Fed Chief Issues Warning on Income Gap

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Federal Reserve Chairman Ben Bernanke says a widening U.S. income gap threatens economic progress. But he urges policymakers to avoid actions that could limit international trade or the flexibility of labor markets.

STEVE INSKEEP, host:

Federal Reserve Chairman Ben Bernanke had a warning yesterday. He said growing income inequality could threaten the dynamism of the U.S. economy. But he cautioned against policies that could hurt economic growth. Bernanke's extensive remarks on this subject came as Democrats in Congress consider legislation aimed at closing the income gap. NPR's John Ydstie reports.

JOHN YDSTIE: In his speech to the greater Omaha Chamber of Commerce, Bernanke cited statistics that show a growing share of U.S. income going to people on the top rungs of the income ladder. For instance, he said the top 10 percent of workers saw their inflation-adjusted incomes rise by a third in the past 25 years, while workers at the bottom saw almost no gain.

In the same period, the share of income going to the top 1 percent of workers has doubled. Bernanke said technological change, globalization and the fading influence of unions all have contributed to growing income inequality. Countering that widening income gap is necessary, he said, in order to maintain the public support for a dynamic economy.

Mr. BEN BERNANKE (Federal Reserve Chairman): If we did not place some limits on the downside risks to individuals affected by economic change, the public at large might become less willing to accept the dynamism that is so essential to economic progress.

YDSTIE: Bernanke said that no one should be allowed to slip too far down the economic ladder, especially for reasons beyond his or her control. But the chairman warned against responding to growing income inequality with policies that could undermine the very forces that fuel economic growth.

Mr. BERNANKE: Tendering the adoption of new technologies or inhibiting trade flows would do far more harm than good, as technology and trade are critical sources of overall economic growth and in increases in the standard of living.

YDSTIE: A better approach, said the Fed chairman, was to allow growth-enhancing forces to work, but to try to cushion their negative effects with policies to help retrain dislocated workers and assist them in finding new jobs. He also suggested improving education and expanding the portability of health and pension benefits to make it easier for workers to change jobs.

John Ydstie, NPR News, Washington.

INSKEEP: Now the average American family has done well in the past quarter century, but the very rich have done much, much better. And you can explore NPR's series on income inequality at npr.org.

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Haves and Have-Nots: Income Inequality in America

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Over the past generation, the financial gulf between the rich and everyone else has widened. hide caption

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Stories in This Series

  • Series Overview: The Haves and Have-Nots — Over the past generation, the financial gulf between the rich and everyone else has widened. Uri Berliner examines the phenomenon.
  • Part 1: The View from the Top — At the top of our income distribution, life is sweet... sweet enough to send private jet sales up sharply. John Ydstie reports on why inequality is growing again and discusses some of the ideas for restraining it.
  • Part 2: Ivy Tower, Blue Collar — What's it like to be a not-so-rich kid at a private, elite school like Amherst? Jim Zarroli finds out.
  • Part 3: Big Hoops Dreams, Tiny Paychecks — The average NBA player makes more than $5 million a year. One notch below, athletes in the NBA's development league earn as little as $15,000 a year. Tom Goldman reports.
  • Part 4: Fears Overblown? — Some economists aren't all that concerned about a growing income gap. They believe a society that allows the market to reward education and skills is moving in the right direction, and worry about the unintended consequences of government intervention. Adam Davidson reports.
  • Part 5: Married with Money — Part of what's driving income inequality: Men and women in high-paying fields tend to pair off and form high-income families. Chris Arnold reports.
  • Part 6: Lucky Strikes — During the golden stock-option years, some employees struck it rich... but others came too late or just didn't time it right to share the wealth. Wendy Kaufman reports.
  • Part 7: When the Good Jobs Vanish — What happens to factory workers when their well-paid manufacturing jobs move overseas? Jim Zarroli reports.
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Scott Stroud, NPR

The wealth gap in America has long been in the making. In the 30 years between 1975 and 2005, U.S. households in the bottom 80 percent income bracket saw their share of national income actually fall. Those in the bottom 40 percent saw a drop in their incomes when adjusted for inflation. Only the top 20 percent of households experienced an increase their share of the total national income; much of that went to households in the highest 5 percent of the income bracket.

Net Worth
Scott Stroud, NPR

U.S. households in the top 20 percent of the income distribution earn own well more than 80 percent of the nation's wealth.

