Wealth gap: A guide to what it is, why it matters

Jan. 27, 2014 11:01 AM ET Wealth gap: A guide to what it is, why it matters By CHRISTOPHER S. RUGABER and JOSH BOAK, AP Economics Writers THE ASSOCIATED PRESS STATEMENT OF NEWS VALUES AND PRINCIPLES Despite market unrest, Fed likely to pare stimulus Jan. 27, 2014 12:18 PM ET The new face of food stamps: working-age Americans Jan. 27, 2014 4:42 AM ET The new face of food stamps: working-age Americans Jan. 26, 2014 4:28 PM ET Global markets hit by fears of growth slowdown Jan. 25, 2014 12:01 AM ET Fear of slowing growth pushes down global markets Jan. 24, 2014 3:40 PM ET Buy AP Photo Reprints WASHINGTON (AP) — 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 very 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 Tuesday night. 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 questions and answers about the wealth gap — what it 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's 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 Emmanuel Saez, an economist at University of California, Berkeley. For the rest of us, it inched up an average of 0.4 percent. In 17 of 22 developed countries, income disparity widened in the past two decades, according to the Organization for Economic Cooperation and Development. Q. So who are the top 1 percent in income? A. They're bankers, lawyers, hedge fund managers, founders of successful companies, entertainers, senior managers and others. One trend: 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 has the middle class fared? A. Not well. 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 a wealth gap that's too wide is usually unhealthy. It can slow economic growth, in part because richer Americans save more of their income than do others. Pay concentrated 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 up their spending even as their 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 the Great Recession were both preceded by surging income gaps and heedless borrowing by middle class Americans. Q. Has it become harder for someone born poor to become rich? A. The evidence is mixed. Countries that have more equal income distributions, such as Sweden and other Scandinavian countries, tend to enjoy more social mobility. But a study released last week found that the United States isn't any less mobile than it was in the 1970s. 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, the study found — 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 study of 22 countries, economist Miles Corak of the University of Ottawa found that the United States ranked 15th in social mobility. Only Italy and the Britain among wealthy countries ranked lower. By some measures, children in the United States are as likely to inherit their parents' economic status as their height. Q. So why has income inequality worsened? A. There's no simple answer. Globalization has created "superstars" and concentrated pay among corporate executives, Wall Street traders, popular entertainers and other financial elite. At the same time, 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 have contributed to a "hollowed out" labor market, with more jobs at the higher and lower ends of the pay scale and fewer in the middle. Social factors contribute, too. Single-parent families are more likely to be poor than other families and less likely to ascend the income ladder. Finally, men and women with college degrees and high pay are more likely to marry each other and amplify income gaps. Q. Does wealth distribution follow a similar pattern? A. It's even more pronounced. A Pew Research Center study found that the wealthiest 7 percent of households grew 28 percent richer from 2009 through 2011. For the bottom 93 percent, collective wealth fell 4 percent. That's largely because wealthy households own far more stocks and other financial assets than others. By contrast, whatever wealth middle-class Americans have is mainly in their home equity. Since the Great Recession ended, stock-market averages have soared, setting records in 2013. Home values, though, remain far below their peaks reached in 2006. That divergence has benefited the richest and left others struggling. Q. Where do the 1 percent live? A. Investor Warren Buffett famously lives in Omaha, Neb. Les Wexner, whose fashion empire includes Victoria's Secret, is an Ohioan. But the wealthy mainly cluster around the largest cities. Of the 515 U.S. billionaires, 96 live around New York City, according to the intelligence firm Wealth-X. Los Angeles is home to 22, Chicago 21, San Francisco 20, Houston 14. Millionaires are more widely dispersed. Maryland has the highest concentration. Of all its households, 7.7 percent have $1 million or more in financial assets. New Jersey, Connecticut, Hawaii and Alaska have the next-highest concentrations, according to a report from Phoenix Marketing International. Q. Is anything being done to narrow the wealth gap? A. President Barack Obama has made the issue a priority and wants