Policy Debate: What accounts for recent increases in income inequality?

Information taken from http://www.swlearning.com/economics/policy_debates/income_inequality.html
Issues and Background

Income inequality in the United States has risen over the past two decades. Its very persistence means that this trend will be difficult to change. Even recognizing the reversal when it does occur will be difficult enough, because statistical analysis cannot easily distinguish a decisive turnaround in inequality from a relatively brief pause in its rise. Because of this uncertainty, continued vigilance is required to find ways to help alleviate inequality, particularly to the extent that it can reduce hardship for those at the bottom of the economic ladder.
~ Economic Report of the President 1997

During the mid- to late-1990s, the United States enjoyed a strong economy with low levels of inflation and unemployment. The strong economy during this period, however, did not result in a steady rise in income for all Americans. In fact, for the last twenty-five years, the gap in income between rich and poor has increased. What accounts for the recent increases in income inequality in the United States?

There is no simple answer or single factor behind this increase in income inequality. In fact, some economists contend that what appears to be an increase in income inequality is a misinterpretation of the economic data. Other economists argue that, while the increase in income inequality is a reality, this phenomenon in itself is not necessarily bad as long as the standard of living for all improves. Those economists who do agree that income inequality has increased cite different and varying reasons for this phenomenon:

  • changing technology,
  • increased trade competition from low wage countries,
  • increased immigration,
  • declines in the real minimum wage, and
  • declines in unionism.
Other reasons often mentioned are the changing makeup of the family, the increased number of women in the labor force, and changes in unearned income.

Few issues resonate more with Americans than income and poverty. Hence, many of the policy solutions recently proposed attempt to solve, in one fashion or another, the income inequality puzzle.

Primary Resources and Data

Inequality is a non-issue

  • Richard Posner, "Why Rising Income Inequality in the United States Should Be a Non-issue"

    In this April 23, 2006 response to Gary Becker's blog posting, Richard Posner agrees with Becker's analysis and suggests that "as society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying inequality... between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck." Posner argues that income inequality is not a very serious problem in U.S. society since the average level of income is relatively high and is growing over time. Inequality is a growing problem

    The Dangers of Inequality
  • Yuliya Demyanyk, "Time for Predatory Lending Laws?":(published by the Federal Reserve Bank of St. Louis),
    Yuliya Demyanyk argues that states are more likely to adopt predatory lending laws when the level of income inequality within the state is above average for the U.S. as a whole. She raises concerns over the growth of income inequality in the U.S. since "it can cause slower economic growth, an increase in crime, worse overall well-being, poor educational outcomes and even higher death rates, the same way a higher level of poverty (absolute, not relative) would."

    Recent Update on Inequality from the Christian Science Monitor. Maybe the 'villain of the piece' isn't the top 1% its the top .01%.