The ris­ing costs of US in­come in­equal­ity

Financial Mirror (Cyprus) - - FRONT PAGE -

Dur­ing the last sev­eral decades, in­come in­equal­ity in the United States has in­creased sig­nif­i­cantly – and the trend shows no sign of rev­ers­ing. The last time in­equal­ity was as high as it is now was just be­fore the Great De­pres­sion. Such a high level of in­equal­ity is not only in­com­pat­i­ble with widely held norms of so­cial jus­tice and equal­ity of op­por­tu­nity; it poses a se­ri­ous threat to Amer­ica’s econ­omy and democ­racy.

Un­der­ly­ing the coun­try’s soar­ing in­equal­ity is in­come stag­na­tion for the majority of Americans. With an ex­pand­ing share of the gains from eco­nomic growth flow­ing to a tiny frac­tion of high-in­come US house­holds, av­er­age fam­ily in­come for the bot­tom 90% has been flat since 1980. Ac­cord­ing to a re­cent re­port by the Coun­cil of Eco­nomic Ad­vis­ers, if the share of in­come go­ing to the bot­tom 90% was the same in 2013 as it was in 1973, me­dian an­nual house­hold in­come (ad­justed for fam­ily size) would be 18%, or about $9,000, higher than it is now.

The dis­pos­able (after tax and trans­fer) in­comes of poor fam­i­lies in the US have trailed those of their coun­ter­parts in other de­vel­oped coun­tries for decades. Now the US mid­dle class is also fall­ing be­hind.

Dur­ing the last three decades, mid­dle-in­come house­holds in most de­vel­oped coun­tries en­joyed larger in­creases in dis­pos­able in­come than com­pa­ra­ble US house­holds. This year, the US lost the dis­tinc­tion of hav­ing the “most af­flu­ent” mid­dle class to Canada, with sev­eral Euro­pean coun­tries not far be­hind. Once the gen­er­ous pub­lic ben­e­fits in ed­u­ca­tion, health care, and re­tire­ment are added to es­ti­mates of dis­pos­able fam­ily in­come in th­ese coun­tries, the rel­a­tive po­si­tion of the US mid­dle class slips even fur­ther.

The main cul­prit be­hind the lan­guish­ing for­tunes of Amer­ica’s mid­dle class is slow wage growth. After peak­ing in the early 1970s, real (in­fla­tion-ad­justed) me­dian earn­ings of full-time work­ers aged 25-64 stag­nated, partly owing to a slow­down in pro­duc­tiv­ity growth and partly be­cause of a yawn­ing gap be­tween pro­duc­tiv­ity and wage growth.

Since 1980, av­er­age real hourly com­pen­sa­tion has in­creased at an an­nual rate of 1%, or half the rate of pro­duc­tiv­ity growth. Wage gains have also be­come con­sid­er­ably more un­equal, with the big­gest in­creases claimed by the top 10% of earn­ers.

More­over, tech­no­log­i­cal change and glob­al­iza­tion have re­duced the share of mid­dle-skill jobs in over­all em­ploy­ment, while the share of lower-skill jobs has in­creased. Th­ese trends, along with a fall­ing la­bor-force par­tic­i­pa­tion rate dur­ing the last decade, ex­plain the stag­na­tion of mid­dle-class in­comes.

For most Americans, wages are the pri­mary source of dis­pos­able in­come, which in turn drives per­sonal con­sump­tion spend­ing – by far the largest com­po­nent of ag­gre­gate de­mand. Over the past sev­eral decades, as growth in dis­pos­able in­come slowed, mid­dle- and lower-in­come house­holds turned to debt to sus­tain con­sump­tion.

Per­sonal sav­ings rates col­lapsed, and credit and mort­gage debt soared, as house­holds at­tempted to keep pace with the con­sump­tion norms of the wealthy. For quite some time, grow­ing in­come in­equal­ity did not slow con­sump­tion growth; in­deed, “trickle-down con­sump­tion” pres­sures fos­tered more con­sumer spend­ing, more debt, more bank­ruptcy, and more fi­nan­cial stress among mid­dle- and lower-in­come house­holds.

