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The Income Divide

The gap between rich and poor in the United States has widened exponentially over the past three decades. The Congressional Budget Office reports that since 1979, the average income for the bottom half of American households has grown by 6 percent. In contrast, the top 1 percent of earners have seen their incomes shoot up by a 229 percent during that same period. Under the Bush administration, the average income of most Americans has fallen, but the average income of top wage earners (those above the 95 percentile range) has increased from $324,427 in 2001 to $385,805 in 2006. Only one other year has seen a comparable income gap: 1928, the year before the Great Depression. Inequality has not been confined to one region or sector but has spread all across the country.  North Carolina and Indiana, two geographically and economically disparate states whose upcoming presidential primaries have brought them to the forefront of the national media, are no exception. With the average income of the richest 20 percent of families 7.2 and 6.7 times larger than the poorest 20 percent of families, respectively, North Carolina and Indiana are a microcosm of a larger national trend. Both of these states are looking for relief from declining wages, sinking job security, and falling benefits. 

WHY THE DIVIDE?: The reasons for this rise in income inequality can be split into three basic components: government policies, tremendous wage inequality, and high investment income. The federal government under Bush, which provides the fundamental rules that guide how economic gains are distributed around the country, has embraced deregulation and an unstructured financial system. Consequently, huge corporations have raked in profits while the economy sags. The administration’s tax policies, which lower taxes on the wealthy rather than the middle class, have furthered the problem. As billionaire Warren Buffett explained, “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” CEO pay, which has increased by 20.5 percent over just the past 12 months, dwarfs the mere 3.5 percent salary increase for American workers. To put this in perspective, the top 500 American corporate executives earned a combined total of $6.4 billion in 2007, about $12.8 million each and roughly 10 percent of all company profits. An absence of laws protecting collective bargaining has removed the leverage that unions once had on companies to increase wages quickly.  Wage inequality, the shrinking value of the minimum wage, and the all-around decline in manufacturing jobs only intensify the problem. The New York Times’ Steven Greenhouse explains, “A little-known secret is that, over the past seven years, the United States has lost one in five manufacturing jobs. … Those are usually jobs that pay good wages, middle-class wages, usually provide middle-class benefits on health and pensions.”

WHERE DOES THE MONEY GO?: With less money available, Americans are increasingly forced to make tough choices on how to spend their diminishing disposable incomes. Consumer spending and confidence have fallen to record low levels, causing families to skimp on discretionary spending. U.S. consumers, up until recently the most powerful force on planet Earth, are in retreat,” wrote Joseph Quinlan, a chief market strategist for Bank of America. A recent report by the Bureau of Labor Statistics shows that the largest increases in consumer spending between 2006 and 2007 was on necessities: fuel, food staples, and medical bills. Not surprisingly, the largest decreases were in a newly defined category of “luxury” goods: electronics, toys, home decor and fresh fruits, and vegetables. “People are not not spending, but they are changing how they spend,” said Marshal Cohen, chief analyst at the NPD Group, a consumer and retail market research organization.

HEALTH INSURANCE PERILS: The decline in the average middle class wage means that Americans who were once financially comfortable are now feeling the sting. Approximately 158 million Americans enjoy employer-provided health care benefits. More and more workers, however, are opting out of their health insurance because they simply can’t afford it. The average cost of those benefits to employees has increased by $1,500 — from $1,800 to $3,300 — since 2001.  For a middle class worker, that amount is an entire month’s paycheck, which is particularly troubling as national incomes rose only one-tenth that amount during that same period.  Due to a combination of bigger out-of-pocket deductibles and co-payments, higher premiums, and less extensive coverage, medical bills now account for almost one-fifth of average family income.