Income Inequality Behind Most Poverty

Financial FAQs

There were 46.2 million Americans in poverty in 2011, as median household income decreased to its lowest level since 2000, according to a Census Bureau report released this week that illustrated the toll from ongoing labor-market weakness.

The main culprit is the still high unemployment rate of 8.1 percent 3 years after the end of the Great Recession. But two other factors play a big part in creating the record poverty—the slow real estate recovery from its worst bust since the Great Depression, and growing inequality. The top 10 percent had the only income increases in 2011, according to U.S. Census figures.

Actually, both the unemployment rate and housing would be recovering much faster if inequality wasn’t so high. A recent column in Popular Economics Weekly highlighted what has happened since the 1970s to create the record inequality—plunging incomes of the middle class, for one, in both the private and public sectors, largely due to a blend of less progressive taxation and wholesale deregulation that has created a much more monopolistic corporate structure. This has diverted more corporate profits to investors and corporate CEOs. It is a lesson few policy makers seem to have learned. Even Henry Ford knew the importance of growing incomes for everyone back in 1914, as I have said, when he raised his workers’ salaries to the “unheard of salary” of $5 per day, so that they could afford to buy his Model T’s.

Graph: DShort.com

And Nobelist Joe Stiglitz highlighted the results of such inequality in his latest book, “The Price of Inequality”. “I won’t run through all the evidence here, except to say that the gap between the 1 percent and the 99 percent is vast when looked at in terms of annual income,” he said in a Vanity Fair article, “and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets.”

Such inequality has caused many of the economic ills of the past decade, including the two most recent recessions. “It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest. It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop.”

Except for the Federal Reserve’s just announced action to implement “QE3” through 2015, nothing is being done to create more jobs with a Congress and White House deadlocked on whether tax cuts or stimulus spending is more important.

So the situation is dire, needless to say, which is why the Federal Open Market Committee extended it credit easing period into 2015. “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

Bernanke also pronounced the maximum employment target was around 6 percent, a full 2 percent drop from the current 8.1 percent, which in effect probably wouldn’t happen until at least 2015. That, combined with the ongoing euro problems and softness in China’s economy were what probably spurred the Fed to further actions.

So there is a direct connection between too much inequality and high unemployment. Professor Stiglitz said it best in the Vanity Fair article.

“It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest,” said Stiglitz. “It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop. Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do.”

Many are now voicing a growing concern on what record inequality has already done to U.S. economic growth and our position in the world, especially over the past decade.  Now it is really up to ordinary Americans to get that message to the policymakers who will make a difference, who understand that our economy only works when all citizens are able to participate in its benefits.

Harlan Green © 2012