5 Reasons to Care About America’s Income Gap

Posted October 30, 2012 by
Sarah Shemkus

Sarah Shemkus, Salary.com contributing writer

Two weeks ago, we looked at some numbers that suggested the gap between rich and poor in the United States is growing. Last week, we considered some possible reasons for this growing inequality.

This week, we answer perhaps the most important question: So what?

The numbers suggest the real income of the poor is holding steady; it is the soaring income of those at the top that is widening the gap. Why then should that one number — the difference between the top and the bottom — be of concern?

According to several analyses, income inequality can cause problems for everyone, no matter where you fall on the earnings scale.

It’s Bad for Demand

When poor households get an extra dollar — or 10 or 20 — they are almost guaranteed to spend that money. Rich households, however, are more likely to lock up the money in investments.

Therefore, as more wealth is concentrated among that already-rich, relatively less money is poured into consumer spending, explained Robert Reich, former U.S. Labor Secretary and current professor of public policy at the University of California at Berkeley.

“As the middle class’s share of total income continues to drop, it cannot spend as much as before,” Reich wrote in August. “Nor can most Americans borrow as they did before the crash of 2008 — borrowing that temporarily masked their declining purchasing power.”

It’s Bad for Economic Growth

Recent research by Andrew Berg and Jonathan Ostry of the International Monetary Fund suggests that countries with high income inequality have a harder time sustaining long-term economic growth than those with smaller income gaps.

Income inequality may make financial crises more likely or increase political instability, discouraging investment, Berg and Ostry theorized.

Furthermore, “inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis,” they wrote. “Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity.”  Continue reading . . .

Article by Sarah Shemkus and courtesy of Salary.com

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