December 17, 2013

Survey: Income gap holding back U.S. economy

Gains are flowing mostly to the rich, who spend less of their money than do low- and middle-income consumers, whose pay is barely rising.

By Christopher S. Rugaber
The Associated Press

WASHINGTON – The growing gap between the richest Americans and everyone else isn’t bad just for individuals.

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A destitute man sleeps on the sidewalk under a holiday window at Blanc de Chine in New York in November. The growing gap between the richest Americans and everyone else is hurting the U.S. economy, say a majority of more than three dozen economists surveyed this month by The Associated Press.

The Associated Press

It’s hurting the U.S. economy.So says a majority of more than three dozen economists surveyed last week by The Associated Press. Their concerns tap into a debate that’s intensified as middle-class pay has stagnated while wealthier households have thrived.

A key source of the economists’ concern: Higher pay and outsize stock market gains are flowing mainly to affluent Americans. Yet these households spend less of their money than do low- and middle-income consumers who make up most of the population but whose pay is barely rising.

“What you want is a broader spending base,” says Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

Spending by wealthier Americans, given the weight of their dollars, does help drive the economy. But analysts say the economy would be better able to sustain its growth if the riches were more evenly dispersed. For one thing, a plunge in stock prices typically leads wealthier Americans to cut sharply back on their spending.

“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

A wide gap in pay limits the ability of poorer and middle-income Americans to improve their living standards, the economists say. About 80 percent of stock market wealth is held by the richest 10 percent of Americans. That means the stock market’s outsize gains this year have mostly benefited the already affluent.

Those trends have fueled an escalating political debate. In a speech this month, President Barack Obama called income inequality “the defining challenge of our time.”

Obama also called for an increase in the federal minimum wage, now $7.25. Republican leaders in the House oppose an increase, arguing that it would slow hiring.

Several states are acting on their own. California, Connecticut and Rhode Island raised their minimum wages this year. Last month, voters in New Jersey approved an increase in the minimum to $8.25 an hour from $7.25.

Income inequality has steadily worsened in recent decades, according to government data and academic studies. The most recent census figures show that the average income for the wealthiest 5 percent of U.S. households, adjusted for inflation, has surged 17 percent in the past 20 years. By contrast, average income for the middle 20 percent of households has risen less than 5 percent.

The AP survey collected the views of private, corporate and academic economists on a range of issues. Among the topics were what policy decisions, if any, the Federal Reserve might announce after it ends a policy meeting Wednesday.

Three-quarters of the economists surveyed don’t think the Fed is ready to announce a pullback in its economic stimulus. Speculation has been rising that the Fed will soon scale back its $85 billion in monthly bond purchases because of the economy’s steady gains. The bond purchases have been intended to keep long-term loan rates low to induce people to borrow and spend.

Most of the economists think the Fed will begin slowing its bond buying in January or March.

And most don’t think the economy needs the Fed’s help. Just over half say they believe growth could reach a healthy 3 percent annual pace even without the Fed’s extraordinary help.

As Janet Yellen prepares to succeed Ben Bernanke as chairman early next year, most of the economists expect the Fed to become more “dovish” — that is, more focused on fighting unemployment than on worrying about higher inflation that might result from the Fed’s actions. The Senate could confirm Yellen as soon as this week.

(Continued on page 2)

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