the government to act to reduce the disparities. The president managed to restore higher tax rates on incomes above $398,350 last year. And he's pushed other steps that might narrow the gap slightly, such as a higher minimum wage. But congressional Republicans say those steps could hurt economic growth and have resisted most such measures. Q. Is everyone concerned about the wealth gap? A. Some conservative economists question much of the data. They note, for example, that Saez's figures don't include government benefits, such as Social Security or food stamps, or employer payments for health insurance, that benefit the less-than-rich. Yet the Congressional Budget Office did include government benefits and the effect of taxes in its own study and still found a sizable gap: For the top 1 percent, income jumped 275 percent, adjusted for inflation, from 1979 to 2007. For the middle 60 percent of Americans, it grew less than 40 percent. Q. So what do experts say is the best way to shrink the wealth gap? A. Most ideas break down along political lines. Liberal economists tend to support a higher minimum wage, greater access to pre-school and college education and more spending on roads, bridges and other infrastructure to help generate good-paying jobs. Most favor higher taxes on the wealthy to pay for such programs. Conservatives tend to back tax cuts, government deregulation and other steps they say will accelerate hiring and growth and raise living standards for everyone. They tend to focus on the need to advance income mobility. In a speech this month, Florida Republican Sen. Marco Rubio acknowledged the enormous pay disparity between a fast food company's cashier and its CEO. "The problem we face is not simply the gap in pay between them, but rather that too many of those cashiers are stuck in the same job for years on end," Rubio said. ___ AP Business Writers Paul Wiseman in Washington and Bernard Condon in New York contributed to this report. ___ Follow Chris Rugaber on Twitter at http://Twitter.com/ChrisRugaber Associated Press ====================== . Emerging currencies hit as time runs out for US easy-money AFPAFP – 11 hours ago.. . . Email Recommend 1 Tweet Print ... . . .Latest News ». .. Water wastage during festive season can diminish reserve – Bernama Water wastage during festive season can diminish reserve – Bernama . At DAP forum, Malaysians voice their thoughts on racial, religious tensions in the country . Savvy Kajang folks know they are the Kingmakers . PKR must give ‘overwhelmingly good reason’ for Kajang by-election, says Ambiga PKR must give ‘overwhelmingly good reason’ for Kajang by-election, says Ambiga . Despite MB post fiasco, analysts see PKR keeping Kajang Despite MB post fiasco, analysts see PKR keeping Kajang . Putrajaya condoning racial and religious tension, says Ambiga Putrajaya condoning racial and religious tension, says Ambiga . .. . More .. . . Emerging economies scrambled to prop up their currencies on Tuesday as time runs out for US Federal Reserve stimulus, exposing them to capital outflows. The prospect of a further tightening of US monetary policy on Wednesday brings closer the risk that stimulus tapering would vacuum more cash from emerging economies, slow global growth and dent the eurozone's recovery. Several top emerging markets have already suffered from capital outflows as the US central bank curbs its so-called quantitative easing (QE) bond-buying stimulus. That policy had fed flows of US money abroad in search of high returns. The currency turmoil is hurting emerging economies in Asia, Latin America, Russia and South Africa as investors pull out funds out of riskier investments, analysts said. India's central bank announced a surprise quarter-point increase in its key rate to 8.0 percent on Tuesday The worries over markets such as Argentina, Brazil, India, Russia, South Africa, Thailand, Turkey, Russia and Ukraine come as the eurozone is emerging from the worst of its sovereign debt crisis. In addition, Turkey, Thailand and Ukraine have all faced political unrest in recent weeks. The Fed has already cut its stimulus this month by $10 billion (7.3 billion euros) to $75 billion a month on signs of a pick-up in the US economy, the world's biggest. Traders are now on tenterhooks to see whether the Fed will announce further stimulus cuts at the conclusion of its two-day monetary policy meeting on Wednesday. Economists are also pricing in tighter monetary policy from the Bank of England (BoE), with Britain's economic recovery expected to pick up more speed this year.

"Quantitative easing can be likening to a tide of cheap money across risky assets. So, when the tide goes out we can see who is swimming naked," Rabobank analyst Jane Foley told AFP. "If cheap money is being wound down, emerging market counties will be more exposed." She added: "These countries rely on foreign savings to finance their deficits and when foreigners lose their nerve and pull their money out, the currencies adjust lower."

