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Does income inequality threaten economic and social stability?

Income disparity could threaten economic stability and social fabric

Income inequality has increased significantly in the U.S. during the current recession, perhaps more than at any time in recent history, a trend that may have significant damaging effects on the economy and social fabric.

The BBC reported startling economic equality figures in a recent documentary: the top 200 wealthiest people in the world control more wealth than the bottom 4 billion. But what is more striking to many is a close look at the economic inequality in the homeland of the "American Dream." The United States is the most economically stratified society in the western world. As The Wall Street Journal reported, a recent study found that the top .01% or 14,000 American families hold 22.2% of wealth, and the bottom 90%, or over 133 million families, just 4% of the nation's wealth.

The U.S. Census Bureau and the World Wealth Report 2010 both report increases for the top 5% of households even during the current recession. Based on Internal Revenue Service figures, the richest 1% have tripled their cut of America's income pie in one generation. In 1980 the richest 1% of America took 1 of every 15 income dollars. Now they take 3 of every 15 income dollars.

Income inequality grew significantly in 2005, with the top 1 percent of Americans - those with incomes that year of more than $348,000 - receiving their largest share of national income since 1928, analysis of newly released tax data shows. The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression. The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans.

According to research done by Elizabeth Gudrais, associate editor of the Harvard Magazine, income inequality has been rising since the late 1970s, and now rests at a level not seen since the Guilded Age (1870 to 1900), a period in U.S. history defined by the contrast between the excesses of the super-rich and the squalor of the poor.
Early in the twentieth century, the share of total national income of the top 1 percent of U.S. earners hovered around 18 percent. That share hit an all-time high in 1928-when top earners took home 21.1 percent of all income, including capital gains-then dropped steadily through the next three decades. Amid the post-World War II boom in higher education, and overall economic growth, the American middle class swelled and prospered, and the top 1 percent of earners took home less than 10 percent of all income through the 1960s and 1970s. Since then, the topmost 1 percent have seen their share rise again: it shot past 15 percent in 1996 and crested at 20.3 percent in 2006, the most recent year for which numbers are available.

The gap between the wealthiest Americans and middle- and working-class Americans has more than tripled in the past three decades, according to a June 25 report by the Center on Budget and Policy Priorities. New data shows that the gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest parts of the population in 2007 was the highest it's been in 80 years, while the share of income going to the middle one-fifth of Americans shrank to its lowest level ever.

According to Paul Buchheit of DePaul University, some hedge fund managers made $4 billion annually. This is enough to pay the salaries of every public school teacher in New York City. In 1965, the average salary for a CEO of a major U.S. company was 25 times the salary of the average worker. Today, the average CEO's pay is more than 250 times the average worker's. And it's not just the rich individuals, but also the corporations that are taking money meant for jobs and public needs. Fareed Zakaria noted in Newsweek that the 500 largest non-financial companies are sitting on $1.8 trillion in uninvested cash.

According to Dean Baker, Co-Director of the Center of Economic and Policy Research, it is no longer possible to contest the fact that there has been an enormous upward redistribution of income since 1980. Dozens of economists have reached the same conclusion, using different methodologies and different data sets. Yet, in the last few months, columnists in many of the nation's leading publications have told readers that the upward redistribution over this period is good, because income has risen for everyone. According to their perspectives, everyone has benefited from the fact that some people are richer and a relatively small number of people are very rich. Part of that perspective is the argument that tax breaks for the wealthy and very rich (both individuals and corporations) will have a beneficial "trickle down" beneficial effect for the middle class and poor. There is little if any evidence to support this argument.

The Pew Foundation study, reported in the New York Times, concluded, "The chance that children of the poor or middle class will climb up the income ladder, has not changed significantly over the last three decades." The Economist's special report, Inequality in America, concluded, "The fruits of productivity gains have been skewed towards the highest earners and towards companies whose profits have reached record levels as a share of GDP."

Emmanuel Saez, an economist at the University of California, Berkeley, who analyzed the Internal Revenue Service data with Thomas Piketty of the Paris School of Economics, argue that such growing disparities were significant in terms of social and political stability.

Between 1983 and 1999, men's life expectancy decreased in more than 50 U.S. counties, according to a recent study by Majid Ezzati, associate professor of international health at the Harvard School of Public Health. For women, the news was even worse: life expectancy decreased in more than 900 counties-more than a quarter of the total. The United States no longer boasts anywhere near the world's longest life expectancy. It doesn't even make the top 40. In this and many other ways, the richest nation on earth is not the healthiest.

Americans, on average, have a higher tolerance for income inequality than their European counterparts. American attitudes focus on equality of opportunity, while Europeans tend to see fairness in equal outcomes. Among Americans, differences of opinion about inequality can easily degenerate into partisan disputes over whether poor people deserve help and sympathy or should instead pull themselves up by their bootstraps. The study of inequality attempts to test inequality's effects on society, and it is delivering findings that command both sides' attention.

Ezzati's results are one example. There is also evidence that living in a society with wide disparities-in health, in wealth, in education-is worse for all the society's members, even the well off. Life-expectancy statistics hint at this. People at the top of the U.S. income spectrum "live a very long time," says Lisa Berkman, Director of Harvard University's Center Population and Development Studies, "but people at the top in some other countries live a lot longer."

Research indicates that high inequality reverberates through societies on multiple levels, correlating with, if not causing, more crime, less happiness, poorer mental and physical health, less racial harmony, and less civic and political participation. Tax policy and social-welfare programs, then, take on importance far beyond determining how much income people hold onto. The level of inequality we allow represents our answer to "a very important question," says Nancy Krieger, professor of society, human development, and health at Harvard "What kind of society do we want to live in?"

 

 

Ray Williams is the author of Breaking Bad Habits and The Leadership Edge.

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