The 2016 U.S. election showed a polarization which was barely seen in the political scene of the United States in the past century. The primaries of the two major parties of the country were extremely competitive and presented fratricidal features. On the Republican side, the constellation of traditional politicians was surpassed by Donald Trump and his populist rhetoric, creating a great divide in the party. As for the Democrats, the victorious candidacy of the Establishment, represented by Hillary Clinton, faced Bernie Sanders’s platform of socialist shades, causing fractures that were observed in the party’s national convention held in July 2016.
Several U.S. electoral disputes throughout the twentieth century showed great cleavages around political and social issues. At the same time, in adverse economic situations, the American voters tended to punish incumbent governments. The turbulent 1968 elections, amid the civil rights movement and the Vietnam War, the 1976 election, which took place under the aegis of Watergate, and even the fierce 2000 election, which took place under the impact of the Clinton-Lewinsky scandal, can be considered disputes of social and political nature. On the other hand, the 1932 elections, in the midst of the Great Depression, those held in 1980, which took place in the throes of oil shocks, and the 2008 ones, at the height of the subprime crisis, were resolved in the incontestable government party replacements by the opposition party. This U.S. election, at first sight, reproduces the dispute of different social and political views. Topics such as racial conflicts, immigration, gender issues and the fight against terrorism are in evidence in the media and in political speeches. However, the interpretation of the meaning of Donald Trump’s and Bernie Sanders’s candidacies undergoes a significant economic transformation that occurred in the United States in the last decades of the twentieth century.
Since the mid-70s, American society has had an increase in income inequality. This represents a shift in the virtuous growth trajectory of the ‘Golden Age’ that took place in the post-war period. The Golden Age was characterized as a period in which economic growth and distribution of relatively equitable income coexisted in a compatible manner. Thus, both the personal income distribution (PID), which indicates the income earned by individuals or households, and the functional income distribution (FID), which represents the proportion of the national income appropriated by capital providers (profit shares) and labor providers (wage share), have shown changes over the period.
According to Graph 1, the Gini coefficient[1] for U.S. households showed expressive raise in the period between 1967 and 2014. The data show a persistent increase trend in income inequality in the U.S. households which started in the mid-70s and reached 2014, the last year of available data.
The functional income distribution, in its turn, has also changed. Regarding the data, some issues associated with the measurement of the wage share are worth mentioning. The social accounting standards establish that the wage share should include the total compensation paid to workers, which comprises paid wages and social security contributions. The share of capital, on the other hand, involves the aggregation of profits, property income and other income sources apart from work. A third component lies in the so-called mixed incomes. These yields are obtained in activities in which there is no clear distinction between labor and capital income. Graph 2 shows the evolution of the wage share with adjustments for mixed incomes.[2] There is a mild upward trend in this segment until the beginning of the 80s. This trend is followed by a period of large fluctuations that occur within a general downward trend in the wage share.
The process of concentration of the PID in the U.S. has generated a vast literature that discusses the various individual and household characteristics, in order to explain this phenomenon. Topics such as education, race, gender, age and professional choices have subsidized a profusion of studies that are replicated around the world. The goal of this type of analysis is to grasp the wage inequalities.
As regards the FID, it started receiving more attention in the late 90s. The 2008 crisis and its strong consequences, both economic and political, deepened such analyses, generating a stimulus for further research on the FID and its relationship with the PID in the USA. In other words, besides the inequality among wages, the inequalities among labor income and capital income are also sought to be understood. Regardless of the degree of relevance of the wage share contraction over the personal income distribution, the fact is that American society is going through distributive issues that seemed to have been overcome in the mid-60s.
There are many explanations for this trend, and some of them carry elements that are linked with the political rhetoric that is present in the troubled U.S. electoral scene. Two major groups of explanations can be cited: one focuses on the effects of neoliberalism and financialization on the United States, and the other one tackles the recent standards of technical progress.
