Income inequality

Widening gap a threat to future

February 14, 2000|By Jared Bernstein

WASHINGTON -- The new economy ... the words conjure many exciting images: the Internet fueling the booming stock market, the lowest unemployment rate in decades, and rates of economic growth we only dreamed of a few years ago.

But this image is tarnished by the growing problem of income inequality. Recently, numerous reports have shown that the gap between the top and the bottom of the income scale is greater than at any time since the gap was tracked, back in the 1940s.

A new report by the Economic Policy Institute and the Center on Budget and Policy Priorities found that while the gap grew more slowly in the 1990s, the best economy in 30 years did not stop inequalitys inexorable climb.

In the 1980s, the rich got richer and the poor got poorer. In the 1990s, the inflation-adjusted incomes of the poor were flat, middle-class incomes grew only 2 percent (adjusting for inflation), while the average income of the top 5 percent grew by 27 percent.

Of two counter-arguments to the inequality debate, only one is worth taking seriously. Proponents of the first claim that inequality hasnt increased. They argue that our economy is highly mobile. So what if people start out lower -- as they get older theyll zip through the income scale.

But studies tracking families economic progress over time find that 41 percent of those who start out in the bottom fifth are there 25 years later, and an additional 25 percent make it only to the next highest fifth. Only 6 percent make it to the top. Look for the inequality deniers to attack the data, too. Inequality research is based on the Census Bureaus income data -- widely considered the single most accurate benchmark of the annual income and poverty status of U.S. families. Nevertheless, it is admittedly incomplete at both ends of the income scale. At the bottom, its missing the cash value of some welfare benefits, like food stamps. But at the top, its missing the value of capital gains, such as the bundle you make when you sell a hot dotcom stock.

The serious opposing view comes from those who acknowledge inequalitys growth but argue that it is inevitable in a global, technologically driven economy.

An analysis of recent trends shows this to be a misguided and cavalier argument. Our economy is growing faster than it has in years, and families are working harder than ever to generate that growth. Yet most families finished the decade only a few percent better off in real terms. Almost all of the economic gains went to the top.

Ultimately, this pattern of growth will undermine the faith that working Americans have in the so-called new economy.

Jared Bernstein is an economist at the Economic Policy Institute in Washington and co-author of the report, Pulling Apart: A State-by-State Analysis of Income Trends.

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