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The Rich Get Richer

June 6, 2012 3 minute Read by John Prestbo

“The fact is that income inequality is real; it’s been rising for more than twenty-five years.” So said George W. Bush in January 2007. This statement leads the introduction to “The Great Divergence: American’s Growing Inequality Crisis and What We Can Do About It” by Timothy Noah. It is a new book about an old trend (now 33 years and counting) of the rich getting richer while everybody else stays the same or maybe loses a little. This book grabbed my attention because I believe the widening gap between the top 10% — or 5% or 1% or 0.01% — of income earners and the next lower echelon (aka the middle class) curtails our ability to accelerate U.S. economic growth. Achieving and sustaining 4% GDP growth will require all shoulders put to all wheels. But that won’t happen if great swaths of society don’t think they will benefit from the effort. Noah’s book relates how economists, both conservative and liberal, have poked and prodded the Great Divergence to see how it came about and what continues to fuel it. Turns out it is a complex phenomenon with contributing factors including the rise of single-parent families, the advent of computers, changing education and immigration policies, and many other things. The Great Divergence started in 1979, following 50 years in which income levels became more equal — a period dubbed the Great Compression. In 1910, the richest 1% received about 18% of the nation’s income, which was the prevailing condition in which the Sixteenth Amendment (instituting the income tax) was passed and ratified. By 2007, the share of income held by the 1% had jumped to 24%. The book bristles with hundreds, maybe thousands, of bits of similar data. Noah does a good job of arranging them into a comprehensible whole. The facts are the facts. It’s the what-to-do-about-it part that generates controversy. I will turn to those recommendations next week.


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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