Argentina adds to pressures The turmoil intensified last week when Argentina implemented a sharp devaluation in an attempt to stabilise its peso currency, which held steady on Tuesday. However, the fallout of Argentina's problems and global monetary tightening continued to hit other emerging markets this week, most notably neighbour Brazil where the real currency hit a five-month trough. South Africa's rand hit a five-year low point on Monday, while Turkey's central bank called a crisis meeting after its heavy intervention failed to halt a run on the lira. "The Fed's decision to taper QE, combined with the increasing likelihood that the BoE is moving closer to tightening monetary policy, is serving to further reinforce investor concerns over external financing for countries such as Turkey and South Africa with elevated current account deficits," said economist Lee Hardman at The Bank of Tokyo-Mitsubishi UFJ in London. All eyes on Turkey rate decision The beleaguered Turkish lira recovered from all-time lows on Tuesday amid expectations that the nation's central bank will raise interest rates at midnight, a move that could support the lira. The Turkish lira has plunged further in recent weeks, pressured also by the political crisis rocking Prime Minister Recep Tayyip Erdogan's government. "Emerging markets continue to be the economic front line in the current market,"said Alistair Cotton, analyst at traders Currencies Direct. "Fed tapering is driving capital flight and putting downward pressure on many emerging market currencies." However, despite growing emerging markets turmoil, eurozone nations are not worried about contagion, Eurogroup chief Jeroen Dijsselbloem insisted this week. "Of course we are worried about this from the perspective of the emerging countries," said Dijsselbloem, whose Eurogroup comprises the finance ministers of countries that use the single currency. "I am not particularly worried about the risk of contagion. I think the position of the eurozone is different and that we have to maintain our progress." He added that recent tapering of the US stimulus programme was partly responsible, but that emerging economies also had to tackle "structural imbalances". Analysts expressed caution over the eurozone outlook. "Dijsselbloem and other politicians probably feel obliged to give reassuring messages to investors," said Foley. "Although it can not be said with complete certainty that there will be no contagion into the eurozone, the region's large current account surplus, the fact that there has been little sign of systematic risk on the eurozone for a while, and the improving economic data are reassuring." ================ Factbox: Highlights of Obama's State of the Union address Tue, Jan 28 23:18 PM EST (Reuters) - The following are highlights from U.S. President Barack Obama's State of the Union address in Washington on Tuesday. JOBS AND THE ECONOMY To help Americans prepare for retirement, Obama will use executive authority to create a "starter" retirement savings account available through employers for workers who can afford to save only small amounts at a time. He also wants to drop retirement tax breaks that apply to wealthy Americans already well positioned for retirement and increase the earned income tax credit for people without children. Through an executive order, Obama said he would raise the minimum wage for workers holding federal contract jobs to $10.10 and will continue pressing Congress to make that rate the prevailing federal minimum wage nationally. The current federal minimum wage is $7.25 an hour. To strengthen the long-term U.S. fiscal position, Obama committed to paying for new initiatives and supporting more budget deficit reduction. Using his executive authority, Obama will start four more manufacturing innovation institutes this year and wants Congress to create up to 45 more. He also will pursue a trans-Pacific partnership and an agreement with the European Union to boost U.S. exports. Obama urged Congress to pass an extension of emergency unemployment insurance. His efforts to get the long-term unemployed back to work will include a meeting this week with leading chief executive, and federal job-training programs will be reviewed to bring them in line with market demands. He also called for bringing outsourced work back to the United States and advocated discrimination protection for women and gays in the workplace. EDUCATION Obama said a further 15,000 schools and 20 million students from kindergarten through 12th grade would have access to high-speed internet service in the next two years as part of his plan to have 99 percent of American students on next-generation connectivity. Apple, Microsoft, Sprint and Verizon will be part of the education-tech push and more partnerships will be announced in coming weeks. He also renewed his call for pre-kindergarten schooling for all 4-year-olds, as well as innovation in preparing students for college and making college more affordable for them. CLIMATE AND ENERGY Obama proposed incentives for medium- and heavy-duty trucks that run on alternative fuels and he will continue his broader campaign to move America toward clean energy sources. He also called for safe natural gas production. IMMIGRATION Obama renewed his call for securing U.S. borders, cracking down on those who hire illegal immigrants and offering a path to citizenship, saying such reforms would create thousands of jobs and boost the economy by $1 trillion over two decades. GUANTANAMO AND FOREIGN POLICY Obama said the U.S. prison at Guantanamo Bay, Cuba, should be closed this year. He did not mention plans for troop levels in Afghanistan, but said America must move off permanent war footing. He stood by an international interim agreement to get Iran to curb its nuclear program and vowed to veto anything from Congress that would impose more sanctions on Tehran while the United States and other Western powers are in diplomatic talks with Iran. DOMESTIC POLICY He defended his healthcare reform and said he would continue working for voters' rights and against gun violence. Obama renewed his call to wind down mortgage-finance giants Fannie Mae and Freddie Mac, urging Congress to pass legislation that rebuilds the mortgage market to rely more on private capital. (Compiled by Bill Trott; Editing by Will Dunham and Peter Cooney) ============ ==========