What the income gap really means

I was reading a piece on Bloomberg.com Tuesday about the rising gap between rich (read executives) and lower earnings (read workers.) The numbers are staggering. From Peter Robinson’s story:

The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent — those that made less than $101,583.

The recovery that officially began in mid-2009 hasn’t arrived in most Americans’ paychecks. In 2010, the top 1 percent of U.S. families captured as much as 93 percent of the nation’s income growth, according to a March paper by Emmanuel Saez, a University of California at Berkeley economist who studied Internal Revenue Service data.

The earnings gap between rich and poor Americans was the widest in more than four decades in 2011, Census data show, surpassing income inequality previously reported in Uganda and Kazakhstan. The notion that each generation does better than the last — one aspect of the American Dream — has been challenged by evidence that average family incomes fell last decade for the first time since World War II.

I immediately thought about a comment a friend said last week. She hasn’t received a salary increase in five years. She’s one of the hardest workers I know, so I’m positive it isn’t for poor job performance. But I know that not having even a slight cost-of-living increase is demoralizing and also, hard financially.

My second thought was then, “So, what’s new?” The shrinking middle class has been a hot topic during this year’s presidential campaign. As someone sitting in a so-called battleground state (North Carolina) I feel saturated in both parties claims that their candidate will do the most to help families earn more and close that gap.

Then, for the first time in my life, it occurred to me why I should care about inflation and the Federal Reserve’s recent signals it would allow it to rise to about 2 percent. This combined with owning a car and paying for gas for the first time in eight years reminded me that my lower salary and higher cost of necessities was going to make it harder to maintain my lifestyle.

Even Bob Crandall, retired American Airlines CEO, is concerned. He started a blog to comment on executive pay, taxes and other economic issues. Here’s an excerpt from an August post called Only in America:

26 CEO’s among the 100 highest paid corporate chief executives made more money in 2011 than their companies paid in federal income taxes in the same year. The group earned average total compensation of $20.4 million, a 23 percent increase over the average in the prior year.

The Institute for Policy Studies, which produced the report, makes the point that the US tax code includes lots of provisions encouraging excess pay, including unlimited tax deductibility of executive pay, unlimited deferred compensation, and preferential treatment of carried interest among others items.

The study goes on to note that 19 of the 26 companies operated subsidiaries in tax havens and that the firms, combined, operated a total of 537 tax haven subsidiaries.

A February piece in the Christian Science Monitor said that we all have reason to be concerned about the rising gap between rich and poor: It’s bad for the economy. In the piece, Mark Trumbull writes:

Disparities of income can mean that people lose faith that there’s a fair economic playing field and that hard work will pay off. It can also mean that millions of people lack access to a good education. To the degree that these negative forces are operating, America is failing to tap the potential of its “human capital.”

That means that we’re making it harder for the next generation to get ahead. If parents are unable to send their children to college, innovation, future earnings and the economy will suffer.

Overall, I think the media has done a great job covering the issue, but more research and reporting could be done to try and determine what the earnings gap means. It’s definitely an issue that’s worth exploring since everyone will ultimately feel the effects.