The $6,000 solution: fixing inequality in the United States starting with kids

Throughout American history, periods of unbounded market exuberance, like the one recently experienced, have been followed by periods of far-reaching social and economic reform. The Gilded Age of the late-19th century gave way to the Populist and Progressive reforms of the early 20th century; the Roaring Twenties to the New Deal; and the Eisenhower-Kennedy Nifty-Fifty bull market to the Great Society and the War on Poverty. From this cycle of great wealth creation (and abuse) followed by great reform has emerged a social contract that has smoothed out the rougher edges of American capitalism while making the US itself a more prosperous society.

Like the Gilded Age and the Roaring Twenties, the Roaring Nineties (which had its roots in the early 1980s) brought worrying new levels of inequality. Those who owned stock, homes, and other assets enjoyed substantial gains each year - and those with privileged access to initial public offerings often doubled their money in a day.

Meanwhile, global competition and the ruthless restructuring of the economy put a lid on wages and benefits for the great majority of Americans, especially those without college degrees. While the rich monitored the gains on their monthly brokerage statements, Americans without financial assets struggled each month to pay the interest on their credit-card bills.

By the close of the 1990s the United States had become more unequal than at any other time since the dawn of the New Deal-indeed, it was the most unequal society in the advanced democratic world. The top 20 per cent of households earned 56 per cent of the nation's income and commanded an astonishing 83 per cent of the nation's wealth.

Even more striking, the top one per cent earned about 17 per cent of national income and owned 38 per cent of national wealth. In nearly two decades the number of millionaires had doubled, to 4.8 million, and the number of "deca-millionaires" - those worth at least $10 million - had more than tripled, from 66,500 to 239,400.

In contrast, the bottom 40 per cent of Americans earned just 10 per cent of the nation's income and owned less than one per cent of the nation's wealth. The bottom 60 per cent did only marginally better, accounting for about 23 per cent of income and less than 5 per cent of wealth.

The racial gaps are even more disheartening. The typical African-American household had 54 cents of income and 12 cents of wealth for every corresponding dollar in the typical white American household. Hispanics had 62 cents of income and four cents of wealth.

The wealth gap dwarfs the more oft-noted income gap not only in size but also in significance, for several reasons. First, ownership of assets - a home, land, a business, savings and investments - provides the kind of security that permits planning for the future and the future of one's children. Second, although a job and an income are obviously important, they cannot be bequeathed to future generations, whereas wealth - and the status and opportunities it confers - can be.

Finally, with wealth comes political influence. Many politicians spend more time raising money from the wealthy than they do speaking with their own constituents. As Kevin Phillips, the author of Wealth and Democracy (2002), recently observed, the intense concentration of the nation's wealth in a small sliver of society has raised the spectre of plutocracy.

One way the rich use their influence, of course, is to protect and increase their wealth. But the political privileges enjoyed by the rich over the past decade cannot alone explain the size of the wealth gap. Clean up all the corruption on Wall Street and K Street, and there would still be huge inequalities of wealth.

Deeper forces are at work, among them the introduction of labour-saving technologies that have benefited the owners of capital at the expense of workers; the downward pressure that globalization has exerted on wages; and changes that have made the tax code less progressive and more friendly to the better-off.

There is also the fact that wealth, like debt, is self-replicating. Compound interest turns wealth into more wealth and debt into more debt. Other things being equal, those with interest-bearing savings accounts will end up richer after a year, and those who must pay interest on credit-card or consumer household debt will end up poorer.