Does Wealth Imbalance Threaten Society's Fabric?

Last week, President Bush, for the first time, expressed concern about income inequality in the United States. It's a trend that has been with us for almost 30 years. The problem stabilized during the boom of the late 1990s, but, in the past five years, the income gap has widened again. Incomes on the middle rungs of the economic ladder have stagnated, despite strong economic growth and strong productivity growth, while most of the rewards of the strong economy have gone to the wealthiest Americans. Their incomes have exploded.

One recent study shows that Americans on the top rung of the income ladder, the top 1 percent, now command nearly 20 percent of the nation's income. That's more than twice the share that group received three decades ago.

The View from the Top

A small sign of that explosion of wealth at the top is the increase in private jet sales. They're the latest status symbol for the super-wealthy, and sales for the jets are rising nearly 30 percent a year.

At a private jetport at Dulles Airport, gleaming small jets taxi on the tarmac and well-dressed passengers come and go unhindered by security lines. Among the jets is a Gulfstream G-200, a large cabin, mid-range business jet. A representative of Gulfstream, Robert Baugniet, offers a glimpse of how the top tier travels.

There's gleaming maple wood trim, sumptuous green leather chairs and sofas, and an owners station, from which a master of the universe can control satellite communications and in-flight entertainment. Depending on its seating configuration, says Baugniet, the jet could carry 8 to 18 people non-stop to Europe or America's West Coast. In the eight-person configuration, the seating converts to beds for overnight flights.

For this aircraft, says Baugniet, the price is $20 million. But don't get too excited — there's a waiting list. Still, around 1,500 private jets have been delivered to companies and wealthy clients over the past couple of years by the aviation industry.

Despite occasional squawking from shareholders, Baugniet maintains that these jets have become essential for top executives.

"Time is money," he says. "Do shareholders really want their CEO waiting for a connecting flight at O'Hare or in Atlanta?" After all, top CEOs make about 300 times what the average worker makes. And as metaphorical justice would have it, their jets fly at 30,000-40,000 feet far above the rest of us, too.

'Sense of Restraint Is Gone'

Among the highest flyers in the U.S. economy in the past year was Lloyd Blankfein, CEO of the Wall Street investment bank Goldman Sachs. His $53 million bonus — and news that, on average, Goldman Sachs employees made $600,000-plus last year — made headlines in the tabloids and the business pages... and produced some public outrage.

The response of economist, actor and social commentator Ben Stein is typical: "All restraint of dignity and decorum and decency has been cast aside by people in the corporate board rooms and some of the people on Wall Street."

Back in the 1960s, says Stein, CEO's were restrained by social mores. "But that sense of restraint is gone," he says.

The Wall Street bonuses paid out last year, $24 billion in all, have helped give New York City the highest income inequality of any city in the country. With one-bedroom condos routinely selling for $1 million, it's becoming harder for the middle class to live there.

Squeezing Out Manhattan's Middle Class

The pressure is even squeezing Stuyvesant Town, a bastion of New York City's middle class. It's a 60-year-old complex of apartment buildings near Greenwich Village, built around a central space of green lawns and playgrounds. Resident JoAnne Police quotes from its mission statement that used to be displayed on a plaque on the grounds. It says, in part, that Stuyvesant Town was created so "families of moderate means might live in health, comfort and dignity in park like communities."

The plaque is gone now. Last year Met Life, the original developer of Stuyvesant Town, sold it to a big real estate firm for $5 billion. Residents have been told they won't be forced out. But there's fear that the middle-class character will change.

For her part, Police has been trying to buy a condo in New York. She says prices are being forced out of her reach by the big bonuses being paid to young people on Wall Street. With that kind of money sloshing around New York, why would the real-estate industry bother to create housing at her modest "price point," she asks.

So what's behind this gap between the fortunes of those in the executive suites and the rest of us? Robert Rubin, former treasury secretary in the Clinton administration, says globalization has dramatically increased the value of some people's skills.

"For example," he says, "an outstanding [financial] trader, who used to trade within the framework of a domestic marketplace, can now can trade within the framework of a global marketplace."

Rubin says that means that person can do a great deal more, and therefore becomes much more valuable. A CEO who runs a company with a global market, instead of just a national one, is more valuable too, he says.

Gap Widened by Globalization

Most economists agree that technology-driven-globalization is the main force behind the widening income gap. The story of a company called Economy.com is one small example of how technology and globalization have supercharged the earning power of skilled and creative workers.

On a recent day at the offices of Economy.com, Mark Zandi sat at the desk in his corner office, reading headlines off an Economy.com Web site.

