Look at the world today and it seems like there are existential threats lurking around every corner. There's Ebola in Africa, ISIS in the Middle East, and reports of nuclear arms advances in North Korea.
Yet when the Pew Research Center recently asked Americans to identify the greatest threat to the world, a plurality of respondents chose inequality: "Around a quarter of Americans say the growing gap between the rich and the poor (27%) is the greatest threat to the world today, with 24% saying this about religious and ethnic hatred and 23% expressing concern about the spread of nuclear weapons."
A critical mass of inequality
While the gap between rich and poor has steadily grown over the last four decades, the attention being given the issue today suggests it has reached a critical mass of sorts.
Indeed, Federal Reserve Chairwoman Janet Yellen joined the debate earlier this month in a speech dedicated specifically to the issue:
The extent of and continuing increase in inequality in the United States greatly concerns me. ... It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.
As Neil Irwin of The New York Times noted, a statement like that wouldn't seem unusual coming from a left-leaning politician or a prominent liberal columnist. But it's another thing entirely when the person in charge of the nation's monetary policy, not to mention its banks, publicly airs such concerns.
Just for the record, data on the disparity in both income and wealth justifies Yellen's alarm.
Historical data curated from tax returns suggest that today's level of income inequality has not been seen since the Gilded Age. And a recent survey commissioned by the Federal Reserve found that the richest 5% of American households held 63% of the nation's wealth, while the bottom 50% held only 1%.
Is America's social mobility escalator broken?
Of course, the fear is not inequality per se. In fact, I think most people would agree that a certain amount of inequality is a good thing from a societal standpoint, as it provides an incentive for people to work hard in order to better their (and their children's) lives.
The fear instead is that there's a point at which the gap becomes so wide that it's no longer possible to traverse. When this happens, social and economic mobility, the essence of the American dream and arguably its economic engine, is brought to a halt.
That calcification has already begun to set in is apparent when you look at education, what Nicholas Kristof called "the best escalator to opportunity in America."
While the United States has long been a leader in educating its citizens, the latest survey of education undertaken by the Organization for Economic Cooperation and Development suggests the nation is losing that edge.
At the turn of the century, the United States ranked second in the percentage of those aged 25-64 with a college degree, behind only Canada. By 2012, we had fallen to fifth, overtaken by Japan, Israel, and Russia.
Moreover, as Kristoff pointed out, among young Americans whose parents didn't graduate from high school, only 5% make it through college themselves. By contrast, in other developed countries the figure is 23%.
This matters because, as my colleague Morgan Housel observed in a column earlier this year, "The single best predictor of future income is your level of education, and one of the best predictors of your level of education is your father's income."
For a slightly more academic spin on this, here's how the OECD explained the relationship in its survey of education:
Higher levels of educational attainment are associated with better health, more social engagement, and higher employment rates, and are perceived as a gateway to better labor opportunities and higher relative earnings. Foundation skills, such as literacy and numeracy, are also strongly associated with better outcomes in the labor market and with living better and healthier lives.
Inequality and economic growth
Of course, it's tempting to dismiss a conversation about inequality as merely another flash point in the partisan battle between political parties. But doing so is a mistake, as a growing body of research ties inequality to economic growth.
As Irwin explained in his column about Yellen's speech on inequality:
The story goes like this: The wealthy tend to save a large proportion of their income, whereas middle and lower-income people spend almost all of what they earn. Because a rising share of income is going to the wealthy, spending -- and hence aggregate demand -- is rising more slowly than it would if there were more even distribution of income. Skyrocketing debt levels papered over this disconnect in the mid-2000s, but now we could be feeling its effect.
If true, this would help account for why the economy has notched mediocre growth since the turn of the century, with the exception being a brief period of the housing bubble.
Specifically in the context of the point at which inequality and education meet, according to Harvard professors Claudia Goldin and Lawrence Katz in their book The Race between Education and Technology, this country's previously unmatched educational system "is what made America the richest nation in the world."
Only time will tell if these concerns are warranted, as society has a tendency to self-correct when things fall too far out of equilibrium. We saw this in the decades after the Gilded Age, when income inequality was cut in half between 1916 and the early 1960s.
In the meantime, however, this situation is worth keeping an eye on. Especially for investors (The Motley Fool is, after all, an site for investors), the implications of growing inequality could be harmful for companies that traditionally served the middle class, while exerting the opposite effect on businesses that cater to the top and bottom of the socioeconomic ladder.
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