Global Policy Forum

By George Hager

Despite the booming economy, the income gap between the richest and poorest Americans has widened to a modern record, as the nation's wealthiest households have enjoyed huge gains while the poorest still haven't caught up to the income they made in the late 1970s, a controversial new study shows.

Since 1977, the after-tax income of America's wealthiest 1 percent has shot up 115 percent, and the income of the richest fifth of Americans has grown by a less spectacular but still robust 43 percent, according to a study by the Center on Budget and Policy Priorities, a liberal-leaning think tank. All these numbers are adjusted for inflation. Meanwhile, though, the poorest fifth of the American population is getting 9 percent less income than it did in 1977, and middle-class households have eked out comparatively tiny gains--an average of less than 8 percent over the past 22 years for the middle three-fifths of the population. The study was based on after-tax income figures from the Congressional Budget Office, which include data going back to the late 1970s and projections for 1999.

Study co-author Isaac Shapiro, a senior fellow at the center, said the income gap is the widest since the CBO began collecting its numbers in 1977, and quite likely the widest since World War II, judging from similar but less complete data from the Census Bureau, which does not incorporate the capital gains income included in the CBO numbers. "It's one thing to have some income inequality; it's another thing to have such vast differences," said Shapiro. "Ultimately we would expect that to come back to some degree to undermine the social fabric."

Shapiro said the numbers reflect familiar trends in the economy. Wealthier households are benefiting from a booming stock market, rising pay and an economy that increasingly rewards the well educated and the highly skilled. Poorer Americans have little or no money in stocks, and while wages have gone up and unemployment down lately, global competition and an increasingly technology-driven economy have lessened the demand and the rewards for poorly educated or unskilled workers.

Critics complained that the study skewed reality by ignoring substantial income gains made since the economy heated up following the 1990-91 recession. "It always does matter where you start any analysis," said William Beach, a senior fellow at the Heritage Foundation, a conservative think tank. Indeed, the study's own internal numbers show that the income gap was much narrower from 1993 through 1999, when the after-tax income of the poorest fifth of Americans rose nearly 13 percent, close to the 14 percent increase for the top fifth and within sight of the nearly 19 percent rise for the top 1 percent.

Beach also criticized the study for ignoring key demographic changes that help explain the income gap. The huge baby boom generation is now in its peak earning years, Beach said, accelerating income growth at the top of the scale. At the same time, though, baby boomers' parents are retiring, pushing them down the income scale. "This report needs to come with a warning label on it--'Readers beware: There is a demographic story far more important than the income story,' " he said.

Shapiro acknowledged that demographics are "part of the explanation" for the income gap, but he said they were "not the main driver" of the trend. And as for looking at the long-term gap instead of the shorter-term improvement, Robert Greenstein, the center's executive director and co-author of the report with Shapiro, said it was crucial to look at trends such as this over a long period, to factor out swings that could be temporary.

The center's findings were buttressed by a separate study by the labor-backed Economic Policy Institute, which found that middle-income working males are still struggling to return to inflation-adjusted wage levels they enjoyed in 1989, before the last recession began. Middle-wage women did better, but not by much, the study said, with inflation-adjusted wages that were just 3.4 percent above the 1989 level.

Both studies used their findings to argue against the congressional Republicans' $792 billion, 10-year tax-cut package, which President Clinton has promised to veto as soon as GOP leaders send it to him. Though Republicans have insisted that their tax cuts would buoy the middle class, the Economic Policy Institute said tax cuts amount to a "one-time adjustment that does nothing to change the long-term trends in wages and incomes."

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