Growing Income Gap Could Lead to Economic Crisis

Article excerpt

A widening gap between rich and poor is reshaping the U.S. economy, leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions.

Left unchecked, the decades-long trend toward increasing inequality may condemn Wall Street to a generation of unimpressive returns and even shake social stability, economists and financial- industry executives say.

"Income inequality in this country is just getting worse and worse and worse," said James Chanos, president and founder of New York-based Kynikos Associates Ltd. last week. "And that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind."

Since 1980, about 5 percent of annual national income has shifted from the middle class to the nation's richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion -- about $109 million apiece -- beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data.

Disputes over what constitutes economic fairness are moving to center stage amid a near-stagnant economy saddled with 9.1 percent unemployment yet boasting record corporate profits. President Obama last month targeted "the wealthiest taxpayers and biggest corporations" for higher taxes, saying they should pay "their fair share." That drew charges of "class warfare" from House Speaker John Boehner of Ohio.

'Occupy Wall Street'

The debate comes as demonstrations in New York by an amorphous group called "Occupy Wall Street" move into their fourth week. The rallies over what protesters call unbridled corporate power began in lower Manhattan's Zuccotti Park, a few blocks from Wall Street, and have spawned copycats in several U.S. cities.

"We are the 99 percent that will no longer tolerate the greed and corruption of the 1 percent," says the occupywallstreet.org web site.

The reference is to the fact that a sliver of households have enjoyed a disproportionate share of recent economic rewards. Between 1993 and 2008, the top 1 percent of families captured 52 percent of total income gains, according to a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel Saez of the University of California, Berkeley.

Defended protesters

Howard Buffett, the Berkshire Hathaway Inc. director and son of Chairman Warren Buffett, defended the Wall Street protesters in an interview with Bloomberg.

"There has never been a larger gap between earnings in this country," Buffett said. "There has never been a time in my lifetime when the government is going to cut an incredible amount of programs that support poor people and feed them."

Such trends have left their mark on public sentiment. Though a majority of Americans reject the idea that the country is divided between "haves" and "have-nots," those seeing such a divide rose to 45 percent from 35 percent in 2009, according to a Pew Research Center poll released Sept. 29. The sharpest increase occurred among self-described political independents.

Economists such as the late Arthur Okun, a chairman of the White House Council of Economic Advisers in the 1960s, traditionally believed that societies could emphasize equality or growth, not both. Now, in an age where the quality of human capital plays a larger role in determining economic outcomes, many economists -- including Federal Reserve Chairman Ben S. Bernanke -- say the two are linked.

Growing gap

"The large and growing gap between the haves and have-nots will tend to undermine growth, both directly and indirectly -- including by reducing the marginal propensity to consume and by amplifying the political polarization that has already contributed to poor economic policymaking," says Mohamed El- Erian, chief executive officer of Pacific Investment Management Co. …