Inequality and politics in the neo-gilded age: a view from the United States

Can mainstream political parties reverse the tide?

Stephanie MudgeThere is much talk about wealth and income inequality nowadays.  Here in the US inequality has now reached levels that look a lot like a neo-gilded age.  The concern, for many, is perhaps less inequality per se, but rather whether it is here to stay (the short answer is yes, unless we change how taxation systems work) and what it portends for the future.  If present wage, debt and unemployment statistics are any indication, today’s younger generations are in particular trouble – a combined effect of long-term wage stagnation, high youth unemployment and underemployment, and the escalating costs of higher education.

In my experience, when you ask an economist whether it’s a good idea to invest in ‘human capital’ by taking out loans for college, she will give you a resounding ‘yes’.  She might even laugh at you a little.

Statistically speaking, the reasons are easy to figure: according to the National Center for Education Statistics, the median earnings of young adults aged 25 to 34 with a bachelor’s degree was US$46,900; US$30,000 for those with a high school credential; and US$22,900 for those without a high school credential.  Median earnings for young adults with a master’s degree or higher was US$59,600.  This pattern of differential income returns to education has been a fairly stable one, holding across sex and racial/ethnic groups, too, for quite some time.  In short, a college degree is essential to joining the statistical middle class: in 2012, median household income in the US was US$51,371.

The big problem, however, is that the statistical American middle class in terms of income, college-educated or not, is not what it used to be.  In real terms, the rate of middle-class wage increases has been remarkably close to zero for the past couple of decades, especially in comparison with the top 10% of wage earners; since 2005, median salaries in the US actually dropped by more than 2%.

And then there is the cost of higher education, and the debt burden that comes with it.  In 2011-12 tuition at a four-year public university in the US averaged over US$14,000; private and for-profit school averaged over US$33,000.  This represents an increase of about 27% since 2006-7, when public university tuition was a little over US$11,000.  One of the striking things about this rate of increase is that it actually was not, overall, especially sensitive to the shock of the financial crisis.  Tuition increases have been growing steadily, well outstripping inflation and wage increases for the majority of Americans, for quite some time now.

The upshot is that an employed college graduate making US$46,000 per year might carry about US$30,000 in student-loan debt.  This present-day average figure has doubled since 1994.  Assuming a 6% interest rate and 20-year loan repayment term, that amount will come to over US$50,000 before the loan is paid.

By 2014, about 70% of US college graduates had student loans, as opposed to less than 50% in 1994. Student-loan default rates for cohorts graduating between 2009 and 2011 range between 8 and 23%, depending on the type of degree and institution.  Since the financial crisis, default rates have risen. This is bad news for lenders; but it is worse news for those who default, particularly since from 1998 federal higher education legislation changed bankruptcy laws to make student-loan debt non-dischargeable.

The removal of a bankruptcy option was a milestone in a general process of pulling up the economic ladder for younger generations.  In housing, another milestone is now being reached: historically speaking, the combination of homeownership and appreciating housing values has been a lifeline for the middle class.  But student-loan debt and housing prices that are now out of many families’ reach may be taking that option off the table.

In other words, what we may be looking at here is not only record-setting levels of post-war economic inequality, but also its cross-generational entrenchment for the foreseeable future.  More than a drag on growth, income inequality is negatively related to intergenerational upward mobility.  If Thomas Piketty is right, barring big, cross-national changes in taxation, wealth inequality is here to stay.  The saddling of more than two-thirds of college graduates with a level of debt that approaches, and may well exceed, median income levels can only make things worse.

The American middle class is not alone in its predicament.  In the UK, where income inequality rates (2011 Gini = .34) approach those of the US (2011 Gini = .39), average student loan debt of those entering repayment in 2012 was £17,000, or about US$26,500 at today’s exchange rate.  By 2014 it was £20,100 – a larger percentage of median income (around £21,000, or US$32,800 in 2012) than in the US.  Repayment terms in the UK are relatively gentle, at least for now, but one does have to wonder whether that can last.

The growing insecurity, and anxieties, of the middle classes on both sides of the Atlantic are, of course, not strictly economic concerns.  A politics of anxiety and insecurity is the natural complement of the ‘neo-gilded age’.  Among younger people in particular, this seems to be taking the form of a deafening silence: younger generations in the UK and the US are, increasingly, remarkably unlikely to vote.  In the US, where it briefly seemed that Barack Obama was reinvigorating young voters, the last elections were marked by an abysmally low voter turnout overall – the worst, in fact, in 72 years.  It appears that the unfolding of civic, then political, then social, rights that T.H. Marshall famously described as the trajectory of modern Western societies since the 18th century may be at risk of winding itself back up.

Where might things go from here?  The answer to this question has to work through an understanding of politics, representation and parties – that is, the institutions that structure our economic and political futures.  In Oregon and several other states in the US a relatively new political party, the Working Families Party, marks a refreshing change in the political landscape, introducing new possibilities for addressing the problem of higher-education financing and student debt.  On the national scene, the ‘Netroots’ (or blogger-led activists) of the Democratic left, unhappy at the thought of another Clinton presidency, appear bent on propelling the self-described economic populist Elizabeth Warren – a former law professor, a specialist in bankruptcy law and a fan of the phrase ‘the game is rigged’ – into the next presidential race, despite her protestations.

And yet the direction in which these developments point is neither linear nor clear: the Republican Party has re-taken the Senate and, although the Center for American Progress claims that the Millennial generation leans in a more progressive than conservative direction, it also notes that conservative youth organisations are better staffed and resourced.  As Gramsci said, democratic politics is a war of position that that tends to privilege the ruling classes; so far, it is not clear that mainstream parties, as they stand, have the capacity or the will to reverse the tide.