The adoption of neoliberal policies in the early 80s was characterized by a change in the main goal of economic policy, which switched the focus from achieving full employment to controlling inflation. This coincided with the advance of the financialization process, in which the relative importance of the financial capital progressively increased in comparison with that of the productive capital, shaping both the economic structure of the country and the behavior of its companies. In macroeconomic terms, the counterpart of the emphasis on fighting inflation corresponded to a tolerance towards higher rates of unemployment, in a general context, observed over the 80s, in which both the workers’ bargaining power and their unions were weakened. This was associated with both the reduction of the share of industry in the employment and a greater exposure to the international competition with low labor cost countries, observed in the 90s. As illustrated in Graph 3, these changes are associated with a new relationship between the workers’ remuneration and the labor productivity. Wages began to grow below productivity, breaking the pattern of the ‘Golden Age’.
The behavior of companies, in its turn, shows a twist from the traditional investment and growth strategies aimed at long-term results to the prioritization of costs reduction, the distribution of short-term dividends and the value of their shares. This is expressed in the general orientation of ‘prioritizing the creation of value for shareholders’. Inserted in a context of flexibilization of labor relations and weakening of trade unions, whose starting point was the defeat of the air traffic controllers’ strike, in 1981, during the Reagan administration, these processes resulted in an increase in wage dispersion at the expense of lower wages, combined with a reduction in the wage share.
The standard of technical progress is also pointed as one of the causes of the increase in inequality in the U.S. From a conventional perspective, the existence of technical progress is discussed in terms of two characteristics: it may have a bias in favor of skilled labor and, at the same time, an increase in the productivity of capital. These two characteristics may have contributed to the increase in income inequality. However, recent studies have shown limitations in demonstrating that these processes have effectively caused such an increase.
With the recovery of the economy after the 2008 crisis, discussions about income inequality took shape again due to the acceleration of the income concentration standard. To face this crisis, the federal government and the Federal Reserve System (Fed) made use of unusual fiscal and monetary measures that injected millions of dollars into financial institutions and companies with problematic balance sheets and also acted as a ‘last-resort negotiator’, buying private securities, thus preventing the collapse of the financial market and the risk of paralysis of the economy. In the labor market, however, the recovery followed the pattern observed since the late 80s, known as the ‘jobless recovery’, in which production recovers faster than employment and the labor market stabilizes in conditions that are worse for the working class than in the previous cycle.
Besides the slower recovery in terms of output since World War II, the current scenario of the U.S. economy is the one that shows more dramatic results in terms of concentration of additional income gains. From the post-war period until the late 70s, the expansion of the average income of the poorer 90% was higher than that of the 10% at the top. Such a pattern was reversed and deepened from the 80s on. Between 2001 and 2007, 98% of the increase in the average income was allocated to the richer 10%, which was intensified even more after the crisis: from 2009 to 2012, the richer 10% appropriated 116% of the growth in income in the period, which means a drop of 16 percentage points in the average income of the poorer 90%, and 95% of the earnings ended up in the hands of the richest 1% in society.
Considering the fact that most of the American population is in worse material conditions than that experienced in the pre-crisis period, there are enough elements for the emergence of political forces not linked with the current status quo. Such forces, expressed in Trump’s and Sanders’s candidacies, seem to represent the frustrations faced by most of American society. The revival of the slogan used in Ronald Reagan’s campaign in 1980 by Donald Trump in 2016 — ‘make America great again’ — indicates that many sectors of American society seek a return of the shared prosperity pattern experienced in the period prior to neoliberalism. Apparently, America can only feel great again when the regressive trends of its income distribution are reversed.
[1] It is worth noting that the Gini coefficient varies between 0 and 1 and measures the inequality of the distribution of personal income. Thus, the closer to 0, the more equal the distribution of income; the closer to 1, the more unequal the distribution.
[2] The correction is performed considering that the proportion of labor income in the mixed income is identical to that observed in the compensation paid to employees and in the share of capital.