Share of National Income
Scott Stroud, NPR

Households in the top fifth of the income bracket earn almost half of the nation's income.

An America where some have more money than others is nothing new. But in the past generation, the financial gap between the rich and everyone else has grown ever wider.

This week, NPR features a seven-part series that explores the human side of income inequality in the United States. We'll have stories about workers who are severed from the middle class when their manufacturing jobs disappear. We'll be speaking with people like Larry Podeswik, a wiry 52-year-old ex-Marine who lost the best-paying job of his life when the Carrier Air Conditioning company shut down its factory in Syracuse, N.Y.

We'll meet people who have succeeded beyond their wildest expectations, because their particular skills meshed perfectly with the Internet age. We'll explore the role of luck and timing — and marriage. And we'll look at what happens when middle- and working-class students attend an elite college with much-more-affluent peers.

The Very Rich... and Everyone Else

To get a sense of how the very wealthy have prospered over the past generation, consider this: The share of total income going to the top-earning 1 percent of Americans went from 8 percent in 1980 to 16 percent in 2004.

That doesn't mean that the average family is worse off than a generation ago; more people own homes, go to college, drive reliable cars and have access to sophisticated health care than ever before. But while the average family has done well, the very rich have done much, much better.

One reason: gains in the stock market. Affluent people own more stocks, and executives are often paid in stock or stock options. So when the market does well, their wealth accelerates quickly. Over the past 10 years, for example, the S&P 500, a broad proxy for the market, has increased 86 percent. At the same time, the people at the very top saw their incomes surge: In the 1970s, corporate chief executives earned 30 times as much as the average worker. Ten years ago, CEO compensation was 116 times the average. CEOs now earn close to 300 times as much as the average worker.

During the same 10-year period, American workers became among the most productive in the rich, industrialized, world. But the growth in their wages, when adjusted for inflation, was spotty at best.

What's Behind the Gap?

This widening gulf between the haves and have-nots has been a consistent trend for a generation or more. Economists largely agree about the primary underlying reasons. New technology has made many jobs obsolete, while creating dramatic opportunities for wealth in computers, finance, and media and entertainment. Global competition has done the same. As middle-class assembly-line jobs vanish, and routine white-collar work gets outsourced overseas, the value of education and special skills rises. The power of unions continues to decline.

For people in the broad middle class, the economic picture over the past decade has been mixed. Unemployment has been low and inflation largely contained. But behind those reassuring trends, you'll find a lot of volatility in labor markets — what economists call "churn." In short, there's more hiring and firing going on.

That churn had led to new opportunities for many workers, but caused hardship and anxiety for many others. Add to this the fast-rising cost of health care and the decline of employer-paid pensions, and you understand why many middle-class families describe themselves as financially squeezed. Low-income Americans, of course, are financially squeezed as well, only more so.

Is the System Broken?

Even the staunchest free-market advocates agree that a widening income gap can be harmful to a society if it cuts people off from economic opportunity. But they aren't convinced that is happening now.

Economists and others who dismiss fears about the income gap point to the low unemployment rate, rising home ownership and a fertile environment for entrepreneurship as evidence that economic opportunity is alive and well. And they argue that it's fine and well if the rich are getting a lot richer, as long as most other people make some economic progress and have the opportunity to make a lot more.

But others – including many politicians — are convinced that something has gone awry in our economic system, threatening the underpinning of the American Dream. Former Sen. John Edwards of North Carolina based his 2004 bid for the Democratic nomination for president on a "two Americas" theme. Democrat James Webb made economic insecurity a centerpiece of his Senate victory in traditionally Republican Virginia. President Bush hasn't emphasized income inequality much during his administration. But he pointedly mentioned it twice last week in a speech on Wall Street. Better schools, he said, can help close the wealth divide.

Action on Capitol Hill

Democrats in Congress have begun to introduce legislation designed to assist lower- and middle-income Americans, from raising the minimum wage to cutting interest rates on student loans. They will try to change labor laws to make it easier for unions to organize. And many will oppose an extension of the Bush administration tax cuts that have benefited wealthier Americans.

Conservatives tend to be mistrustful of any attempt to fix income inequality by making new laws. And they argue that the big increase in single-parent families has contributed significantly to the wealth gap — more so than liberals often acknowledge.

Economists of all political persuasions believe income inequality transcends partisan politics: Neither party caused it, and neither party has the means to reverse it. There are just too many forces at work for the wealth gap to be halted by a flurry of bills passed in Washington.

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