Income inequality in US wider than anywhere else

In the past weeks I have tracked news reports and analyses on the phenomenon of income inequality — or the gap between the few rich and “everybody else” — in the United States, the bastion of world capitalism.

The conclusion: in the last 20 years income inequality has grown wider in the US than anywhere else. From 1993 to 2010, the incomes of the richest 1 percent of Americans rose 58 percent; those of the 99 percent, only 6.4 percent.

“There is little reason to think the trend will go into reverse any time soon, given globalization and technological change,” writes Eduardo Porter in the International Herald Tribune. The two factors, he adds, “have weighed heavily on the wages of less-educated workers who compete against machines and cheap foreign labor while increasing the returns of top executives and financiers.”

For a while, the global recession that began in 2008 narrowed that income gap a little, mainly because the crash in US stock prices reduced the portfolio of the rich.

But as US recovery began staggeringly in 2010, the top 1 percent rich Americans (average yearly income: $1,019,089) cornered 93 percent of the $288-billion income gains that year. Their earnings increased by 11.6 percent.

Worse, the top 0.01 percent – or 15,000 US households with average incomes of $23.8 million – took 37 percent of the income gains. Their earnings rose by 21.5 percent.

In contrast, the bottom 99 percent received only $80 pay increase per person, after adjusting for inflation.

These data are derived from a study of American tax returns by two French economists, Thomas Piketty and Emmanuel Saez.

A longtime Wall Street executive, Steven Rattner, notes in his IHT op-ed article that these statistics point to “the desperate need to address this wrenching problem.” He adds:

“Even in a country that sometimes seems inured to income inequality, these takeaways are truly stunning... Still more astonishing was the extent to which the super rich got rich faster than the merely rich.”

How inured are Americans to income inequality, and why?

Poll results cited by Porter show that whereas the US income gap has been worse than in other developed countries in three decades, “Americans are much less concerned about it than people in other countries are.”

“Policy makers have not cared much either,” Porter observes. “The (US) does less than other rich countries to transfer income from the affluent to the less fortunate. Even as the income gap has grown enormously during the past 30 years, government has done little to curb the trend.”

Of the $1.1-trillion tax breaks given by the US government, $723 billion (67 percent) go to the richest segment of the population, according to calculations in March 2011 by the Tax Policy Center and the Center on Budget and Policy Priorities.

However, the $2.01-billion entitlement benefits and other federal social benefits (unemployment, social security, Medicare, Medicaid, housing assistance, and food stamps) are more evenly distributed.

Perhaps the 99 percent who were relatively content with their entitlements are growing uneasy and, until lately, unaware of the huge tax breaks given to the rich. This may partly explain these November 2011 Gallup survey results:

1. Only 17 percent of Americans said it was extremely important for the government to reduce income and wealth inequality, but 35 percent said it was crucial to “reignite” economic growth;

2. 29 percent said it was extremely important for the government to increase equality of opportunity. However, 41 percent said there was not much opportunity in the US — a big jump from 17 percent in 1998 and 8 percent in 1952.

“Americans have accepted income inequality in the past partly because of the belief that capitalism cannot work without it,” Porter points out. Their view, he adds, was that if entrepreneurs invested and workers improved their skills to improve their lot, “a government that taxed the rich heavily to give to the poor could destroy that incentive and stymie economic growth that benefits everybody.”

Although the rising concern over lack of opportunity may be a reaction to the economic slack, high unemployment and stagnant incomes — not to income inequality —, Porter counters: “Evidence is mounting, however, that inequality itself is obstructing Americans’ shot at a better life.” He cites these findings:

1. Two-thirds of American families - including 4 of 5 in the poorest 5th of the population — earn more than their parents did 30 years ago, but they do not advance much.

2. Only 6 of 10 children of families in the bottom 5th will rise to the top 5th as adults, the rest will remain where they are.

Another worrisome factor, Porter says, is political. He warns:

“If the very rich can use the political system to slow or stop the ascent of the rest, the United States (can) become a hereditary plutocracy under the trappings of liberal democracy... Once inequality becomes acute, it breeds resentment and political instability, eroding the legitimacy of democratic institutions. It can produce political polarization and gridlock, splitting the political system between haves and have-nots, making it more difficult for government to address imbalances and respond to brewing crises.”

The likes of George Soros warn of direr political scenarios. Will this happen in America?

Email to: [email protected]