The mo­ment of reck­on­ing ar­rived with the 2007-2008 fi­nan­cial cri­sis. Since then, ag­gre­gate con­sump­tion growth has been lack­lus­ter, as mid­dle- and lower-in­come fam­i­lies have been forced to re­duce their bor­row­ing and pay down their debt, of­ten through painful de­faults on their homes – their pri­mary (and of­ten their only) as­set.

As th­ese fam­i­lies have tight­ened their belts, the pace of con­sump­tion spend­ing and eco­nomic growth has be­come more de­pen­dent on earn­ers at the top of the in­come dis­tri­bu­tion. Since the re­ces­sion ended in 2009, real con­sump­tion spend­ing by the top 5% has in­creased by 17%, com­pared to just 1% for the bot­tom 95%.

The re­cov­ery’s pat­tern has re­in­forced longer-run trends. In 2012, the top 5% of earn­ers ac­counted for 38% of per­son­al­con­sump­tion ex­pen­di­ture, com­pared to 27% in 1995. Dur­ing that pe­riod, the con­sump­tion share for the bot­tom 80% of earn­ers dropped from 47% to 39%.

Look­ing to the fu­ture, grow­ing in­come in­equal­ity and stag­nant in­comes for the majority of Americans mean weaker ag­gre­gate de­mand and slower growth. Even more im­por­tant, in­come in­equal­ity con­strains eco­nomic growth on the sup­ply side through its ad­verse ef­fects on ed­u­ca­tional op­por­tu­nity and hu­man-cap­i­tal de­vel­op­ment.

Chil­dren born into low- and high­in­come fam­i­lies are born with sim­i­lar abil­i­ties. But they have very dif­fer­ent ed­u­ca­tional op­por­tu­ni­ties, with chil­dren in low-in­come fam­i­lies less likely to have ac­cess to early child­hood ed­u­ca­tion, more likely to at­tend un­der-re­sourced schools that de­liver in­fe­rior K-12 ed­u­ca­tion, and less likely to at­tend or com­plete col­lege. The re­sult­ing ed­u­ca­tional-at­tain­ment gap be­tween chil­dren born into low and high-in­come fam­i­lies emerges at an early age and grows over time. By some es­ti­mates, the gap to­day is twice as large as it was two decades ago. So the US is caught in a vi­cious cir­cle: ris­ing in­come in­equal­ity breeds more in­equal­ity in ed­u­ca­tional op­por­tu­nity, which gen­er­ates greater in­equal­ity in ed­u­ca­tional at­tain­ment. That, in turn, trans­lates into a waste of hu­man tal­ent, a less ed­u­cated work­force, slower eco­nomic growth, and even greater in­come in­equal­ity.

Although the eco­nomic costs of in­come in­equal­ity are sub­stan­tial, the po­lit­i­cal costs may prove to be the most dam­ag­ing and dan­ger­ous. The rich have both the in­cen­tives and the abil­ity to pro­mote poli­cies that main­tain or en­hance their po­si­tion.

Given the US Supreme Court’s evis­cer­a­tion of cam­paign­fi­nance re­stric­tions, it has be­come eas­ier than ever for con­cen­trated eco­nomic power to ex­er­cise con­cen­trated po­lit­i­cal power. Though cam­paign con­tri­bu­tions do not guar­an­tee vic­tory, they give the eco­nomic elite greater ac­cess to legislators, reg­u­la­tors, and other pub­lic of­fi­cials, en­abling them to shape the po­lit­i­cal de­bate in fa­vor of their in­ter­ests.

As a re­sult, the US po­lit­i­cal sys­tem is in­creas­ingly dom­i­nated by money. This is a clear sign that in­come in­equal­ity in the US has risen to lev­els that threaten not only the econ­omy’s growth, but also the health of its democ­racy.

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