Posted by: Kevin | March 30, 2007

The Rich Get Richer and … Who Cares About the Rest Anyway?

A report in yesterday’s New York Times shows the widening gap in income between the rich and the poor. 

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

Meanwhile the top 1% of Americans saw a 14% increase in their income.  This continues a trend which started in the eighties and accelerated in the mid-nineties with the internet boom.  Except for a brief interruption caused by the stock market fall in 2000-1, the richest 1% has been taking in an ever larger share of the nation’s wealth.  What is new is the decline in income for the bottom 90% of Americans.  Over the past 5 years, income for the bottom 90% of Americans has stagnated1.  Meaning that after inflation, real earnings are falling for the overwhelming majority of Americans.

It’s hard to avoid a comparison to the mid to late 20’s, the last time wealth was so concentrated at the top.  The 20’s also saw a stock market driven run up in wealth which obscured the declining wages of most Americans.  This disconnect, between stock market wealth and declining living standards amongst average Americans, helped to fuel the Great Depression. 

We might not be headed for complete economic collapse, I hope. But we still have some fundamental issues to confront in our economy.  The long slow death of manufacturing in the US has left a void and nothing yet has rushed in to fill it.  Computing may have taken manufacturing’s role as a cornerstone of the economy.  But it hasn’t replaced manufacturing’s role as a stepping stone for the working poor to achieve a middleclass lifestyle. 

Call centers, data centers, programming, nearly anything to do with computing can be done elsewhere.  Thus, even those jobs which aren’t outsourced are subject to severe wage pressures.  The only jobs which absolutely can’t be shipped overseas are in retail, where the wage pressures are already extreme and job security is non-existent.

A large income gap isn’t necessarily fatal to our economy.  Declining real wages for 90% of Americans is.  That this hasn’t become a real problem yet is due to the current environment of easy credit.  Americans have been spending more than they earn at an ever faster rate.  We can’t just chalk it up to a lack of judgment amongst consumers.  If real wages are failing then people must save less in order to maintain their current standard of living.  

The problem is that credit can’t stay easy forever.  Eventually enough people will spend too far into debt to keep up with the payments.  We’re already seeing it in the housing market.  If the high risk mortgage industry collapses can the high risk consumer credit industry be far behind?

1 From the 2004 Income Poverty and Health Insurance Report at www.census.gov.  The relevant information in on pages 44 and 45

Hat Tip to Balloon Juice

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