A RAND Study Destroyed the Concept of Unfettered Capitalism and Nobody Noticed

It happened two years ago and hasn’t gotten much attention since it came out.

Two years ago, I was scrolling through my daily Medium newsletter, and I came across a Fast Company article from October 6, 2020. It neatly sums up the outcome of a RAND study which found that had incomes kept up with the economy, the median income would be about $42,000 higher than it currently is. Here’s the article if you’re interested.

The study itself is loaded with interesting data, which I’ve gone through with my layman’s knowledge, but the linked article sums it up nicely. Here’s the actual report, if you’re a data wonk and would like to read it:

The study found that across basically every demographic that was measurable in their timeframe (1975–2018), real income growth for the vast majority of people did not keep up with economic growth. Their premise was that measuring across all quintiles (that’s every 20%) of income brackets, income growth should roughly match economic growth evenly across all brackets. This is indeed the case in the 20 years post-World War II, as they demonstrate in their opening charts.

Contrary to this expectation, starting in 1975, income growth for the bottom four quartiles (that’s the top 80% of earners and below) did not keep up with economic growth, with the lowest earners faring the worst. During that same time frame, however, the top 20% of earners’ incomes rose at a rate much higher than economic growth. The rise was much more pronounced in the top 5% of earners, to the point where even being in the 90th percentile of wages put you below the rate of economic growth.

For example, let’s look at someone at the 25th percentile (all dollar amounts adjusted for 2018 dollars). This means that 25% of people make less than them and 75% of people make more. They made $15,000 per year in 2018, compared to $9,000 per year in 1975. However, had their income kept up with inflation, they would be making $20,000 per year.

Looking at someone at the median (half make more and half make less), they earned $26,000 in 1975 and $36,000 in 2018; however, had their income kept up with inflation, it would’ve been $57,000 in 2018. At the 75th percentile, they earned $46,000 in 1975 and $65,000 in 2018, but would’ve made $100,000. Even at the 90th percentile, they earned $65,000 in 1975 and $112,000 in 2018 but would’ve made $142,000.

In fact, the only group that experienced significant earnings growth above the rate of economic growth was the 99th percentile. Their 1975 earnings were $162,000 and their 2018 earnings were $491,000 but would’ve been only $353,000 had those earnings kept up with inflation. It gets worse when you take the mean of the top 1% of earners — the 1975 average earnings were $252,000 compared to $1,160,000 in 2018, but it would’ve been $549,000 if it had tracked economic growth. Again, all of this is in 2018 dollars.

What this means in simple terms is that the bottom 90% of earners got hosed in favor of the 1%. If you made the median income in 2018 — $36,000 for an individual — you would’ve been making $21,000 more if your wages had tracked economic growth as they did in the 50s and 60s. For a household with two full-time earners, that’s $42,000 a year in wages lost to the 1%.

So, what caused all of this? What happened (or started happening) in 1975 that spawned over 40 years of increasingly inequitable income distribution?

The actual answer is “lots of things,” but in a nutshell, it was most likely unfettered capitalism. It started with the notion that corporations should serve their shareholders above all others, which led most companies to seek profits above all else. In addition, this was hastened by a series of actions and inactions that led to weakened protections for workers.

Demonizing unions and reducing their power through laws such as the so-called “right to work,” letting the minimum wage continue to fall in real terms, and reducing protections for workers, in general, all contributed to a reduction in real wages for most Americans.

At the same time, the 1% was growing their income by leaps and bounds thanks to a corporate structure that favored them. Because corporations were beholden to their shareholders first, profits were driven into dividends, share buybacks, and stock splits as opposed to company infrastructure and employees. The end result was that companies were able to keep wages broadly down in a sort of “race to the bottom” because more investment in workers affected the bottom line.

So, it wound up being a sort of perfect storm to enrich the 1% at the expense of everyone else. All the CEOs, hedge fund managers, and assorted other major shareholders got rich while the precepts of unfettered capitalism and fiscally conservative/libertarian government policies kept wages for just about everyone else low.

Put simply: trickle-down economics didn’t.

This has been theorized for quite a while now, and there has been a lot of research on this subject, but this study in particular put it into stark relief. It showed that the idea of shoving money at corporations, taxing them lightly, and then expecting them to shower that money down on the rest of us had predictable results for anyone with common sense. Of course they’re not going to shower that money down on the rest of us! They already have it, why share it?

So, income growth, and by extension wealth, was concentrated at the top rung of the income ladder while everyone else got shafted. The vast majority of us had income that grew much slower than the actual rate of economic growth, while those at the top enjoyed growth that was much faster than economic growth.

And now, the end result is that so many people live paycheck to paycheck while those at the top enrich themselves through our labor. For the past 50 years or so, the system has been engineered and fine-tuned to work not for us, but for the American oligarchs — those who have the money to control the system. This has only accelerated in recent years with Supreme Court rulings like Citizens United and the recent ruling that allows political donations to be used to pay back private debts after an election cycle.

Money is power, and it is also considered political speech here in the good ol’ US of A. That means that those with money can partake in much, much more political speech than you or I could, and the value of their speech is, by default, much greater than most of the rest of us combined. Hence, the American oligarchs have created a system whereby they can control the politics as well as the narrative (through ownership of various media channels, whether traditional, electronic, or social media).

I haven’t looked for anything that summarizes the outlook in the four years since the study’s reach ends, but I suspect that, based on current events, it’s probably still bad. The Great Resignation and the subsequent “labor shortage” have driven up wages a bit, but I suspect that it will not last long.

Whatever gains we make have a pretty good chance of being wiped away by the oligarchs and their political class. After all, the system works for them, not us, doesn’t it?

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Here are a few more things about the system, man: