Rich, poor income gap widens

Rich, poor income gap widens is an article in the Chicago Tribune.

The report, which offers a state-by-state analysis, suggests the gap between the nation's top earners and lower- and middle-income families is widening because of powerful economic forces, such as global competition, combined with government policies.

"The wealth and income is once again accruing to families at the very top," said Jared Bernstein, senior economist at the Washington, D.C.-based Economic Policy Institute, a liberal think tank.

The study was conducted by the institute and the Center on Budget and Policy Priorities. Economists at conservative institutions don't dispute that inequality is growing, but they disagree about the causes and solutions.

"The important thing is, everybody is doing better," said Rea Hederman Jr., senior policy analyst at the conservative Heritage Foundation. "Even people at the bottom quintile are better off than they were at the start of the period."

The report goes on to state a falsehood.

From the post-World War II period into the 1970s, average wages moved in lockstep with the country's economic growth, benefiting workers at all income levels equally, Bernstein said. But that changed starting in the 1980s, when the gap between rich and poor began to widen.

Income inequality indeed declined from World War II until about 1969. It fluctuated for a few years and then began to increase in 1975, not the 1980s. This is an attempt to link income inequality to Reagan's tax policies. The change began six years before Reagan's policies, and changes in inequality have been unlinked to tax policies over the past half-century. (See my post about Economic Status.)

There is a much more likely cause for the rise. What social trends began circa 1970 that have carried forward into the present?

1. An explosion in single-parent households headed by parents with poor education.

2. A steady increase in two wage-earner households.

What also appears to be missing from the report is income from entitlements and government assistance. I don't know that to be true, but I have suspicions.

Also, there has been no significant change in income inequality (using the Gini Index) for the last five years.

Comments

[Stephanie]

My first comment is that we should also factor in the world economy to this picture - what is the state of the world, in similar periods? What are we considering "poor" and how does it line up with "poor" in other countries and economies? Even within our country, what does "poor" look like rurally, and what does it look like in urban areas?

Secondly, if the entitlements/government programs are not factored in, are we even seeing a true picture? What about programs like WIC, which don't ever get figured into economic statistics like this, but surely improve the conditions of families in poverty? In short, how much are these numbers skewed to reflect the more "alarmist" attitude of the press? What, again, IS poor?

Thirdly, has any study been done to correlate these income gaps with the price of our dependence on foreign oil? Definitely tying the disparity in wage increase to periods of fluctuating oil/gas prices is a relevant and likely scenario, one that goes much further than "Reaganomics blame game" syndrome in explaining the truth in American economics. I think it might be theorirized that as gas/oil prices go up (think 70s forward), the state of the middle and lower classes economic affairs goes down, relative to the increase. The amount of expendable income for both of those groups becomes less and less as they put more dollars into gas/fuel/food costs, all going up with the price of foreign oil. In the upper class, that portion of outgoing income is so much smaller because they have more expendable income in the first place possibly? Further, the upper class, more likely to employ lower and middle class persons, can pass the "cost" of increased gas/oil on to their employees in many ways, including lower wage increases annually, increased employee contribution to health care costs and so on.
I truly think the state of the middle and lower classes' reported income has very little to do with political party in the White House, just as an aside.

[Michael Kruse]

Hey there Steph. I have read several source on this topic from several angles and my opinion is that no one fully understands what drives income inequality. Modest tax rate changes probably don't have a great impact on inequality but certainly taking the top rate from 25% to 90% as FDR did in the 1930s will. Here are some of my thoughts.

The really significant closing of the gap in the last century did not come until WWII. The gap narrowed radically as porfit making priorities gave way to government war production. The wealthy had far less places to invest in a global conflagration thus reducing their income and closing the gap from one side.

Meanwhile, because so many men were drafted, you had an increased demand for labor. Wages and benefits increased (despite government attempts to control them) but consumers had little they could buy. So they saved. This increased their income, closing the gap from the other side.

At wars end you had a glut of experienced labor, high levels of saving (thus low capital rates) and pent up consumer demand. Married women were pushed out of the labor force and women in general were denied many jobs to make room for the returning veterans. The percentage of adults over 25 with a college degree was in the single digits in the late '40s, which meant that those returning vets all had similar educational levels. But most importantly, it created single wage-earner families when most wage-earners had similar qualifications.

Inequality continued to narrow until about 1969. This is precisely the time when women began to enter the labor market. This meant an increasing number of families with two wage-earners. As their education and experience grew, as well as overall numbers of employed rose, I can't help but believe this has widened the gap by expanding the upper end of the distribution.

At the same time (1960s) poverty programs were introduced that devestated family structures among the poorest families and, in tandem, the support sturctures that would enable people to grow up healthy and recieve a solid education. That trend has expanded and worsened over the last three decades. This widened the inequality gap by trapping more people in low income living then there otherwise would have been. This expanded the gap be supressing more people at the bottom of the distribution.

I think there are a range of factors involved but I suspect what I have described here accounts for more than half of what has been driving the inequality rise. Fuel prices, healthcare, and high education eductaion costs, I expect, also play a role but my suspicion is that the change in families is the driving factor