"Here's a good piece on unraveling the employment puzzle," he comments as he scrolls down the page.

Zandi and a couple of partners started a new economic research firm just outside Philadelphia in the 1990s. About a year ago, Zandi and his partners sold Economy.com to Moody's, the venerable credit-rating and research firm, for $27 million. Zandi and his partners still manage the company.

What enabled them to get the big payday was computing power and the Internet. They started 15 years ago, thinking they would give economic advice and analysis through a newsletter. Then the Internet blossomed, and they developed a Web site to distribute their product. At first, Zandi and his partners couldn't figure out how to make money at it. It was a free Web site for many years, and they tried to generate revenue through advertising, but it didn't work. So they decided to charge $160 a month for access to the site and nervously watched to see what would happen.

The day the site moved to a payment model was fascinating, Zandi he says.

"We had a Web page showing who subscribed, so I would go there every half-hour" to check the numbers, he says. When things were going well and there were a lot of subscribers, Zandi said he'd check every 10 minutes. He was stunned by the number of people who valued the Web site and signed up. It was fascinating watching who was signing up, too, he says. "You know, I'm reading the names and I have no idea who these people are."

It wasn't just big institutions, like the Federal Reserve or Bank of America, but small customers: a city manager in a Tennessee town; two churches that needed economic forecasts so they could project income in their collection plates. The Internet had made Economy.com's market nearly infinite. At the same time, the Web lowered the cost of collecting the data that the firm relies on to do its analysis

Fears of an Oligarchy

But Zandi acknowledges that the very technological forces that boosted his fortunes have eroded the jobs and incomes of others through automation and outsourcing.

"That has hurt workers that are at the lower-middle part of the economy," he says.

And Zandi is very concerned that the widening income gap could be corrosive to American society. Those who feel left behind, he says, may feel compelled to support policies, such as trade barriers, that could short-circuit the tech-based global economy.

"We want to have as big and as flourishing an economy as we can," says Zandi. "And we can't have that unless the benefits of the growth in our economy are distributed evenly enough that we all feel comfortable with what's happening."

Commentator and economist Ben Stein sees the threat to society from the income gap differently. He envisions the wealthy buying political influence and entrenching their economic advantages.

"If management and the top dogs on Wall Street are just going to continue to be able to get whatever they want," he says, "then this will become not a democracy any longer, but an oligarchy where a very few, very rich people call all the shots."

"We're way down the road to that happening already," he says.

Growing Concern Over the Effects of Inequality

There's lots of worry about the corrosive effects of income inequality in official circles, too. The current treasury secretary and current and former Federal Reserve chairmen have expressed concern. Congressional Democrats made it an issue in the last election, and it helped them win majorities in Congress. That means the issue will be on Washington's agenda this year.

But finding ways to close the income gap that don't undermine the economy will be a challenge. Already, the Congress has passed legislation boosting the minimum wage. Most economists suggest that is more symbolic than significant.

Other ideas include restraining CEO pay, strengthening unions, making health care accessible to all and increasing grants to low-income college students. Some Democrats suggest those things could be paid for by allowing President Bush's tax cuts for wealthy Americans to expire in 2010.

Former Treasury Secretary Robert Rubin, who's a leading Democratic voice on this issue, argues that balancing the federal budget is necessary to build a strong foundation for the economy and income growth. Not all Democrats agree with him on that, but most would agree with Rubin that at the top of the list of things to do should be education. That's necessary, he says, in order "to equip workers to be productive and effective."

Rubin also says that boosting the educational attainment of workers would encourage the creation of jobs in this country, because "an effective, well-educated work force leads to investment, it catalyzes investment."

College Is Not Enough Anymore

But these days, it appears that even a college education is not sufficient to close the income gap. During the past five years, even incomes for the college educated have stagnated. Many economists, including Mark Zandi of Moody's Economy.com, now say that college is not enough.

What's required, says Zandi, is continually "going back and getting educated and trained, and developing a talent and a skill; something that's unique and different.

"It could be something that you can't learn in school, he says. "It could be you're great at mathematics, programming, or even just have nice white teeth that you can display in a TV ad," says Zandi. "You are the product that matters most, and you have to keep working on it and market it."

Here's one cautionary note about the ability of individual Americans to change their economic circumstances. Despite the fervent belief among Americans that we all have a chance to make it to the top, recent studies suggest the United States is actually among the least economically mobile of the big industrialized countries.

Here's a more hopeful note, as well. In 2006, incomes did begin to rise again up and down the income ladder. Economists and policymakers hope that will build into the same broad gains in income experienced by workers from 1995 to 2000.