Income disparity in U.S. is a big problem, but is there a solution?

Apr 17, 2012

 “The rich get richer, and the poor get poorer.”

It may be a tired old cliché, but it's true.

The gap between the 1 percent and the 99 percent continues to widen, and it could pose dire consequences for the economy and society in general.

Financial commentator Greg Heberlein and KPLU’s Dave Meyer tackle the issue of income disparity on this week’s Money Matters.

Greg's analysis:

Countries in which the middle class disappears, or is reduced, promote economic instability. The economic consequences can be severe.

What backs up that assertion?

Statistics are overwhelming. Consider this:  Two decades ago, the top 1 percent captured 45 percent of annual income growth. Today, more than double that, almost 100 percent, went to the wealthiest.

What evidence exists that declining middle-class income has a significant impact on the economy?

The International Monetary Fund reports that when income declines for most, but increases at the top, economic growth wanes. As growth recedes, recessions occur more often. But the IMF study does not offer a clear solution.

The IMF says poorly designed efforts to reduce inequality could be counterproductive. Efforts that might help, the IMF says, could be better-targeted subsidies for the middle class, better education of the poor and policies to promote employment. How those are achieved remains unclear.

Don’t political unrest, religion, general anger toward despots and policies limiting social activity play a role?

They do, but the overriding factor remains income disparity.

Economic-driven unrest in the Middle East has been widespread. In the streets of more than a half-dozen countries in Europe, protesters have been disruptive.  Even Germany, home of Europe’s most solid economy, has seen protests. Asian unrest continues.

Latin and South America?

John Hamilton, who lives in Shelton, says his position as U.S. ambassador to Peru and Colombia gave him a front-seat view of what happens when despots corner the wealth at the middle class’s expense.

He says if the mood of the U.S. middle class worsens, our own economic wealth will be imperiled. Hamilton says increased tax benefits for the less wealthy and higher taxes on the rich would help, but concedes the current environment makes those strategies non-starters.

During upheavals, consumers save instead of spend. Small businesses that create jobs stagnate. Consumer confidence, the big driver of economic expansion, tanks.

As the IMF study showed, recessions become more frequent and dissatisfaction increases. Spending by the wealthy does not make up the losses caused by middle-income families deferring purchases.

That doesn't bode well for stocks.

Heightened unrest paralyzes the markets. Millions of middle income investors have exited the stock market. More will follow.

What can be done?

Starbucks chief Howard Schultz knows about unrest. Fires started by rioters burned down a Starbucks store in Athens, Greece. 

To boost the economy and stabilize the public mood, Schultz says incentives should be enacted to get corporations to bring back $2 trillion in profits from foreign countries. Taxes on that income would be reduced significantly if the money were employed to create jobs. Schultz figures that would cut unemployment in half.

Blue-ribbon panels are usually ignored, but not always. We should tap some of the country’s best minds. Start with the three ex-presidents, Clinton and the two Bushes. Add in economists, executives and pundits. Sequester them in a remote site and charge them with developing solutions society can embrace.

If solutions were obvious, the problem wouldn’t exist. 

But increased awareness might motivate us to find those solutions.