Reply #48: Income Inequality Threatens Growth

[UpInArms]

http://www.forbes.com/business/2005/08/29/us-income-inequality-cx_0829oxan_usincome.html

Federal Reserve Chairman Alan Greenspan's tenure has delivered robust economic growth, low unemployment and soaring corporate profits. However, an increasing gap between the after-tax income of the wealthiest Americans and the working class may create a perception that the benefits of this prosperity have been unevenly distributed, hurting overall consumer confidence.

In the past eight quarters, U.S. economic growth has averaged an annualized rate of 3.9% per quarter. Moreover, since 1980, there have been only 15 quarters in which year-on-year gross domestic product growth has been 3.6% or higher, and in which the unemployment rate has been 5.1% or lower, as was true in the second quarter of 2005. In these 15 "economic-boom" quarters, consumer sentiment typically has been strong, with the University of Michigan's Consumer Sentiment Index averaging 104.8. However, in the second quarter of 2005, it was a mere 90.2.

Fear of terrorism may play a role in creating a disconnect between economic conditions and consumer perceptions, but a bifurcation of U.S. income distribution could be significant in explaining this unexpectedly low confidence.

There are indications that the U.S. working class may not be fully participating in the economic boom:

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President George Bush's tax cuts, which began in 2001, have helped shift the income balance in favor of wealthy citizens. Although nearly all Americans' taxes dropped in absolute terms, the cuts reduced the effective tax rates on the wealthiest Americans by more than the rest.

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