Here, and across the country, the economy is suffering because people cannot fulfill their potential. Researchers at the University of Chicago and Stanford University published a paper this spring arguing that up to one-fifth of America’s wage growth over the past 50 years can be attributed to the knocking down of social barriers that prevented women and minorities from doing their best—clearing the way for waitresses to become lawyers, or African-American orderlies to become doctors.
Now, the reverse appears to be happening. Workers who once produced $100,000 a year of manufactured goods have been forced downward into jobs flipping $20,000 worth of burgers. Carbone, who once produced $40,000 in education services, now tends toddlers for half that value. That’s an economy-wide output loss. If the slide continues, “growth would go down, no question,” says Chang-Tai Hsieh, an economist at Chicago’s Booth School of Business who was the study’s lead author. True, a branch of economists and conservative politicians say that rising inequality isn’t bad for growth and might even be good. Edward Conard, a former managing partner of private-equity firm Bain Capital, argues in a book out this month that the income gulf should be even wider because it’s a sign that the economy is rewarding risk-takers. Conard contends that too many Americans today avoid risk-taking, settling into comfortable fields such as law. The only way to jar more smart people into the innovation game, he says, is to increase the rewards of success.
History contradicts that argument. For nearly all of the recorded economic past, rising national wealth went hand in hand with rising equality. A seminal 2000 study by World Bank economist William Easterly, “The Middle Class Consensus and Economic Development,” found that countries with larger middle classes enjoy higher levels of growth and income, along with a variety of health benefits such as lower infant mortality rates and greater life expectancy.
In a 2011 paper, economists Andrew Berg and Jonathan Ostry of the International Monetary Fund studied nations’ economic growth through history and concluded that “longer growth spells are robustly associated with more equality in the income distribution.” The correlation was greater than for any other factor, including liberalizing trade and cracking down on corruption.
Widening inequality can throw the economy into crisis. Chicago Booth economists Marianne Bertrand and Adair Morse argue in a draft paper this spring that the rising income gap in the United States fueled a surge in recent years of what they dubbed “trickle-down consumption”—middle-class families drained their savings and maxed out their credit cards to keep up with the jet-set lifestyles of the Hanauers of the world.
Hanauer worries about the prospect of inequality expanding not contracting, in the years to come. If you extrapolate the trends over the past 30 years, he warns, in another 30 years, the richest 1 percent will take home 37 percent of U.S. income. The bottom 50 percent will earn a paltry 6 percent. “If you let that happen,” he says, “very bad things happen.”
Wide income inequality correlates to political unrest—the Arab Spring is a classic example—and just the threat of turmoil distorts the economy. Wealthy people who fear massive attempts to redistribute their wealth—we’re talking huge tax increases here, not a few extra points tacked on the top marginal rate—do inefficient things with their money. They wall off their houses and install high-tech security systems. They park money in offshore bank accounts. They don’t buy new equipment, or hire more workers, even if they see a chance to profit from those investments, because they worry that someone could come along at any moment, a mob or a cash-strapped government, or both, to take
it all away.
We aren’t there yet. Seattle was jostled by protests on May Day, when anarchists broke off from an Occupy march downtown and smashed store windows; by the next day, most people in town had shrugged off the damage as a small-group aberration. But Hanauer worries that the climate could change. Soon.
“Ultimately, taxes are a bribe rich people pay to poor people so they won’t kill them,” he says. “People understand that. We’re an armed nation, you know. Things could get very fucking ugly.”
BEHIND THESE WALLS
The Hanauers live 50 blocks north of Courtney Carbone, behind a guardhouse and down a narrow road that hugs the emerald fairways of the Seattle Golf Club and winds through ferns, cedars, and tall Douglas firs.
Hanauer is a mammoth political donor who has given hundreds of thousands of dollars to Democratic candidates and just as much to push state ballot measures that would have raised taxes to support schools, fund teaching jobs to build the state’s human capital stock, and employ eager young educators like Carbone. (Lately, he has also picked a huge fight with the state teachers union over accountability, charter schools, and other components of education reform.)