NCPA - National Center for Policy Analysis

INCOME GAP SHRINKS IN SLUMP AT THE EXPENSE OF THE WEALTHY

September 11, 2009

The deepest downturn in the U.S. economy since the Great Depression may finally shrink the gap between the very best-off Americans and everyone else.  If so, it won't be by lifting up the bottom.  It will be by pulling down the top, says the Wall Street Journal. 

Over the past 30 years, chief executives, Wall Street bankers and traders, law-firm partners and such amassed ever-greater incomes, while the incomes of factory workers, teachers, office managers and others in the middle grew much more slowly:

  • In 2007, the top 1 percent of U.S. families accounted for 23.5 percent of all personal income in the United States, according to economists Emmanuel Saez of the University of California at Berkeley and Thomas Piketty of the Paris School of Economics; that was a level not seen since the Roaring Twenties.
  • The top 1 percent's share appears to be falling fast; Saez and other economists expect income going to the top 1 percent of taxpayers -- currently, those with about $400,000 a year -- will drop to somewhere between 15 percent and 19 percent of all income by 2010, but that still would leave income distribution more top-heavy in the United States than in many other countries.
  • One early indication is that median chief-executive pay at companies in the S&P 500 fell 15 percent in 2008 (to $7.3 million), according to University of Southern California pay expert Kevin Murphy.

"Based on experience, it looks like inequality will go down and change the long-term trend of America becoming a less egalitarian society," says Ariell Reshef, a University of Virginia economist.

This is among several potentially far-reaching changes wrought by the bursting of the housing and credit bubbles and the deep recession that ensued, says the Journal:

  • Finance is likely to claim a smaller share of the nation's talent and make up a smaller part of the economy.
  • The relationship between employers and employees may shift, and some workers will never fully recover from the blows they have suffered.
  • Borrowing will be harder for many, and in any case, reducing debt instead of increasing it will hold new priority, possibly for a long while.
  • In time, the past two years may be seen as a watershed in Americans' behavior and the nation's economic life.

All this would be welcomed by some, particularly on the left.  But reduced rewards at the top also "could diminish incentives for talented people and stifle a certain kind of innovation," says Michael Spence, a Stanford economist and Nobel laureate.

One member of the top 1 percent, Charles McDaniel, CEO of a Virginia moving company called Hilldrup Cos., is blunter.  "When high-wage earners make less, at some point they'll say all the policies are stacked against them," he says.  "They won't take risks [and] you won't have jobs created or new opportunities."

Source: Bob Davis and Robert Frank, "Income Gap Shrinks in Slump at the Expense of the Wealthy," Wall Street Journal, September 10, 2009.

 

Browse more articles on Economic Issues