The gap between the rich and the lower classes was historically very high before the days of democracy. But the 20th century saw the dawn of a strong middle class in the U.S. and elsewhere, which served to provide a buffer between the poor and the rich and stabilize the domestic economy. But the middle class in America began eroding in the 1970s, and new statistics are revealing that the gap in both income and net worth between the wealthy and the lower classes is now starting to widen exponentially, and the data indicates that this cannot be entirely attributed to mere racial segregation or social injustice. The consequences of this disturbing trend will ultimately have far-reaching economic and demographic effects on our society as time goes on, unless steps are taken to slow or reverse the pattern.
The Rich Vs. the Rest
There are numerous indicators that show that the wealth and income gap in the U.S is now approaching the levels of those of the late 19th and early 20th centuries. From the turn of the century until the Great Depression, the top earners in the U.S. raked in around 20% of the gross national income. This ratio dropped to below 10% in the decades after World War II but began to rise again after 1980, and now once again hovers at or near 20%. In 2010, the wealthiest 6,000 or so households in the U.S. reaped a whopping additional $650 billion (an average of nearly $110 million per household in this group) above and beyond what they would have earned if the income for domestic households was still allocated according to the 1980 ratio. And a study of tax data supplied by the IRS shows that the top 1% of households earned just over half of all gains in income between 1993 and 2008. Another telling indicator is the Gini index, which was developed by Italian statistician Corrado Gini in 1912. This variable ranks income inequality on a scale from 0 to 1, where 0 represents a society where everyone in a society receives an equal share of income, and 1 equates to a single person in a society receiving 100% of all income earned. The U.S. stood at 0.35 on this scale in 1965, but its current score has risen to 0.44, which is on a par with countries such as Russia and Sri Lanka. A growing number of financial experts are lamenting this unfortunate trend. James Chanos, a respected money manager and the president of Kynikos Associates in New York told Bloomberg radio in a recent interview that “Income inequality in this country is just getting worse and worse and worse, and that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind.”
The increase in this income disparity is perhaps most clearly illustrated in the vast differences between the compensation of the CEOs of many major U.S. corporations and their rank-and-file workers. A recent study by NerdWallet based on data from proxy statements and governmental data revealed that the average CEO earned about 550 times as much as an average employee and received a pension equal to about 239 times the amount paid to the average employee. Some companies are much worse; the study shows that Mike Duke, the CEO of Walmart, one of the chief offenders on this list, has a retirement plan that is approximately 6,000 times the size of a retail store employee and rakes in close to $21 million per year in total compensation, which is equal to 836 times the average store employee’s earnings and 305 times the average store manager’s earnings. But even this discrepancy is dwarfed by that of Oracle, which has a CEO bringing in a whopping $80 million annually. The following table provides a breakdown of some of the earnings statistics for some major corporations and their CEOs versus their average workers.
Source: CNBC / Nerdwallet Note
What Does the Future Hold?
Of course, many of the employees at these companies are unaware of the magnitude of the discrepancy in compensation between themselves and their corporate leaders. But that will change in 2014 when a law passed by Congress in 2010 will go into effect requiring corporations to disseminate the pay of both the CEO and an average employee. Of course, this may have an impact on employee morale and productivity, which could in turn affect investor sentiment. But the Great Recession has left employers with uncertain cash flows and reduced balanced sheets, and they are increasingly rewarding employees according to their performance in an effort to spend their money most efficiently. But this is also effectively helping to further the division in compensation between more and less productive workers.
Increased awareness of pay inequality also isn’t going to resolve many of the key consequences of the growing wealth gap in America. Economic inequality has historically bred more crime, greater racial and ethnic divisions, and an increased load on the healthcare system due to physical and mental afflictions of the poor. Politicians must cater to voters who have some interest in what happens in their communities and preserving what they have. This means that potential voters in poor communities are often overlooked, and most of them have no motivation to vote or become involved in their communities, because they are preoccupied with daily survival. Therefore, they are unable to put someone in office who will look out for their interests, which will, of course, only make life harder for them. And if nothing is done to curb the growth in the inequality gap, it could ultimately lead to weak long-term returns in the markets and a less stable economy and social structure, as societies with narrower gaps between the rich and poor enjoy greater economic growth.
The Bottom Line
The continually widening gap in wealth and income between the rich and everyone else is becoming an issue of increasing concern for both political and economic pundits. Economists can look to history and see what happens when a country is ruled by a tiny elite and the rest of the people live in poverty. King Louis the 16th of France and Czar Nicholas II are two examples of rulers who were executed because of their refusal and inability to meet the basic needs of their people. Such extremes aren’t likely in modern times, but Americans may need to threaten the political lives of our current leaders to spur the economic reform needed to redistribute the nation’s wealth.w stands above 9% in the U.S. despite record corporate profits. Although we may not be on the verge of another revolution, Washington will need to address this trend sooner or later if it does not wish to see history eventually repeat itself.