The Income Gap & Why We Should Care
Two weeks ago, we looked at some numbers that suggested the gap between rich and poor in the United States is growing. Last week, we considered some possible reasons for this growing inequality.
This week, we answer perhaps the most important question: So what?
The numbers suggest the real income of the poor is holding steady; it is the soaring income of those at the top that is widening the gap. Why then should that one number -- the difference between the top and the bottom -- be of concern?
According to several analyses, income inequality can cause problems for everyone, no matter where you fall on the earnings scale.
It's Bad for Demand
When poor households get an extra dollar -- or 10 or 20 -- they are almost guaranteed to spend that money. Rich households, however, are more likely to lock up the money in investments.
Therefore, as more wealth is concentrated among that already-rich, relatively less money is poured into consumer spending, explained Robert Reich, former U.S. Labor Secretary and current professor of public policy at the University of California at Berkeley.
"As the middle class's share of total income continues to drop, it cannot spend as much as before," Reich wrote in August. "Nor can most Americans borrow as they did before the crash of 2008 -- borrowing that temporarily masked their declining purchasing power."
It's Bad for Economic Growth
Recent research by Andrew Berg and Jonathan Ostry of the International Monetary Fund suggests that countries with high income inequality have a harder time sustaining long-term economic growth than those with smaller income gaps.
Income inequality may make financial crises more likely or increase political instability, discouraging investment, Berg and Ostry theorized.
Furthermore, "inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis," they wrote. "Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity."
It's Harder to Get Ahead
Income inequality may also make it more difficult for those from low-earning backgrounds to move up into a higher income range, according to labor economist Alan Krueger, chair of the White House Council of Economic Advisors. In a January 2012 presentation to the Center for American Progress, Krueger cited several studies that find a correlation between income inequality and lack of mobility between income levels.
"Children of wealthy parents already have much more access to opportunities to succeed than children of poor families," Krueger said, "and this is likely to be increasingly the case in the future unless we take steps to ensure that all children have access to quality education, health care, a safe environment and other opportunities that are necessary to have a fair shot at economic success."
It Causes Social Problems
Though intuition might suggest that rich countries would have fewer social problems than poor ones, work by public health researcher Richard Wilkinson indicates that it is in fact the nations with higher economic inequality that face more social challenges.
In a recent TED talk, Wilkinson presented analysis that showed countries with higher levels of income inequality had lower levels of child well-being, higher levels of mental illness, lower levels of trust among their citizens, and higher levels of social and health problems such as obesity, teenage pregnancy, alcohol and drug addiction, and infant mortality.
"The more unequal countries are doing worse on all these kinds of social problems," Wilkinson concluded.
Or Maybe There's Nothing to Worry About After All
There are some people who don't believe there is an income inequality problem at all.
Today, more than in the past, low-income earners are compensated with non-taxable benefits such as health insurance and the numbers that show stagnant wages among the lowest earners fail to capture the value of these benefits, argues Michael Tanner, a fellow at the conservative Cato Institute in a recent article. Furthermore, he writes, changes in the tax code may be making it seem as if top-tier incomes are rising faster than they actually are. So the "growing income gap" may be overstated, Tanner contends.
To the extent that income inequality exists, it should be seen as a good thing, motivating and rewarding those who work hard to improve their economic standing, he said.
"We need people who are ambitious, skilled risk-takers. We need people to be ever striving for more," Tanner writes. "That means that they must be rewarded for their efforts, their skills, their ambitions, and their risks. Such rewards inevitably lead to greater inequality."
Thank you for reading. As an added bonus, the Salary.com editorial team has compiled a recommended reading list regarding this topic. Enjoy:
- The Price of Inequality: How Today's Divided Society Endangers Our Future
- The Great Divergence: America's Growing Inequality Crisis & What We Can Do About It
- Plutocrats: The Rise of the New Global Super-Rich & the Fall of Everyone Else
- Who Stole the American Dream?