With income inequality, it's forward to the past

Cars may soon drive themselves and our eyewear surf the Web, but in one important way in the U.S. these days it’s still 1928: Economic inequality is on the rise.

Just before the Great Depression, the wealthiest 1 percent of Americans collected nearly a quarter of the nation’s income, while the bottom 90 percent got just over two-thirds. Some eight decades later, it’s back to the future. As of 2012, according to University of California-Berkeley economist Emmanuel Saez, the top strata of earners got 22.5 percent of national income, while the bottom 90 percent’s share of the treasure had fallen to less than half for the first time ever.

It is visible in our politics, with President Obama last week calling inequality the “defining issue of our time.” It is in the streets, as fast-food and Walmart workers fed up with living on a pittance invade restaurants to demand higher pay. More broadly, it is plastered across an economy that myriad statistics show is increasingly cleaved between haves and have-nots, between Wall Street bankers who need government support to protect their profits and bank tellers who need the government for food stamps.

The wound will not easily be sutured. Although the job market appears to be finally on the mend, economic growth alone will not close the widening gap between the ultra-rich and, well, everyone else. That’s because income inequality, which has surged since the late 1970s, has many roots. Those range from a domestic trade policy that pits U.S. workers against the ill-paid masses abroad, to a tax code that encourages U.S. corporations to park their profits overseas rather than invest them stateside, to basic inequities such as the lack of universal Pre-K education. 

What is the cost of income inequality? Financial crisis, for one. For years before the housing market collapsed in 2008, Americans borrowed heavily to sustain a standard of living they could no longer afford on their wages, which as Saez's statistics bear out had stagnated for decades. They also put less money away, making millions of households more vulnerable when the bubble inevitably popped. The ensuing plunge in home prices caused people to curb their spending, a hammer blow for an economy that depends on consumers to keep shopping.

Inequality is also partly responsible for the slow recovery, according to a new study by the Federal Reserve Bank of St. Louis. In highlighting how weak income growth for the vast majority of Americans has reduced their purchasing power, economists Barry Cynamon and Steven Fazzari conclude that inequality "compromises the basic demand engine that was necessary for acceptable macroeconomic results prior to the Great Recession, and it threatens growth and employment going forward."

In this light, reversing inequality is less about economic justice than about economic survival. That, too, hasn't changed.

Some economic releases to look for this week:

Tuesday, Dec. 10

- Wholesale inventories (U.S. Census Bureau)
- Job openings and labor turnover survey (U.S. Labor Department)

Wednesday, Dec. 11

- Mortgage Bankers Association index

Thursday, Dec. 12

- November retail sales (U.S. Department of Commerce)
- Jobless claims (U.S. Labor Department)
- Business inventories (U.S. Commerce Department)

Friday, Dec. 13

-  November Producer Price Index (U.S. Labor Department)