Rich getting richer: Campaign issue?

Studies show that the rich are getting a lot richer, the poor a little poorer. The middle class is slipping.

By , columnist

It's almost not news any more. The rich have been getting richer, and the middle class and poor are finding life more difficult economically.

The latest study of income inequality in the United States, released last week, confirms that trend. It finds that since the late 1990s, despite several years of reasonable economic growth, the bottom 20 percent of families actually lost 2.5 percent in their average income by 2005, while the top 20 percent of American households enjoyed a 9 percent rise. Those in the middle fifth got a 1 percent hike in inflation-adjusted incomes.

What makes the study noteworthy is that it raises further suspicion among many that the economic system isn't fair. Further, it suggests lower-income families are "ill prepared" to weather a recession, says Jared Bernstein, an economist at the liberal-leaning Economic Policy Institute (EPI) in Washington, and one author of the latest inequality study. (Most economic forecasters now say the US has probably slipped into recession.)

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Using Census Bureau data, the study by EPI and the Center on Budget and Policy Priorities (CBPP), another Washington think tank, examined the situation in individual states. In 37 states, from the late 1980s to the middle of the current decade, the richest fifth of families got an average $36,300 boost in their annual income while the poorest fifth got just $1,600. In terms of purchasing power, the annual income of the poorest families increased only $93 by the end of the period (To see the study, visit www.cbpp.org.)

Another study, by the Congressional Budget Office, using tax data, calculates that the share of national after-tax income going to the top 1 percent of households more than doubled, from 7.5 percent in 1979 to 15.6 percent in 2005. In 2005 alone, the $180,000 average income gain for these rich households was more than three times the average middle-income household's total income.

An academic look at increasing income polarization, written by economists Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics, found that average incomes of the highest-earning 1 percent grew 11 percent year-over-year between 2002 and 2006. The bottom 99 percent saw their incomes grow on average just 0.9 percent annually.

Then The New York Times this month reported that average compensation for chief executives who served at least two years at some 200 major US companies grew by 5 percent in 2007, to $11.2 million. With their businesses often slumping, performance-based bonuses were down. But discretionary bonuses, not linked to performance, were up a bit. For CEOs, "things go well when things go up; they go well when things go down," says Mr. Bernstein. "It's a heck of a racket."

A couple of decades or so ago, CEO compensation had minor material impact on the bottom line of corporations. Now their pay has reached such a level that more and more shareholders object. Congressional committees hold hearings on the issue. But at a time when political candidates need campaign contributions, no restraining action has been taken.

Meanwhile, the presidential candidates are speaking of the urgency of dealing with the housing crisis and the economic slowdown. But it seems likely that the Democratic candidates will talk more than the Republican one about growing income inequality.

Conservatives tend to think the economic system is fair, rewarding the deserving properly. Americans have generally been tolerant of unequal outcomes, since most believe opportunities to get ahead are abundant and that hard work and skill are well rewarded, as Isabel Sawhill, of Washington's Brookings Institution notes.

But she questions these assumptions, citing a Brookings study released in February that found that 1 out of 3 American children are worse off than their parents were at their age. It also noted that intergenerational economic mobility in the US is worse than in Canada and the Scandinavian countries, and even lower than in France and Germany with their aristocratic heritages.

Assuming American tolerance for income inequality continues, some political pundits figure Hillary Rodham Clinton's electoral prospects won't be damaged by reports that she and her husband made $109 million in the past eight years.

Even so, Elizabeth McNichol at the CBPP worries that the growing income gap will worsen public cynicism about government and erode support for the tax revenues needed for education and other necessary government services.

She and Bernstein suggest several tactics to remedy for the income-gap situation: States could raise the minimum wage above the federal level; both state and federal taxes could be made more progressive, with the extra revenues helping support such poverty-fighting programs as the Earned Income Tax Credit; barriers to unionization could be cut, and health insurance coverage could be expanded.

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