Edward N Wolff's A Century of Wealth in America provides insight into Trump's success. Photo: Max Pixel

It's the inequality, stupid: anyone who wants to understand the rise of Trump should read Wolff

Want to know why Trump really won? A breathtaking new economic analysis has some answers
October 9, 2017

Three and a half years ago, Thomas Piketty’s 700-page tome about inequality knocked Disney’s Frozen: Journey to the Ice Palace off the Amazon top spot. One reviewer joked Capital in the Twenty-First Century was a VIB (very important book). And it was about a VIP (very important problem)—although on Kindle, apparently, not many readers got past the introduction. Coffee tables groaned under the weight of the wealth gap, but that didn’t necessarily mean that the public had suddenly developed a new appetite for number crunching.

The vast inequality that mars much of the contemporary west, and the United States in particular, is not new: it has slowly set in over a generation or more. But for most of that time—until the 2008 crash—it was relegated to the margins of social science and the political left. Since Piketty’s breakthrough, however, publishers cannot get enough of it.

Since then, we’ve had the political scientist Branko Milanovi’s Global Inequality, the late British economist Tony Atkinson’s Inequality: What Can be Done?, and a host of new books interrogating the link with financial instability, such as Matthew P Drennan’s Income Inequality: Why It Matters and Why Most Economists Didn’t Notice. Other, very different, books such as sociologist Robert Putnam’s Our Kids and even JD Vance’s US poverty memoir, Hillbilly Elegy, were successfully marketed as shedding light on the great inequality problem.

So what, at this point, can we hope to glean from Edward N Wolff’s A Century of Wealth in America? It weighs in at over 800 pages, 100 more than Piketty, many of them just as replete with charts, tables and detailed statistical appendices. Yet it remains a remarkably easy and valuable read. That might be less to do with what the book is, than what it is not. Unlike so many other inequality books, and unlike Piketty, this is not a work of grand theory. The great achievement of Wolff, a professor of economics at New York University, is to assemble reams of data, and let his numbers speak for themselves—and they speak very loudly and clearly indeed. Anyone trying to understand the rise of Donald Trump would be well advised to study Wolff closely. Many of the underlying causes of the frustrations that led to last November’s shock vote can be found in these numbers.

While Piketty painted a bright picture in broad brush strokes, Wolff’s approach is to use a fine liner. A Century of Wealth in America is—as the title suggests—broadly limited to one country and to inequality of wealth (assets, such as property, savings and pensions) rather than the gap in incomes, the angle from which modern economics had most often analysed inequality before Piketty. His book is devoted to the inegalitarian dynamics that play out in the feedback between wealth and income in capitalist societies, a theory that can be summarised (including on student T-shirts) as “r>g”—the rate of return on capital (r) is higher than the growth rate of the economy (g) and that, over time, this will engender rising inequalities of wealth, something he attempts to demonstrate has been happening across much of the world.

Wolff is unencumbered by any such grand theory. Instead, he works within a much tighter frame, which allows for a more detailed look at the specifics of wealth by age, race and educational background and so on. And working with this tighter focus, he is able to produce some remarkable new facts, about how financially frail ordinary Americans have become. A generation ago, in 1989, the middle quintile of earners typically had accumulated enough financial wealth to maintain 3.6 months of normal spending if they lost their income. By 2013, that figure had fallen to just 0.2 months. In other words, the typical safety cushion was now down to just a week or so’s normal spending. Is it any wonder that feelings of insecurity run so high or that American politics feels so febrile?

Towards the middle of the work he does, perhaps mischievously, ask if r was indeed always higher than g in the US. He concludes that it was not always the case.

The lack of a grand theory is a strength rather than a weakness. Not so long ago, the consensus in academic macroeconomics on the relationship between economic growth and inequality had been set by the work of Simon Kuznets in the 1950s and 1960s. The so-called Kuznets curve suggested that as a country first industrialised, inequality would increase. Urban factory jobs would require higher wages to pull in the workforce from the countryside, pushing up inequality. But once a sufficient development had occurred, democratisation would take effect, a welfare state would be established and inequality would begin to fall.

Piketty’s charge is that Kuznets mistook a temporary fall in inequality in the special circumstances of the 1940s and 50s for a permanent phenomenon: usually capitalism will push inequality up.

Of course, without knowing the future it is hard to say if he is correct, or whether there might come a time when he will look as prone to over-generalisation as Kuznets. If inequality were to fall substantially in the next few decades—and inequality of incomes, in the UK at least, has not recently risen in the way that many experts predicted it would—then Piketty’s theoretical claims would soon begin to look shaky.

Wolff avoids making such bold predictions, and instead concentrates on showing how many contingencies—politics, regulation and other developments in the wider socio-economic structure—bear on the path of inequality over the last 100 years, and the last 30 in particular. It may be that both Kuznets and Piketty have it wrong—that there is no iron law about the development of inequality under capitalism. What happens is shaped by choices made along the way. If that is the way the future unfolds, with different trends continuing to play out in different times and places, then Wolff’s cautious empiricism will look wise indeed.

