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Yawning rich-poor gap could hobble economy

Column: Income equality may lead to protectionism and slow down trade, among other things.

By David R. FrancisStaff Writer / July 30, 2007



Democratic presidential candidate John Edwards has been trying to put poverty reduction back on the national agenda. During an 11-city tour, Mr. Edwards spelled out his goal to eradicate poverty by 2036. He would do this not merely through economic growth, but with direct measures, such as healthcare for all, the creation of 1 million one-year transition jobs, housing vouchers, and eliminating tax benefits for the rich.

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His lamentations over the poor have been echoed by the two leading Democratic contenders: Sens. Barack Obama and Hillary Clinton. Their efforts, accompanied by greater public awareness of the growing gap between the rich and poor in the United States, may even result in congressional action.

"We could even take some baby steps in the next couple of years" – that is, before President Bush leaves the White House, suggests Jared Bernstein, an economist at the liberal-leaning Economic Policy Institute in Washington.

If Democrats win the White House in 2008 and retain Congress, laws to deal with poverty and income inequality could multiply. "I'm hopeful that in 2008 we will see some changes," says Heather Boushey, an income expert at the Center for Eco­­nomic Policy and Research in Wash­­­ington.

She's troubled by the fact that the productivity of American business has been increasing steadily, but little of that new wealth and income reaches the poor – or even the middle class. The richest 0.01 percent has grabbed most of the gains, enjoying a 250 percent increase in income between 1973 and 2005. The entire economy grew by 160 percent during that period.

In 2005, 37 million Americans – 12.6 percent of the population – lived below the official poverty line. It was a slight improvement from 12.7 percent in 2004, but well above the 11.3 percent level just before the 2000 recession.

The Census Bureau is scheduled to release official poverty numbers for 2006 on Aug. 28. With continued growth in the economy, the percentage of Americans who are officially poor may have dropped again last year, Mr. Bernstein figures.

Nonetheless, the US probably will continue to have a much higher proportion of its people ranked as poor than almost all other rich industrial nations. At the turn of this century, it ranked 24th among 25 countries in the proportion of its population having incomes below half of the median income – the level where half of the people have a bigger income, and half have a smaller income.

The US is not alone in experiencing high levels of income inequality.

Earlier this month, the Joseph Rowntree Foundation in York, England, published a study finding that the gap between the rich and poor in Britain has reached its highest level in more than 40 years. Over the past 15 years, more households have become poor, but fewer are very poor – "breadline poor."

Finance ministers of "Euroland" (the 11 nations that have adopted the euro as their common currency) noted after a meeting last winter that rising inequality increasingly poses a danger to "social stability." What that means exactly was not spelled out. In the politically stable US, it probably doesn't mean demonstrations in the street, or worse.

A Wall Street firm, Goldman Sachs, released a paper July 6 about the unequal distribution of income in Euroland, Japan, and the US. Rising inequality, the paper notes, "can affect the long-term growth prospects of an economy, as well as the way an economy behaves throughout the [business] cycle." It sees a risk that more inequality could lead to protectionism, which would hurt global trade, and thus do "more damage than good." The best medium-to-long-term answer to rising inequality is better education, the firm suggests, something that can't be engineered overnight.

Bernstein hopes that Mr. Bush will not veto legislation moving through Congress that would expand the State Children's Health Insurance Program to cover more low-income children and more adults. Healthcare costs are often a major burden for poor families. He also hopes that the president will allow a tax boost for super-rich hedge-fund managers, providing an extra $4 billion to $6 billion in revenue that could be used, for example, to raise the Earned Income Tax Credit that helps the working poor.

Last week, a modest boost in the federal minimum wage went into effect, helping out some working poor.

One unresolved issue is how to measure poverty. When last year's poverty numbers came out, for example, Nicholas Eberstadt of the American Enterprise Institute noted that today's officially poor (versus those of four decades ago) are more likely to have access to credit, spend relatively less on food, and have more housing space. They also receive better healthcare. Many own cars, televisions, telephones, microwaves, and VCRs or DVD players.

The argument over a definition of poverty gets complex. A basic point Bernstein makes is that poverty is not just about material deprivation, but relative to the prosperity of the rest of the nation. "Today's poor are increasingly left behind the mainstream," he argues.

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