President Barack Obama will focus on what he has described as “the defining challenge of our time” during the State of the Union address on Tuesday: the nation’s growing gap between the rich and poor. What economists saw as a temporary aberration in the early 1970s — the first time since the end of World War II when the incomes of lower- and middle-income Americans failed to keep pace with those of the rich — has in the intervening 40 years become a full-blown crisis.
From 1979 to 2007, the top 1 percent of families experienced a 278 percent increase in their real after-tax income, while families in the middle 60 percent saw an increase of less than 40 percent. During this period, many blue collar jobs become automated by advances in technology, American workers started competing against cheaper overseas labor, and the number of workers represented by unions dropped from 20 percent in 1983 to 11 percent today. As the earnings of lower and middle income Americans stalled, however, CEOs — particularly in the financial industry — saw astronomical economic benefits and, thanks to tax changes in the early 2000s, began paying some of the lowest tax rates in the country’s history.
Below are the most shocking consequences of this income inequality:
1. Income inequality forces Americans into debt.
As the wealthy become wealthier, they create an “economic arms race in which the middle class has been spending beyond their means in order to keep up,” a 2013 study from the University of Chicago’s Marianne Bertrand and Adair Morse concludes.
“What you think you need depends on the context you find yourself in,” says Cornell economist Robert H. Frank, who has written about the “expenditure cascades.” “And standards tend to be local. When most of the income gains are going to the very top, the people around them feel relatively poorer and spend more because of that.” Lower- and middle-income Americans, in other words, are not forced to buy expensive cares or houses, but they feel pressured to do so, leading to an increase in the personal bankruptcy rate and a plummeting savings rate.
The wealthy bid up the the prices of real estate, create a boom in more expensive restaurants, bars, and grocery stores, and effectively price out their lower-income neighbors or force them to spend more to continue living in the community.
2. Income inequality makes America sick.
Researchers at Harvard University’s School of Public Health found that women living in areas with large gaps between the “haves” and “have-nots” are at greater risk of being depressed and are nearly twice as likely to suffer from depression compared to the women living in areas that have a more equal income distribution.
Meanwhile, though American life expectancy has increased dramatically over past decades, research shows that those gains are going mostly to people at the upper end of the income ladder. Life expectancy of male workers retiring at 65 has grown by six years in the top half of the income distribution but only 1.3 years in the bottom half over the last 30 years, for instance. “Life expectancy has increased mainly among the privileged class,” Economic Policy Institute economist Monique Morrissey told the Washington Post. “For many people, raising the retirement age would amount to a significant benefit cut.”
The lack of health care providers in poorer communities and lack of education about health care conditions means that lower-income Americans are much more likely to develop and live with chronic medical conditions like diabetes or high blood pressure. A study by the National Urban League Policy estimates that U.S. health care disparities have contributed to $59.9 billion in excess spending, a price tag that will fall significantly as lower-income Americans start accessing health care services through the Affordable Care Act’s Medicaid expansion.
3. Income inequality makes America less safe.
Statistical patterns show that crime rates increase with rising economic inequality. For instance, a 1999 Harvard analysis of the homicide rates in each state and the District of Columbia found that as the gap between the rich and the poor rose, the rate of homicide rose along with it. Income inequality alone accounted for “74 percent of the variance in murder rates and half of the aggravated assaults,” the research concluded. A 2002 World Bank study confirmed these results, concluding that homicide and an unequal distribution of resources are inextricably tied throughout the world.
The National Bureau of Economic Research has developed an even more precise number, reporting that “a twenty percent drop in wages leads to a 12 to 18 percent increase in youth crime.” Other analysis has found that a 1 percentage point increase in the Gini index (a measure of wealth inequality) produces, on average, a 3.6 percent increase in the homicide rate.
4. Income inequality makes America less democratic.
A large body of research suggests that high inequality leads to lower levels of representative democracy and a higher probability of revolution, as poorer citizens become convinced that the government is only serving and representing the interests of the rich. And today’s political candidates and parties are relying more on deep pocketed campaign donors than at any other time since the early 1970s, when Congress first enacted campaign finance laws.
The Huffington Post’s Paul Blumenthal recently pointed out that “the top 0.01 percent of campaign donors — one percent of the one percent — contributed more than 40 percent of all the money spent in the 2012 elections.” Compare that to 1980, when the top 0.01 percent of campaign donors accounted for just under 15 percent of all the political contributions. Today’s rich also donate millions to Political Action Committees (PACs) and so-called 501(c)4 organizations in an effort to influence the politics and public policy. The Washington Post reported this month that the 17 groups that are funded by conservative donors Charles and David Koch “raised at least $407 million during the 2012 campaign” — more than Democrats and Republicans spent in the entire 2000 election.
Harvard economics professor Edward L. Glaeser argues that as the rich become richer and secure more political influence, they support policies that make them wealthier at the expense of everyone else. “If the rich can influence political outcomes through lobbying activities or membership in special interest groups, then more inequality could lead to less redistribution rather than more,” he explained in a 2006 paper.
5. Income inequality undermines the American dream.
New research finds that while economic mobility in the United States has stayed flat for two decades, the distance between the richest Americans and the poorest has grown dramatically. So if social mobility is a ladder, this means “the rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed,” the researchers note.
This intergenerational mobility is significantly lower in the United States than in most other developed countries. The chances of a child moving out of poverty are about half as high in the U.S. as in Denmark, for instance, leading Richard Wilkinson, Professor Emeritus of Social Epidemiology at England’s University of Nottingham, to conclude, “If Americans want to live the American dream, they should go to Denmark.”
Other research has found that economic mobility depends heavily on geography, and in particular, that areas with strong middle classes have higher rates. Places with lower and less progressive state income taxes, on the other hand, have lower rates of mobility.
6. Income inequality is undermining long-term economic growth.
Societies with greater income inequality experience slower and less stable economic growth, a recent global comparison from the International Monetary Fund concluded, and see far shorter economic expansions.
They “are more vulnerable to both financial crises and political instability” and, if hit by external shocks, “often stumble into gridlock rather than agree to tough policies needed to keep growth alive,” the report found. As a result, American income trends suggest that current economic expansions “could last just one-third as long as in the late 1960s.”