An Unequal Recovery Shows that Inequality is Growing Bigger and Faster

One of the most troubling economic facts of the past few years is that many of the very same people who helped crash the economy saw their fortunes rebound the fastest after the financial crisis of 2008. Meanwhile, the innocent bystanders who had nothing to do with the financial crash -- e.g., most households -- have still not fully recovered at all.

The unevenness and unfairness of the recovery has long been apparent -- from news of record corporate profits to surges in stock values to anecdotal reports of a big uptick in luxury spending.

Nevertheless, it is shocking to see -- for the first time -- hard data that shows just how skewed the recovery has been. According to updated income data by the inequality expert Emmanuel Saez, released last week, the top 1 percent of households saw their incomes go up by 11.6 percent in 2010 -- while incomes for the bottom 99 percent grew by only 0.2 percent.

What that means, estimates Saez, is that the top 1 percent captured a stunning 93 percent of all income growth during 2010. And Saez suggests that this trend probably remained constant in 2011.

These numbers should be illuminating to critics of Occupy Wall Street who spent last fall wondering what the protesters were so angry about.

The bigger story in the Saez estimates, though, is the accelerating nature of inequality in America today. The study finds that during the economic expansion of the 1990s, coming out of the recession of 1991-92, the top 1 percent captured 45 percent of all income gains. But during the Bush expansion of 2002 - 2007, following the dotcom crash, the top 1 percent captured 65 percent of all income gains. Saez also shows how the far upper crust took a smaller hit during the recession of 2001 than they did during the Great Recession of 2007 - 2009.

So not only are the rich getter richer when times are good, but they are more insulated from downturns when things go bad.

Looking through an even wider historical lens, the other lesson of Saez's data is that recent policy steps have done little to discourage gross inequality in the wake of go-go excesses -- in contrast to the 1930s and 1940s when politicians did take steps to rein in inequality.

Saez's data, which goes back to 1913, shows that inequality fell dramatically after the crash of 1929 and remained down until the late 1970s. A big reason for this lower inequality, which economists have called the "great compression," is that policymakers took dramatic steps to reduce the share of income going to the top -- including labor laws like the minimum wage and the 40-hour work week, stronger protections for unions, better oversight of Wall Street, and higher tax rates on the wealthy.

Inequality is bad for the middle class, bad for democracy, and bad for financial stability, since unchecked power at the top leads to excessive risktaking and -- as we just saw -- major crashes. Yet despite all this, the U.S. political class has yet to take anything like the steps it did during the New Deal to rebalance the economy.

Of course, this story is still being written. The Bush tax cuts for the wealthy are very likely to expire at the end of this year, the Dodd-Frank reform of Wall Street has still not been fully implemented, and the new healthcare law -- which has a strong redistributive dimension -- won't be fully in effect for another two years.

If all these changes happen, that will somewhat reduce inequality. But that's a big "if," since a Republican victory this November -- fueled by record levels of unlimited campaign spending by wealthy interests -- would mean a reversal of all these policies.

In any case, a much bigger attack on inequality is still needed than anything Washington has yet enacted. That would be a worthy goal for Obama's second term.