Many Americans have been cheering on protestors in Egypt and across the Middle East as they stand against political repression and economic injustice. But shockingly, when it comes to income inequality, the United States ranks worse than Egypt -- as well as Russia, China, and Iran! This matters for America and investors alike.
A recent CNNMoney article noted that the American middle class has now become the underclass. In 1988, the average American taxpayer earned the modern-day inflation-adjusted equivalent of around $33,400 per year. Two decades years later, in 2008, that figure became … just $33,000. In other words, though we arguably have more things we may want to buy, we have not increased our purchasing power over time.
Well, most of us haven't. Americans in the highest 1% by income -- those who earn at least $380,000 annually -- have enjoyed an income boost of 33% over the past two decades. The richest 10% of America now controls two-thirds of our nation's wealth. These charts and tables illustrate the status quo starkly.
Root causes
One cause frequently cited is union membership, which has long protected and boosted employee incomes. It has declined sharply since 1983, falling from 20% of workers to 12% -- and just 7.5% in the private sector. Globalization is another cause, as U.S. companies find it hard to compete with foreign companies' cheaper manufacturing and labor costs. Many blue-collar jobs evaporated, while folks with special skills and college educations saw their incomes rise. As the stock market rose robustly over recent decades, the wealthy benefited most.
Many allege that President George W. Bush's tax cuts further helped the rich preserve more of their wealth, but that claim isn't certain. Slate's Timothy Noah has explained that while marginal tax rates have been lowered for the rich, effective tax rates have actually fallen for both the rich and poor since 1979. Princeton political scientist Larry Bartels suggests that a more influential factor is simply which party controls the White House, with real income growth tapering off for the masses when Republicans are in charge. Bartels has not yet identified which particular policies matter most.
Excessive executive compensation has also played a role in the growing divide. Bloated CEO paychecks ahve become such a well-known problem that they sparked new rules requiring "say on pay" votes from shareholders. (Few companies have embraced my modest solution: bidding for CEO jobs.)
Finally, research by Harvard's Lawrence Katz and Claudia Goldin has shown that educational attainment in America has been slipping in recent decades, contributing to income inequality. A less educated population has been less able to keep up with changing technologies and demands for higher-skilled labor.
Good news elsewhere
While the U.S. is experiencing significant income inequality, Latin America and other regions are seeing equality grow. That's at least partly due to a commitment to boost the financial health of the masses. Consider Chile, which requires employees to contribute 10% of their income or more toward their retirement. There's a little of that afoot in the U.S. these days; many companies have started enrolling workers in 401(k) plans by default. But millions still don't participate, and millions more don't save and accumulate enough.
The future matters
Knowing the various causes of our income inequality means that we know at least some of the ways to repair the growing divide: higher educational attainment and strengthened unions, among other solutions. For now, though, there doesn't seem to be a critical mass of effort aimed at addressing the problem.
What does this problem mean for investors seeking great stocks? Well, it may already be manifesting itself in the performance of companies serving the upper and lower crusts of America. Consider that Sotheby's
But stuck somewhere in the middle are companies such as Best Buy
Income inequality is not the only factor influencing these companies' performance, but the numbers above do suggest that it's having some effect. Some companies that clearly cater to the richest and poorest, such as Tiffany and Family Dollar, seem to be performing the most strongly lately.
It's a problem well worth addressing. If the lower and middle economic classes see their real incomes rise, they'll be able to buy more goods and services. That should boost our overall economy -- and it can lead to strong stock performances.
To help close your personal income gap, you'll need to start from a solid foundation. Our 13 Steps to Investing Foolishly can help launch your investments the right way.