All of Wolff’s tables and charts about wealth combine to retell with extra authority two linked and increasingly familiar stories that are crucial to understanding modern American capitalism: the great rise in inequality that took off in earnest in the 1980s; and middle America’s four-decade income stagnation.

Today the US has the second highest level of wealth inequality of any advanced economy bar Switzerland. Wolff reveals, however, that this was not always the case. Back in the early 20th century, 100 years or so after De Tocqueville had written about the strikingly democratic habits and manners of the New World, US wealth inequality was not only lower than that of class-ridden Edwardian Britain, but also lower than that of Sweden. For all the talk of the return of a “second gilded age” in contemporary America, this is the first time that the nation has pushed the frontiers of the wealth gap on the world stage.

In the 1950s and 1960s, inequality in Europe was compressed by all the social and economic changes unleashed by the two world wars. Fifty years ago, US inequality was broadly comparable, but this began to change after the 1970s. The core of Wolff’s work focuses on the post-1980 period, when there was a staggering increase in inequality. Almost all the gains in wealth between 1983 and 2013 were captured by the top 20 per cent of US households. In absolute terms the wealth of the bottom 40 per cent declined. All this came at a time when the top rate of marginal tax was slashed from 70 per cent in 1980 to 35 per cent in 2012.

Wolff writes that the “core thesis of this book could be summarised as the rise and fall of the middle class.” Using middle class in the American sense—broadly speaking middle earners—the numbers are stark. Median wealth (in inflation-adjusted real terms) more than doubled between 1962 and 2007, and then fell by 45 per cent in the six years from 2007 to 2013. For Wolff, this collapse—driven by the housing market—is the “principal factor leading to the general malaise of the middle class.”

Some elements of the middle class’s woes are familiar—the stagnation of male wages from the 1970s, the temporary prop which was provided to families by more women earning over the subsequent couple of decades, and the big squeeze on household incomes which set in after this was complete. By 2013, real household median incomes were actually below 1997. But by concentrating on wealth and its opposite, Wolff sheds new light on what all of this did to household balance sheets. The big squeeze on incomes was accompanied by a huge rise in household debt to maintain consumption growth. By the mid-2000s, the steady lowering in credit standards ushered in the subprime mortgage scandal.

The real power of the book comes out as one digs deeper into the familiar story. For example, between 2007 and 2013 Wolff calculates that median net worth fell by a staggering 45 per cent; furthermore, the net worth of lower middle-income families fell by 60 per cent and that of lower-income families plunged by 70 per cent. The grim divergence in fortunes is even sharper among different ethnic groups.

The (perhaps comforting?) thought that the better-off suffered more between 2007 and 2013 is shown to be mistaken. Those who benefited the least from the great credit bubble of the 1990s and 2000s were the most exposed when it burst. Stagnant incomes, high debt levels and low wealth have resulted in an American middle class a lot less lucky than their 1960s predecessors.

Like Piketty, Wolff ends by asking if anything can be done to reduce wealth inequality, and—like Piketty—comes forward with his own proposals. But there is a difference. Where Piketty calls for a global tax on wealth which would require an almost-Utopian level of cross-border cooperation to pull off, Wolff restricts himself to a partial, but probably more realistic, solution. He suggests a modest tax on wealth modelled on the Swiss system. In 1989 Wolff argued for a tax on wealth over $100,000 with a marginal rate that progressively increased from 0.05 per cent, rising to 0.3 per cent per annum on assets worth over $2.4m. Inflation-adjusting the numbers to 2013, he finds that such a tax would have raised $121bn, equivalent to 4.5 per cent of the existing US tax take.

Beyond the advantage in reducing inequality, Wolff presses a two-pronged economic case. First, there are the revenues. By focusing on income and not wealth, he says, the current system misses out on a lot of taxable capacity; two families with identical incomes but vastly different wealth will have different experiences of life, and the tax system should reflect this. Secondly, he argues that if wealth is taxed people will be encouraged to manage it in more productive ways.

The majority of Americans (56 per cent) would pay no wealth taxes under his scheme, and only 15 per cent would face a tax increase of more than $500 a year. The $121bn raised is not transformative, but if it were spent on the poor—through food stamps, unemployment insurance, tax credits or educational aid—it could make serious inroads into the inequality problem.

Given the vast inequality Wolff has documented, if anything his proposal looks modest. Indeed, the extra wealth inequality since he first advocated this tax is in itself an argument for a higher charge. But Wolff’s relatively limited scheme should, one would hope, have half a chance of being implemented. Though it certainly won’t be under Trump, and—as he concedes—Americans are rarely in favour of new taxes, even taxes most of them won’t pay. Until that changes, there might always be room for one more inequality book.