Wealth gap: A guide to what it is, why it matters
WASHINGTON — From the White House to the Vatican to the business elite in Davos, Switzerland, one issue keeps seizing the agenda: the growing gap between the very wealthy and everyone else.
It’s “the defining challenge of our time,” says President Barack Obama, who will spotlight the issue in his State of the Union address Tuesday night. A Gallup poll finds two-thirds of Americans are unhappy with the nation’s distribution of wealth. Experts say it may be slowing the economy.
Why has the issue suddenly galvanized attention? Here are questions and answers about the wealth gap — what it is and why it matters.
Q. Hasn’t there always been a wide gulf between the richest people and the poorest?
A. Yes. What’s new is the widening gap between the wealthiest and everyone else. Three decades ago, Americans’ income tended to grow at roughly similar rates, no matter how much you made. But since roughly 1980, income has grown most for the top earners. For the poorest 20 percent of families, it’s dropped. Incomes for the highest-earning 1 percent of Americans soared 31 percent from 2009 through 2012, after adjusting for inflation, according to data compiled by Emmanuel Saez, an economist at University of California, Berkeley. For the rest of us, it inched up an average of 0.4 percent. In 17 of 22 developed countries, income disparity widened in the past two decades, according to the Organization for Economic Cooperation and Development.
Q. So who are the top 1 percent in income?
A. They’re bankers, lawyers, hedge fund managers, founders of successful companies, entertainers, senior managers and others. One trend: Corporate executives, doctors, and farmers made up smaller shares of the top 1 percent in 2005 than in 1979. By contrast, the proportion of the wealthiest who work in the financial and real estate industries has doubled. The top 1 percent earned at least $394,000 in 2012. Through most of the post-World War II era, the top 1 percent earned about 10 percent of all income. By 2007, that figure had jumped to 23.5 percent, the most since 1928. As of 2012, it was 22.5 percent.
Q. How has the middle class fared?
A. Not well. Median household income peaked in 1999 at $56,080, adjusted for inflation. It fell to $51,017 by 2012. The percentage of American households with income within 50 percent of the median — one way of measuring the middle class — fell from 50 percent in 1970 to 42 percent in 2010.
Q. Does it matter if some people are much richer than others?
A. Most economists say some inequality is needed to reward hard work, talent and innovation. But a wealth gap that’s too wide is usually unhealthy. It can slow economic growth, in part because richer Americans save more of their income than do others. Pay concentrated at the top is less likely to be spent.
It can also trigger reckless borrowing. Before the 2008 financial crisis, middle class households struggled to keep up their spending even as their pay stagnated. To do so, they piled up debt. Swelling debt helped inflate the housing bubble and ignite the financial crisis. Experts note that the Great Depression and the Great Recession were both preceded by surging income gaps and heedless borrowing by middle class Americans.
Q. Has it become harder for someone born poor to become rich?
A. The evidence is mixed. Countries that have more equal income distributions, such as Sweden and other Scandinavian countries, tend to enjoy more social mobility. But a study released last week found that the United States isn’t any less mobile than it was in the 1970s. A child born in the poorest 20 percent of families in 1986 had a 9 percent chance of reaching the top 20 percent as an adult, the study found — roughly the same odds as in 1971.
Other research has shown that the United States isn’t as socially mobile as once thought. In a study of 22 countries, economist Miles Corak of the University of Ottawa found that the United States ranked 15th in social mobility. Only Italy and the Britain among wealthy countries ranked lower. By some measures, children in the United States are as likely to inherit their parents’ economic status as their height.
Q. So why has income inequality worsened?
A. There’s no simple answer. Globalization has created “superstars” and concentrated pay among corporate executives, Wall Street traders, popular entertainers and other financial elite. At the same time, factory workers now compete with 3 billion people in China, India, eastern Europe and elsewhere who weren’t working for multinational corporations 20 years ago. Many now make products for Apple, Intel, General Motors and others at low wages. This has depressed middle-class pay. And pay has risen much faster for college graduates than for high-school graduates. These trends have contributed to a “hollowed out” labor market, with more jobs at the higher and lower ends of the pay scale and fewer in the middle.
Social factors contribute, too. Single-parent families are more likely to be poor than other families and less likely to ascend the income ladder. Finally, men and women with college degrees and high pay are more likely to marry each other and amplify income gaps.
Q. Does wealth distribution follow a similar pattern?
A. It’s even more pronounced. A Pew Research Center study found that the wealthiest 7 percent of households grew 28 percent richer from 2009 through 2011. For the bottom 93 percent, collective wealth fell 4 percent. That’s largely because wealthy households own far more stocks and other financial assets than others. By contrast, whatever wealth middle-class Americans have is mainly in their home equity.
Since the Great Recession ended, stock-market averages have soared, setting records in 2013. Home values, though, remain far below their peaks reached in 2006. That divergence has benefited the richest and left others struggling.
Q. Where do the 1 percent live?
A. Investor Warren Buffett famously lives in Omaha, Neb. Les Wexner, whose fashion empire includes Victoria’s Secret, is an Ohioan. But the wealthy mainly cluster around the largest cities. Of the 515 U.S. billionaires, 96 live around New York City, according to the intelligence firm Wealth-X. Los Angeles is home to 22, Chicago 21, San Francisco 20, Houston 14. Millionaires are more widely dispersed. Maryland has the highest concentration. Of all its households, 7.7 percent have $1 million or more in financial assets. New Jersey, Connecticut, Hawaii and Alaska have the next-highest concentrations, according to a report from Phoenix Marketing International.
Q. Is anything being done to narrow the wealth gap?
A. President Barack Obama has made the issue a priority and wants the government to act to reduce the disparities. The president managed to restore higher tax rates on incomes above $398,350 last year. And he’s pushed other steps that might narrow the gap slightly, such as a higher minimum wage. But congressional Republicans say those steps could hurt economic growth and have resisted most such measures.
Q. Is everyone concerned about the wealth gap?
A. Some conservative economists question much of the data. They note, for example, that Saez’s figures don’t include government benefits, such as Social Security or food stamps, or employer payments for health insurance, that benefit the less-than-rich. Yet the Congressional Budget Office did include government benefits and the effect of taxes in its own study and still found a sizable gap: For the top 1 percent, income jumped 275 percent, adjusted for inflation, from 1979 to 2007. For the middle 60 percent of Americans, it grew less than 40 percent.
Q. So what do experts say is the best way to shrink the wealth gap?
A. Most ideas break down along political lines. Liberal economists tend to support a higher minimum wage, greater access to pre-school and college education and more spending on roads, bridges and other infrastructure to help generate good-paying jobs. Most favor higher taxes on the wealthy to pay for such programs.
Conservatives tend to back tax cuts, government deregulation and other steps they say will accelerate hiring and growth and raise living standards for everyone. They tend to focus on the need to advance income mobility.
In a speech this month, Florida Republican Sen. Marco Rubio acknowledged the enormous pay disparity between a fast food company’s cashier and its CEO.
“The problem we face is not simply the gap in pay between them, but rather that too many of those cashiers are stuck in the same job for years on end,” Rubio said.