Yawning rich-poor gap could hobble economy

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

from the July 30, 2007 edition

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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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