Society May Pay as Income Gap Widens

One of the worrisome aspects of this nation’s economy is that an income gap is growing even as the country gains an important victory over inflation and looks forward to more stable growth.

Questions of fairness are central to a strong democractic society, and the income gap is one measure of fairness. It is also a reflection of important changes taking place that must be understood and dealt with.

There are a number of possible explanations for this growing gap. Super-high inflation and severe recession of the recent past is certainly one, hurting those at the low end of the income scale more than those at the top. Income tax reductions in recent years also have made it easier for those with wealth to accumulate more.

Another important factor is that benefits of economic recovery are being shared unevenly, more so than ever before. Some industries remain depressed; despite better times in others, employees at all levels except perhaps at the very top are proving expendable amid efforts to bolster profits. For those left on the job after massive cutbacks, wage rates have failed to keep pace with the inflation of the past 15 years. In terms of spending power, wages have fallen by more than 10%.

Increasing Imbalance

A number of statistics show the increasing imbalance in how people are faring. Most recently, Democrats on the Joint Economic Committee of Congress issued a study concluding that 0.5% of the nation’s families hold 35% of the wealth. That’s up sharply from the 25% this small group held some two decades ago.

Meantime, a decreasing share of personal income is coming from wages and an increasing share from interest earned on investments, something the haves enjoy and the have-nots don’t.

The very disappearance of inflation itself is a factor in the current uneven prosperity. In past recoveries, companies anticipated fairly rapid growth, fueled partly by renewed inflation and the ease with which they could raise prices. Payrolls and wage levels both grew rapidly. Now, despite the lack of inflation and slow economic growth, companies continue to set optimistic profit goals, and the only way to meet them is to cut costs. In too many cases, they are doing this simply by demanding wage concessions and by pushing employees into early retirement or out on the street.

To the extent that this reflects excesses of the past, it obviously is healthy and overdue. But there is good reason to worry that expediency is causing many employers to overlook other ways to get control of costs. One of those is better productivity, which is a lot easier to generate from a happy, loyal work force than from one that sees fellow workers as the first to go when the company fails to meet profit projections.

Produces Other Problems

Such wholesale payroll slashing can produce some problems beyond just loss of morale. At one major oil company that sharply cut back its refinery staff, safety procedure violations have become a problem. It’s difficult to prove, but the loss of experienced personnel in the cutback may be a factor.

Similarly, too much cutting back can affect how well a company performs at all levels of its operations, perhaps leading to loss of markets and still more cutbacks.

The growing income disparity is having some far-reaching effects on the economy. Middle and lower-income people are borrowing heavily to try to hang onto the living standards they had for a while, hoping for better times ahead, observes economist A. Gary Shilling. “But with all the cost control, I doubt they are going to be able to bridge the gap to better times.”

If they aren’t, then at some point their inability to make ends meet will lead to some real weakness in the economy. The borrowing binge will ease, and society will adjust permanently to less prosperous times.

In addition, slipping living standards will mean new political pressure to restore a better distribution of the wealth.

“When everyone’s losing, that’s one thing,” says Shilling. “But when people on top are still gaining, then we have a problem.”