The Myth of Economic Inequality

The problem may not be that the rich are getting richer; it's that the poor can't climb the ladder.

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The gap between the rich and the poor is growing in the United States and has been for decades. The topic came to the forefront of the national debate last year with the rise of Occupy Wall Street. However, a growing income gap may not be the problem that some make it out to be.

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The evidence that growing inequality hurts the middle class and poor is weak, as Scott Winship, a fellow at Washington-based think tank the Brookings Institution, testified to the Senate Budget Committee today at a hearing about inequality and economic mobility. "There is very little evidence to suggest that the gains at the top have come at the expense of other Americans," he said.

Without question, income inequality has grown substantially in the United States. According to an October report from the Congressional Budget Office, a nonpartisan agency that provides economic data to Congress, real income for the top 1 percent of the population grew by 275 percent between 1979 and 2007. Meanwhile, household income for the middle 60 percent of the population grew by just under 40 percent, and for the bottom 20 percent, it grew by just 18 percent. That's a wide disparity, but explosive income growth for the richest Americans isn't necessarily detrimental to the poorest Americans.

As an example, Winship pointed to Mitt Romney, who made $22 million or so in 2010, and Mark Zuckerberg, who could make $5 billion off of his stock options this year. "Should we be concerned about the poorer man?" asked Winship. In other words, extreme economic inequality isn't always problematic; it's simply a fact of life as some Americans get fantastically richer and skew the numbers even further. This means that the income gap within the bottom 99 percent has grown much more slowly than that between the 99 percent and the top 1 percent. This means that a tiny segment of the richest Americans has an increasingly large impact on measures of inequality, though the negative impact on other Americans may be minimal.

"How will the typical American end up better off if the Facebook IPO were to fall through so that Zuckerberg could not exercise his options?" said Winship in his opening statement.

While the problems of inequality can be deceptive and perhaps overstated, growing income disparities can point to larger economic problems. For example, the CBO has cited a lack of skilled labor as one contributing factor to inequality, as demand and pay grow for rare skilled workers. Better education, particularly in STEM fields, could mean a better chance at a better life for many.

Likewise, while income gaps continue to grow, economic mobility—the ability to move up (or down) the income ladder—is very limited.

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Even while a vast majority of Americans are earning more than their parents did, many Americans find it difficult to move from their places on the economic ladder, says Erin Currier, project manager at Pew's Economic Mobility Project, which studies economic opportunity in the U.S. Many Americans, particularly the richest and poorest, tend to "stick" at their parents' places on the ladder: "65 percent of kids raised in the bottom 20 percent never make it to the middle class as adults," says Currier.

In part, this is again a question of education; the cost of higher education has increased faster than median family income in recent decades. Postsecondary education, says Currier, quadruples the chances that a child born in the bottom fifth of the population will make it to the top fifth.

Some inequality is good, as Winship told the committee members today. "In a world of perfect equality, there would be no rewards for hard work or risk," he said. The worry may instead be that those rewards are diminishing.

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