WASHINGTON — Former Democratic presidential candidate John Edwards liked to speak of “two Americas.” Freshly elected New York City Mayor Bill De Blasio this year called it “a tale of two cities.”
Their message was clear and simple: One part of the country is comfortably rich, the other is struggling.
For the past three decades, wealthier Americans have seen their annual income grow at a far-faster rate than all other Americans. Studies show that even after the wealthy pay income taxes and the low-income receive federal help in the form of food stamps, Medicaid and education grants, a huge financial chasm remains between them.
In a 2011 report, the non-partisan Congressional Budget Office concluded that the average after-tax household income for the wealthiest 1 percent grew 275 percent between 1979 and 2007 compared to 65 percent for the 20 percent of households in the next-highest income group. By contrast, the 60 percent of households in the middle- and lower-income groups saw their average real after-tax income increase by 40 percent.
Although real household income for all Americans increased during that time, economists say that the huge financial gap exacerbated the 2008 recession for middle-income people who had much of their wealth tied up in their homes. As home prices collapsed, those Americans compensated by curbing borrowing and spending less on consumer goods.
In a speech in April in New York City, Sarah Bloom Raskin, a member of the Federal Reserve Board who has been nominated as deputy secretary of the Treasury Department, concluded that “because of how hard these lower-and middle-income households were hit, the (2008) recession was worse and the recovery” less robust.
“Even if you make certain corrections, the gap is growing,” said Tom Garrett, an economics professor at the University of Mississippi and author of income-inequality studies when he was an economist for the Federal Reserve Bank in St. Louis.
“My argument: It’s not the size of the gap that matters, it is the fact that we have a growing percentage of the population at or below poverty,” Garrett said. “It seems there needs to be policy about what we can do to move the people at the bottom away from the bottom, while recognizing we don’t want policies in place that discourage people from moving up.”
Nobody has yet to produce a formula to reduce the gap. It has grown under Republican presidents and Democratic presidents. It has grown no matter which political party controls Congress. And it has grown despite major tax cuts in 1981 and 2001 and substantial tax increases in 1993 and this year.
Just two weeks ago, President Barack Obama called income inequality “the defining challenge of our time,” saying that since 1979, the U.S. economy “has more than doubled in size, but most of that growth has flowed to a fortunate few.”
In his speech, Obama cited both income inequality and the inability of Americans to advance from the lower-income group to a higher group. But a 2007 report by the Treasury Department showed that between 1996 and 2005, roughly half the taxpayers in the bottom 20 percent in 1996 advanced to a higher-income group by 2005.
The same report showed only 25 percent of the very wealthiest of American families in 1996 remained in that group a decade later. And the report showed that “the degree of mobility among income groups is unchanged from” 1987 through 1997.
“To close the income gap, the most important thing is jobs,” said Sen. Rob Portman, R-Ohio. “ Second, we've got to figure out how to reform our K-12 system so it works better for the kids falling between the cracks.”
Democratic politicians and some economists offer a broad swath of explanations for the gap, ranging from income and business tax cuts that tended to favor the wealthy.
They complain that free-trade agreements and the sharp drop in unionized workers have crippled wage growth for middle-income people. They contend that the federal minimum wage has not been raised enough to close the gap.
But other economists point out that the gap is due to sweeping technological changes in manufacturing that favor better-educated workers while punishing workers without the ready skills to adapt to the new economy.
Combined with the rapid growth of high-paying jobs in the financial and health industries as well as a rapid increase in the pay of chief executive officers, the gap between the top 20 percent and the rest has exploded.
“Certain skills are rewarded more than other skills have been,’’ said Bradley Heim, an economist and professor of public and environmental affairs at Indiana University. “If you are a highly skilled worker, technology has served to complement your skills. The returns to that group have increased and the returns of a lower-skilled worker have decreased.’’
Those changes may be beyond Washington’s power to revise. “You’re not going to pass a law in D.C. that un-does technological change,’’ Heim said. “A good chunk of this is due to larger forces that don’t necessarily have a ready policy response to them.’’
Yet Heather Boushey, executive director of the Washington Center for Equitable Growth, said that federal and state policy decisions have fueled the gap, saying that Congress has allowed the value of the minimum wage “to be eroded over time. We don’t index it for inflation.”
“And then at the very top, we have seen a cultural shift,’’ Boushey said. “Forty years ago having these huge gaps between the top and the bottom was not socially acceptable. Now, it is.”
Democrats have rallied around a menu of ideas, such as raising the minimum wage, ending tax deductions that encourage companies to hire people at factories abroad, expanding pre-school, extending unemployment benefits, raising taxes on the wealthy and increasing Social Security benefits.
“It’s also — and this is where I’m critical of my own party, too — it’s trade agreements and manufacturing strategy that actually focuses on manufacturing instead of financial services,” said Sen. Sherrod Brown, D-Ohio. “This government under presidents from both parties has had a bias toward financial services at the expense of manufacturing. And we need to balance that.”
In his speech two weeks ago, Obama also cited making quality pre-school “available to every child in America.” Although conservatives have complained that programs such as Head Start are not nearly as effective as their backers claim, Boushey and Garrett insist that early education can make a dent in the financial gap.
“In terms of a long-term solution, it is education that matters,” Garrett said. “By the age of 5 or 6, a child’s long-term success is pre-determined by their pre-K environment. Spending more money at the high school or college level, that’s not where we’ll see the big differences. The big difference is preparing young children right away.”
“The problem is poor people are poor because the value of their labor as valued by the market is low,” Garrett said. “There is a reason people working at McDonald’s earn the minimum wage. Giving them more money through a higher minimum wage — in an accounting sense it raises their income, but their productivity hasn’t changed. You want people to permanently increase their productivity.”