How Income Disparity Will Affect the Whole Economy

By Thursday, January 17, 2013

How Income Disparity Will Affect The gap between the rich and the middle class and the poor is growing exponentially. While the rich continue to spend lavishly on their toys and material goods, the middle class and the poor are struggling to make ends meet. Despite America’s ability to create wealth, the income gap between the rich and the poor has been expanding, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed.

This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.

The real problem is the superlative rise in the poor and its impact on consumer spending.

According to The Working Poor Project’s report, the number of families taking on lower-paying jobs in the service industry increased in 2011. According to the report, about 10.4 million families representing about 47.5 million Americans live near the poverty line. The data indicated that the top 20% of U.S. workers accounted for 48% of total income, whereas the bottom 20% of workers earned less than five percent of total income (Source: Heavey, S., “Number of working poor families grows as wealth gap widens,” Reuters, January 15, 2013.)

The results are disappointing, given the riches of this country. But at the same time, I’m not that surprised; it’s a trend that is occurring around the globe, especially in the emerging economies of China, India, Russia, Brazil, among others, including the eurozone, where the problems are immense. (Read “Forget the Debt; There are More Pressing Issues with the Eurozone.”)

The median family income plummeted to an inflation-adjusted $45,800 in 2010, compared to $49,600 in 2007, according to the Survey of Consumer Finances, published by the Federal Reserve. The survey also indicated that the top 10% of U.S. households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into lower consumer spending by the middle class as income levels fade.

What is worrisome is that the recession resulted in a greater disparity in incomes between the poor and the rich, which impacts consumer spending. It’s common for the CEO of a large company to earn multiples of regular workers. According to AFL-CIO, the average S&P 500 CEO earned $12.9 million in 2011, which is 380-times higher than the average income of a worker in the U.S. of $33,947.

In America, the rich are getting richer, while the poor are getting poorer, and this is impacting consumer spending.

With more than 30 million Americans using some form of food stamps, another factor that affects consumer spending, there is a great disparity of income in this country.

The income gap is widening. In 1962, the top one percent of income earners had a net worth of 125-times the median household, according to the Economic Policy Institute. The income gap surged to 288-times in 2010, and it continues to grow. This means less consumer spending from the middle class. President Obama realizes this and wants to remedy the situation. Of course, the gap will continue to be significant, as the rich have a much larger base of wealth to work from and can accelerate the growth of their net worth much quicker. Making two percent on $10.0 million is a lot better than earning two percent on $1,000.

Whatever your views on income distribution, and there will be some who feel the current tax structure is the right one, the problem is that income disparity inevitably causes societal issues. In the long run, this cannot be good for America, as it impacts consumer spending.

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George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »

  • Lord Byng

    There's a Keynesian implication to income disparity that hasn't been explored- rich people don't spend, they lend; graphically, the increasing slice of economic output that is going to the non-spenders is starting to look very much like the classic demand gap. That's going to get larger and larger as dark money increases. The current solution- the classical Keynesian solution- is to borrow that money back. There's another way, though: simply tax that money away and put it back in circulation. From both the corporations and high-income individuals. Apple obviously doesn't need the $130 billion it's got socked a way to do business. They aren't going to either invest it or spend it. So taxing it away would have had no effect on their operations.

    It's the other way of eliminating the demand gap. This is not increasing taxes- it's in fact restoring taxes to the levels they were when the economy worked. The huge demand gap is not only bad for poor people. It's bad for rich people.
    It's counterintuitive, but in fact, higher taxes are good for them.