The Worrying Return of Inequality

Over the past three decades, inequality in the United States
increased dramatically, reaching Robber Baron-era proportions in 2007 at the
height of the housing and credit bubble. Paradoxically, the bursting of the
bubble brought the rise of inequality to a temporary halt as the asset values
of the wealthiest fell with the decline in the equity market. But as the
economic recovery takes hold, the trends that drove inequality before the Great
Recession have begun to reassert themselves, ominously suggesting that
inequality may again be on the rise. (See Chart 1)

The trends are threefold. First, monetary reflation has
led to a big rebound in financial assets. The S&P is up close to 50
percent from a year ago, and 75 percent from its November 2008 lows.
By some measures, the bond market has done even better. Just as the
stock market collapse in 2008 hurt the wealthiest the most, the recovery has
most benefited the same group, which has the majority of its assets in
financial instruments and business equity, as shown below. In 2007, the richest
five percent of Americans owned about 60 percent of all financial assets while
those in the bottom 50 percentile owned only 2.7 percent.[1] (See Chart 2)

Meanwhile, the crash of the over-inflated housing market has
disproportionately affected middle-income homeowners, who have much of their
wealth invested in non-financial assets, such as homes and vehicles. But unlike
the stock market, home values have not rebounded: as of the end of January
2010, the S&P Case-Shiller home price index was still down 0.7 percent from
January 2009, leaving the lower and middle classes mired in debt and underwater
mortgages.[2] Worse, there seems
to be little relief on the horizon for homeowners, as the number of
foreclosures and the shadow inventory of unsold homes continues to rise.

Second, thanks to cost-cutting measures and rising
productivity, corporate profits are on the rise while wages continue to
stagnate or even fall in real terms. Total U.S. corporate profits rose 30.6
percent year on year in the fourth quarter. By contrast, average hourly
earnings declined 0.1 percent month on month in March, and for the year are up
only 2.1 percent, running behind inflation. Wage stagnation has long undermined
the financial well being of the American middle class, but workers are now facing
an even more brutal job market with one out of six Americans unemployed or
underemployed and with little prospect of strong job creation on the
horizon. (America’s jobs deficit and the problems associated with today’s
jobless recovery are explored in more detail in this Economic
Growth presentation.[3]) (See Chart 3)

Third, energy costs are again on the rise, with oil well
above $80 a barrel and gasoline topping $3 per gallon. Rising energy prices
disproportionately affect the standard of living of low- and moderate-income
families. Lower income families devote from 9 to 14 percent of their income
just to gasoline, considerably more than the four percent the average family
spends. At best, high energy prices are a huge regressive tax on low- and
moderate-income Americans, who are dependent upon (often less efficient) vehicles
to get to and from work. At worst, they constitute a major transfer of wealth
from these low and moderate income Americans to oil and gas producers both at
home and from foreign petro-dollar states.

The fact that the trends underlying inequality are again on
the rise suggests the magnitude of the policy challenge ahead. It will not be
enough merely to fiddle with tax rates and to provide tax relief for working
families. If they are serious about stemming rising inequality, the
administration and Congress will need to do more than they have to date to
create jobs, expand public investment, and promote new energy development.

[1] Federal Reserve Board. Arthur B. Kennickell. “Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007.” Finance and Economics Discussion Series. Divisions of Research & Statistics and Monetary Affairs. Washington, D.C., 2009. Available at: http://www.federalreserve.gov/pubs/feds/2009/200913/200913pap.pdf

[2] http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff–p-us—-#

[3] “The Jobs Deficit: The Challenge of Putting America Back to Work.” Schwenninger, S.; Kolansky, B. & S. Sherraden. New America Foundation Economic Growth Program. Available at: http://www.newamerica.net/publications/resources/2010/the_jobs_deficit