Growing economic divide puts economy at risk
June 18, 2001
There's an ironic contrast in recent news from Washington: Just as the Congressional Budget Office (CBO) reported dramatic increases in income disparities, President Bush signed a tax bill guaranteed to make these disparities worse. The CBO study may suggest that the widening wealth gap of the last two decades could be the harbinger of a deep recession and a period of insecurity.
The 1980s and '90s were a bonanza for the wealthiest 1 percent of households. This group, which has an average income of $1,117,000, saw after-tax income, after inflation, rise a whopping 157 percent since 1979. Most of that was "unearned income" -- money from stocks, bonds and commercial real estate.
Meanwhile, for people who have to work for a paycheck, there is a different story. The bottom fifth of households saw their real incomes decline over the last 20 years. And the middle class saw incomes creep up only 10 percent, pretty lackluster considering the dramatic increase in productivity and profits.
So with real incomes flat or falling, how are people paying the bills? One answer is by working longer hours. Another perilous coping strategy has been to take on more consumer debt. For many U.S. households, the real story of the 1990s was not an explosion in stock portfolios, but the plummeting of personal savings and the corresponding escalation of debt.
The U.S. savings rate fell into negative territory during 2000 for the first time since the Great Depression. In the first quarter of 2001, the savings rate stood at negative 1 percent, according to the Commerce Department's Bureau of Economic Analysis. Total consumer debt, including credit cards and loans, hit a record $1.54 trillion in January 2001. Households with negative net worth increased from 7.3 percent to 8 percent between 1989 and 1998.
Will the tax cut help reduce consumer debt and increase savings? It's not likely for taxpayers in the bottom 39 percent of the income scale. This group will either get no rebate or only part of the rebate that Bush so loudly heralded in his new tax plan.
The poorest fifth of households, who make an average income of $8,600, would see their total federal tax burden fall the least, by 5.5 percent.
Meanwhile, the richest 1 percent would see their tax burden fall the most, by 11.6 percent, according to the Center on Budget & Policy Priorities and Citizens for Tax Justice.
For Americans who own their homes, many have outspent their incomes through two long economic expansions by borrowing against their home equity at record levels. The home equity borrowing has been so extensive that homeowners have let their equity fall to the lowest levels on record since the first modern mortgages of the 1930s, according to the Federal Reserve.
These trends underlie a potentially bleak scenario. If the economy moves into recession, it will trigger more layoffs and increase unemployment. At the same time, consumer confidence will be shaken and people will stop taking on additional consumer debt.
Americans are unprepared to weather a period of economic slowdown and joblessness. Millions of households that depend on their paychecks for security could wake up with tens of thousands of dollars in consumer debt, a maxed-out mortgage and jobs in the "new economy" that lack security, health insurance and retirement plans.
We need to promote shared prosperity policies that will reduce wage and wealth inequalities. Raising the minimum wage, expanding home-ownership opportunities and establishing universal savings programs would help close the gap. Unfortunately, the Bush tax plan heads in the opposite direction and will only widen America's economic divide.
Growth based on consumer borrowing and a 60-hour workweek rather than real-wage growth is unsustainable. If we want to have our economy on a solid footing, we must narrow the persistent income disparities that put us at risk.
Chuck Collins is the co-founder of United for a Fair Economy and the author of "Economic Apartheid in America: A Primer on Economic Inequality and Insecurity" (New Press, 2000). He can be reached at email@example.com.