The Widening Income Gap: What You Need to Know

By | December 10, 2013

Despite the heated political debates over the causes and consequences of income inequality that have characterized our nightly news for years, little has actually succeeded in combating the widening gap between the rich and the poor. In fact, studies on the data obtained from recent census reports have found that the income gap between the poor and rich has grown in the last five years in forty-five states throughout the U.S. Why is the income gap an important economic and social indicator? What contributes to it? What can the government do to combat trends of widening inequality?

the widening income gap

What is the income gap in the U.S.  ?

The income gap refers to the difference in concentrations of wealth amongst individuals in a population. Within the US, the richest 0.01% make 4% of the nation’s total income as of 2012, marking the largest income gap in the U.S. since 1916. Fascinatingly, this is the first time in American history that the gap continued to widen instead of shrink after a financial collapse, a result of the Obama administration’s bank bailout schemes according to some analysts.

The widening income gap

Why is income equality important?

Income equality measures are very important because they can show the economic development of a society better than averaging tools like Gross Domestic Product or mean salaries. By examining these income medians, we can understand the balance of income within a society and where resources are being distributed or are in need. High levels of income inequality tend to be associated with non-uniform development and has been linked to increased levels of violence and murder. Because of the cyclical nature of poverty and the cultural mechanisms that play a role in its reproduction, analysts worry that ignoring trends in increasing income inequality can lead to the waste of an entire generation of productive but disenfranchised youth who will be the most heavily affected group by the income gap and the resultant lack of opportunities. Income inequality is an important marker for the current and future health of a society.

 

The widening income gap

How could the government respond?

Although the current American government under Obama has promised to combat income inequality, the income gap has only widened in recent years. If the government were to take decisive action against income equality, it would need to attack the societal inequalities that characterize income inequality at their roots. Experts recommend that providing free and quality preschool services can contribute significantly to a child’s development and later likelihood of professional success, and that investing in such a social service would ultimately pay for itself in time through contributions of intellectual capital. The government could also work harder to close tax loops for the rich that have helped reward those with higher capital investments with weighty tax breaks. Along the same line, state-sponsored social campaigns helping to educate low- and middle-income families about safe and easy investment options that require little initial capital to start and that could yield continuous income via options like covered call stocks should be opened up to the masses so as not to constitute a secret investment and wealth-generation tool of only a few knowledgeable wealthy people.

Growing trends in income inequality in the U.S. and around the world are troubling indicators of the lasting effects of our recent recession. To avoid wasting the potential of an entire generation of workers, the government can institute policies supporting early childhood education and the closing of tax holes that unfairly benefit the rich, among other solutions. For more information about income inequality, see The Economist

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