It's a pleasure to be engaging in this epistolary dialogue with you here on Slate, where I began the reporting that eventually led to The Great Divergence. I know this is a subject that interests you and that you know pretty well.
You're right to start with the most elementary question: Why should we care about income inequality? A century ago, the answer (at least for the ruling class) was, "Because if we don't, there will be a violent socialist revolution." Today we don't have to worry about that so much, for some reason, so we need to address the question more directly.
Let me start by conceding a point that conservatives often make: Yes, a certain amount of income inequality is necessary in a capitalist system. You have to let the market reward effort and skill. But a system in which inequality of incomes constantly increases over time is worrisome.
Why is it necessary to reward so much more today than in 1979 the effort and skill (and dumb luck) that gets you into the top 1 percent of incomes (i.e., above about $350,000)? In 1979 the top 1 percent consumed about 10 percent of the nation’s collective income. In 2010 it consumed about 20 percent. (That includes capital gains.) Sure, the economy was in lousy shape in 1979. But the top 1 percent contented itself with 9-12 percent of the nation’s collective income for three decades prior to 1979, during the great post-World War II economic boom. Indeed, income share for the top 1 percent fell a little during that period. From the early 1930s through the late 1970s incomes in America didn’t become more unequal; they became more equal. So clearly the top earners can get by on much less without undermining capitalism.
So that’s why growing inequality isn’t necessary. Why is it worrisome?
Because it creates alienation. I worry less about the 99 percent (which, let’s face it, includes a lot of pretty affluent people) than about the bottom 60 or 50 percent. Income earners at the median have not shared in America’s prosperity. They’ve actually seen their incomes go down (after inflation) during the past decade, and over the past three decades their increases seem pitiful compared both with people earning top incomes (and here I mean not just the top 1 percent but the top 10 and even 20 percent) and with people at the median during the postwar era. For a long time economists said: Wait until productivity rebounds. Then working families will get their share. But when productivity rebounded like crazy in the aughts, working families saw no reward.
What this means is that if you’re at the median you have no positive reason to care how the economy does. Your only motivation is fear—if the economy does really badly you may lose your job. But there’s no upside.
I think this situation has a lot to do with why there’s so much suspicion of institutions that knit the country together—Congress, the media, etc. Logically the suspicion should be directed at the rich, but nobody knows what Lloyd Blankfein looks like. Everybody knows what Barack Obama and John Boehner look like. So people rage against Washington, and government, and you get both the Tea Party and Occupy Wall Street. These groups are quite different in their political orientation, but both groups express contempt for democratic processes.
I also think that the social deterioration of the working class described in Charles Murray’s recent book Coming Apart—out-of-wedlock births, dwindling church attendance, etc.—is largely attributable to the Great Divergence. Murray perversely insists that it’s entirely cultural, but if you ignore that then his book does a pretty good job describing what happens to a society in which people lose their sense of common purpose.
Over to you,
P.S. The book’s income statistics go to 2008, but for this post I’ve updated them to 2010. The 2009 and 2010 stats just became available at my favorite website, the World Top Incomes Database, by Thomas Piketty and Emmanuel Saez—whose 2003 paper introduced “the 1 percent” and “the 99 percent” to our national dialogue—along with Facundo Alvaredo and Tony Atkinson.