The Wonk Room

New Report Highlights Disturbing Trends In Income Inequality

Today’s Center for Budget Policies and Priorities report on national income inequality throws a curve ball to the administration’s claim that “the fundamentals of the economy are still pretty strong.” In a state-by-state study examining data over the past two business cycles, the CBPP concludes that the income gap between America’s richest income families has America’s poorest and middle-income families has increased substantially. Some key highlights:

– On average, incomes have declined by 2.5 percent among the bottom fifth of families since the late 1990s, while increasing by 9.1 percent among the top fifth.

–In 19 states, average incomes have grown more quickly among the top fifth of families than among the bottom fifth since the late 1990s. In no state has the bottom fifth grown significantly faster than the top fifth.

– For very high-income families — the richest 5 percent — income growth since the late 1990s has been especially dramatic, and much faster than among the poorest fifth of families.

–On average, incomes have grown by just 1.3 percent among the middle fifth of families since the late 1990s, well below the 9.1 percent gain among the top fifth. Income disparities between the top and middle fifths have increased significantly in Alabama, California, Florida, Illinois, Mississippi, Missouri, New Mexico, and Texas. Income disparities did not decline significantly in any state.

The most interesting part of the report, however, outlines WHY inequality has risen so much in the last two decades:

Government Inaction: Deregulation, lack of laws protecting collective bargaining, the declining value of the minimum wage, and most notably, “changes in federal, state, and local tax structures and benefit programs have, in many cases, accelerated the trend toward growing inequality emerging from the labor market.” Economist’s View notes that “there was time to find a way to share the gains from the boom across a wider swath of the population – but the administration and congress, a congress that was controlled by Republicans for most of this time period, had no desire to do so.”

Investment income: Capital gains, Wall Street investments, and huge increases in corporate profits and CEO pay has contributed to growing inequality by boosting investors’ incomes.

Wage Inequality: Weak unions, shrinking manufacturing jobs, and stagnant wages at the bottom of the pay-scale are eroding opportunities for “workers with less than a college education, who make up approximately the lowest-earning 70 percent of the workforce.”

But why does income inequality matter? Besides the fact that unequal societies have tended to shortchange basic education and engage in politically corrupt practices, inequality matters because it decreases long-term innovation, productivity, and national wealth.