A guide to why wealth gap matters

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WASHINGTON -- From the White House to the Vatican to the business elite in Davos, Switzerland, one issue keeps seizing the agenda: the growing gap between the wealthy and everyone else.

It's "the defining challenge of our time," says President Barack Obama, who will spotlight the issue in his State of the Union address tonight. A Gallup poll finds two-thirds of Americans are unhappy with the nation's distribution of wealth. Experts say it may be slowing the economy.

Why has the issue suddenly galvanized attention? Here are some answers about what the wealth gap is and why it matters.

Q. Hasn't there always been a wide gulf between the richest people and the poorest?

A. Yes. What's new is the widening gap between the wealthiest and everyone else. Three decades ago, Americans' income tended to grow at roughly similar rates, no matter how much you made. But since roughly 1980, income has grown most for the top earners. For the poorest 20 percent of families, it has dropped.

Incomes for the highest-earning 1 percent of Americans soared 31 percent from 2009 through 2012, after adjusting for inflation, according to data compiled by University of California-Berkeley economist Emmanuel Saez. For the rest of us, it inched up an average of 0.4 percent. In 17 of 22 developed nations, income disparity widened in the past two decades, the Organization for Economic Cooperation and Development reported.

Q. So who are the top 1 percent in income?

A. They are bankers, lawyers, hedge fund managers, successful companies' founders, entertainers, senior managers and others. But corporate executives, doctors and farmers made up smaller shares of the top 1 percent in 2005 than in 1979. By contrast, the proportion of the wealthiest who work in the financial and real estate industries has doubled.

The top 1 percent earned at least $394,000 in 2012. Through most of the post-World War II era, the top 1 percent earned about 10 percent of all income. By 2007, that figure had jumped to 23.5 percent, the most since 1928. As of 2012, it was 22.5 percent.

Q. How about the middle class?

A. Median household income peaked in 1999 at $56,080, adjusted for inflation. It fell to $51,017 by 2012. The percentage of American households with income within 50 percent of the median -- one way of measuring the middle class -- fell from 50 percent in 1970 to 42 percent in 2010.

Q. Does it matter if some people are much richer than others?

A. Most economists say some inequality is needed to reward hard work, talent and innovation. But too wide a wealth gap is usually unhealthy. It can slow economic growth, in part because richer Americans save more income than do others. Pay at the top is less likely to be spent.

It can also trigger reckless borrowing. Before the 2008 financial crisis, middle-class households struggled to keep spending, even as pay stagnated. To do so, they piled up debt. Swelling debt helped inflate the housing bubble and ignite the financial crisis. Experts note that the Great Depression and Great Recession were both preceded by surging income gaps and heedless borrowing by the middle class.

Q. Has it become harder for someone born poor to get rich?

A. The evidence is mixed. A study released last week found that the United States isn't any less mobile now than in the 1970s. The study found that a child born in the poorest 20 percent of families in 1986 had a 9 percent chance of reaching the top 20 percent as an adult, or roughly the same odds as in 1971.

Other research has shown that the United States isn't as socially mobile as once thought. In a 22-nation study, University of Ottawa economist Miles Corak found the United States ranked 15th in social mobility. Only Italy and Britain among wealthy nations ranked lower. By some measures, U.S. children are as likely to inherit their parents' economic status as their height.

Q. Why has income inequality worsened?

A. Globalization has created "superstars" and concentrated pay among corporate executives, Wall Street traders, popular entertainers and other financial elite. Factory workers now compete with 3 billion people in China, India, eastern Europe and elsewhere who weren't working for multinational corporations 20 years ago; many now make products for Apple, Intel, General Motors and others at low wages.

This has depressed middle-class pay. And pay has risen much faster for college graduates than for high school graduates. These trends contribute to a "hollowed out" labor market, with more jobs at the pay scale's higher and lower ends, fewer in the middle.

Social factors contribute. Single-parent families are more likely to be poor and less likely to ascend the income ladder. Finally, men and women with college degrees and high pay are more apt to marry each other.



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