From: davidb@zeus.ce.washington.edu (David W. Barts)
Subject: Income equality (or lack thereof)
Summary: _Business Week_ article ...
Organization: University of Washington
Date: Thu, 30 Jul 1992 04:45:28 GMT


Seeing the recent thread on income equality, I thought this may be
of interest:

[ The following article appeared in the 18 Nov 1991 issue of
  _Business Week_ magazine.   Time prevents me from entering the
  whole article. -- David B.]

THE RICH ARE RICHER -- AND AMERICA MAY BE THE POORER
The widening income gap could cost the US plenty 

In recessions, certain things are predictable:  Incomes stagnate or
fall, and the poverty rate climbs.

This recession is no different.  Median household income fell by 1.7%
in 1990, and the poverty rate jumped to 13.5%.  The numbers for 1991,
which will be released just before the Presidential election in 1992,
could look even worse.  But the cyclical deterioration in incomes
shouldn't be regarded as merely a passing phenomenon.  Indeed, the most
troubling thing about the latest numbers is that for the majority of
the US population, they cape more than a decade of income stagnation or
worse.  At the same time, a small minority has enjoyed rapid gains in
income.  This is already shaping up as a juicy morsel for politicians
-- the "fairness issue" is on more and more vote seekers' lips these
days.

But what has happened to incomes in America over the past 15 years or
so is troubling on economic as well as moral grounds.  Simply put,
growing income inequality and stubbornly high poverty rates threaten
the country's long-term growth prospects.  That's because inequality of
income distribution and persistent poverty can put a damper on
productivity growth, while stagnating incomes crimp consumer purchasing
power.

What's more, there don't seem to have been any economic benefits
derived from the rich having gotten richer, as some economists argued
in the early 1980s when the Reagan Administration first slashed taxes.
The nation's savings rate was supposed to rise, but it didn't.  And the
swelling tide of income for a few was supposed to lift all boats, but
it didn't.  "I don't know what you can say that's good about what's
happened to incomes," says Lawrence Chimerine, senior advisor to
DRI/McGraw Hill.

FAT SLICE.  Most of the 3.3 million families whose income topped
$102,000 last year -- the richest 5% of the population -- would
probably disagree with Chimerine and give three cheers for their good
fortune.  By next year, that group will have seen its aftertax income,
after inflation, grow nearly 60% over a 15-year period, according to
calculations by the Congressional Budget Office based on Census Bureau
data (chart).  And the richest 1% of the population will have enjoyed
even sharper gains in real income, both pretax and especially aftertax,
over the same period.  Indeed, it's only those in the top quintile, or
top 20%, who show a respectable gain in real incomes over the 15-year
span.

. . .  [ edited ]  . . .

The changes in the supply and demand for low-skilled labor may explain
why some incomes lagged behind even the mediocre performance of the
middle-income group.  But they fail to explain why incomes of the
richest segment surged.  "It's impossible to attribute the sharp
increase in income at the top of the scale to a drastic increase in the
relative value of the services provided by people at that level," says
Henry J.  Aaron of the Brookings Institution.  "What we're observing is
some successful rent-seeking activity," whereby lawyers, investment
bankers, and other professionals earn extra income for seemingly unique
abilities.  And because such endeavors earn high rewards, says Aaron,
talent may be diverted from more productive, but lower-paying
endeavors, such as engineering.

FEWER BUYERS.  What are the economic consequences of the stark
divisions that have developed?  Big earners may be big spenders, but
their outlays may not offset cutbacks in the rest of the economy.  It's
possible, ventures DRI's Chimerine, that with wages squeezed, tax
burdens up, and the majority of the population "standing still or worse
in terms of purchasing power," the U.S. could end up with "a
demand-short economy."  He argues that if one person gets a $20,000
raise while another person loses a $20,000 job, the first person's
additional consumption is unlikely  to make up for the loss of the
newly unemployed person's consumption.

. . .  [ edited ]  . . .

Inequality and stagnating incomes may also constrain growth in other
ways.  "We have to ask ourselves whether the macroeconomy is becoming
permanently hostile to less-skilled workers," says Northwestern
[University economist Rebecca M.] Blank.  If so, there will be
considerable costs.  First, there are the costs of having to support a
population that is barely making it economically.  Next, there's the
potential cost of possible social disruption resulting from worsening
income inequality and a population of persistently poor individuals.
Finally, there's the cost of consigning people to low-productivity jobs
when they and society could do better.

. . .  [ edited ]  . . .

--
David Barts  N5JRN                      UW Civil Engineering, FX-10
davidb@ce.washington.edu                Seattle, WA  98195