For those unfamiliar with the term "decile," the 1st decile is the poorest 10 percent of the population, the 2nd decile the 2nd poorest, and so on.

Average Income Level and Effective Federal Tax Rates in Each Family Decile by Year, in 1988 dollars (Corporate income tax allocated to capital income)11

                                                 Percent change:
                                                 1977-   1980-   1985-
Decile    1977      1980      1985      1990       90      90      90
1st      $4,277     3,852     3,568     3,805    -11.0%  -1.2    6.7
2nd       8,663     7,982     7,717     8,251     -4.8    3.4    6.9
3rd      13,510    12,530    12,230    13,110     -3.7    4.6    7.2
4th      18,980    17,240    17,010    18,200     -4.1    5.6    7.0
5th      24,520    22,380    22,070    23,580     -3.8    5.4    6.9
6th      30,430    28,100    27,620    29,490     -3.1    5.0    6.8
7th      36,880    34,370    34,620    36,890      0.0    7.3    6.5
8th      44,820    42,050    43,370    46,280      3.3   10.1    6.7
9th      56,360    53,660    56,190    59,860      6.2   11.6    6.5
10th    111,100   107,900   123,200   133,200     19.9   23.4    8.2
top 5%  149,500   146,000   172,100   187,400     25.4   28.3    8.9
top 1%  319,100   321,400   415,700   463,800     45.4   44.3   11.6
All      34,830    32,850    34,480    37,050      6.4   12.8    7.4

As you can see, the majority of American families were worse off in 1990 than they were in 1977, at the beginning of Carter's presidency!

When supply-siders talk about family income in the 80s, they are always careful to use 1980 as a benchmark for their comparisons, and never 1977. This is because the recession of 1980-82 was the worst since World War II -- perfect for comparing the later Reagan years in their best light. But comparing the Reagan recovery to the non-recession year of 1977 puts everything in perspective: most Americans lost ground, even at the end of the recovery.

Which leads to the question: are presidents responsible for creating recessions and recoveries? If yes, then Reagan deserves credit for rescuing the economy from Carter's mismanagement. But if not -- which is what almost all mainstream economists believe -- then the supply-sider's praise of the 80s rings hollow. In that case, it is natural for recessions to be followed by recoveries, and supply-siders might as well take credit for the incoming of the tide. In reality, the Chairman of the Federal Reserve Board is far more responsible for influencing recessions and recoveries. (More)

Supply-siders have a partial rebuttal to the above chart. They point out that family size decreased during the 70s and 80s, which means that less family income would cover fewer people, and therefore not lower their standard of living. The following chart shows the long-term decline in average family size:

Average Family Size12

1970   3.58 persons
1975   3.42 
1980   3.29
1985   3.23
1990   3.17

But this counter-argument runs into a few others. First, falling individual income is responsible for declining family size, so to say that families are maintaining their standard of living despite everything is missing the point. (More) Second, the rather small decline in family size does not explain or justify the massive income gains seen by the top 1 percent, while 80 percent of all families are treading water.

The following chart shows how large a slice of the economic pie everyone is getting. More specifically, it shows how much of the total national income that each 20 percent of American families are making. As you can see, everyone's slice of the pie grew smaller in the 80s except the top 20 percent, which grew. And the top 1 percent was responsible for most of that quintile's growth, as the last chart reveals.

Percent of National Aggregate Income Received by Each Quintile (by Family, in 1992 dollars)13

Quintile       1980   1992
Lowest 20%      5.2%   4.4
2nd 20%        11.5   10.5
3rd 20%        17.5   16.5
4th 20%        24.3   24.0
Top 20%        41.5   44.6

Top 5%         15.3   17.6

Shares of Pretax Adjusted Family Income14

Quintile        1977     1980    1985    1988    1989
Lowest 20%      4.7%     4.3     3.7     3.5     3.5
2nd 20%         10.8     10.5    9.5     9.1     9.2
3rd 20%         16.3     16.0    15.1    14.6    14.7
4th 20%         22.9     22.9    22.2    21.7    21.7
Top 20%         45.6     46.7    50.1    51.4    51.4*

Top 1%           8.3      9.2    11.6    13.4    13.0

*Table reads that 51.4 percent of all adjusted pretax family income in 1989 belonged to families in fifth or highest quintile. Quintiles are weighted by persons.

A common defense of these charts runs something like this: "How equally the pie is sliced is not as important as the fact that the pie itself is growing. Our GDP grows almost every year, so everyone benefits." But this argument becomes incoherent when paired with the claim that America should be an unrestricted meritocracy. If competition is the primary basis of American society, then how equally the pie is sliced becomes significantly more important than the size of the pie itself. (More)

An even stronger refutation is that, over the 80s, as the pie has grown, 70 percent of the extra growth has gone to the top one percent, with the rest going to the next 5 percent or so. The middle class share has simply stayed the same size.15 This means that the average American worker is working harder, producing more, and creating overall growth, but is not seeing any of the rewards. And this largely explains why middle class anxiety, voter anger and economic uncertainty are gripping the nation today. (More)

Next Section: Taxes
Return to The Reagan Years Home Page
1 Internal Revenue Service.
2 U.S. Bureau of the Census, Current Population Survey.
3 U.S. Bureau of Labor Statistics. The "before tax" column is Measure 1 of the Gini Index. The "after tax" column is Measure 15, which measures inequality after all taxes and government transfers.
4 U.S. Bureau of Labor Statistics, Bulletin 2445, and Employment and Earnings, monthly, June and March issues.
5 U.S. Department of Labor, Employment Standards Administration, Minimum Wage and Maximum Hour Standards Under Fair Labor Standards Act, 1981, annual and unpublished data.
6 Kevin Phillips, Boiling Point (New York: HarperPerennial, 1993), p. 251.
7 Internal Revenue Service.
8 The statistics and estimates for millionaires are drawn from multiple sources, according to Kevin Phillips in The Politics of Rich and Poor (New York: Random House, 1990), Appendix A, p. 239. The decamillionaire data for 1982-88 comes from Thomas J. Stealey, Marketing to the Affluent (Homewood, Ill.: Dow Jones-Irwin, 1988). The remaining data comes from Forbes and Fortune surveys of the richest Americans during the 1980s.
9 Internal Revenue Service.
10 Calculations based on L.F. Katz and K.M. Murphy, Changes in Relative Wages, 1963-1987: Supply and Demand Factors (Cambridge, Massachusetts: National Bureau of Economic Research, 1990).
11 Congressional Budget Office, House Ways and Means Committee, 1992 Green Book.
12 U.S. Bureau of the Census, Current Population Reports, P20-477.
13 U.S. Bureau of the Census, Current Population Reports, P60-184; and unpublished reports.
14 Congressional Budget Office tax simulation model, cited in U.S. House Ways and Means Committee, 1992 Green Book, p. 1521.
15 This is the so-called "Krugman calculation," which has successfully resisted various statistical challenges by supply-siders. See Paul Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations (W.W. Norton & Company, 1994), p. 138.