Rich-poor gap gaining attention

The income gap between the rich and the rest of the US population has become so wide, and is growing so fast, that it might eventually threaten the stability of democratic capitalism itself.

Is that a liberal's talking point? Sure. But it's also a line from the recent public testimony of a champion of the free market: Federal Reserve Chairman Alan Greenspan.

America's powerful central banker hasn't suddenly lurched to the left of Democratic National Committee chief Howard Dean. His solution is better education today to create a flexible workforce for tomorrow - not confiscation of plutocrats' yachts.

But the fact that Mr. Greenspan speaks about this topic at all may show how much the growing concentration of national wealth at the top, combined with the uncertainties of increased globalization, worries economic policymakers as they peer into the future.

"He is the conventional wisdom," says Jared Bernstein, senior economist at the Economic Policy Institute, a liberal think tank. "When I'm arguing with people, I say, 'Even Alan Greenspan....' "

Greenspan's comments at a Joint Economic Committee hearing last week were typical, for him. Asked a leading question by Sen. Jack Reed (D) of Rhode Island, he agreed that over the past two quarters hourly wages have shown few signs of accelerating. Overall employee compensation has gone up - but mostly due to a surge in bonuses and stock-option exercises.

The Fed chief than added that the 80 percent of the workforce represented by nonsupervisory workers has recently seen little, if any, income growth at all. The top 20 percent of supervisory, salaried, and other workers has.

The result of this, said Greenspan, is that the US now has a significant divergence in the fortunes of different groups in its labor market. "As I've often said, this is not the type of thing which a democratic society - a capitalist democratic society - can really accept without addressing," Greenspan told the congressional hearing.

The cause of this problem? Education, according to Greenspan. Specifically, high school education. US children test above world average levels at the 4th grade level, he noted. By the 12th grade, they do not. "We have to do something to prevent that from happening," said Greenspan.

So are liberals overjoyed by these words from a man who is the high priest of capitalism? Not really, or at least not entirely.

For one thing, some liberal analysts prefer to focus on the very tip of the income scale, not the top 20 percent. Recent Congressional Budget Office data show that the top 1 percent of the population received 11.4 percent of national after-tax income in 2002, points out Isaac Shapiro of the Center on Budget and Policy Priorities in a new study. That's up from a 7.5 percent share in 1979.

By contrast, the middle fifth of the population saw its share of national after-tax income fall over that same period of time, from 16.5 to 15.8. "Income is now more concentrated at the very top of the income spectrum than in all but six years since the mid-1930s," asserts Mr. Shapiro in his report.

For another, some Democratic analysts believe that Greenspan's emphasis on education as a cure ignores other causal factors of inequity. Data show an income gap widening among college graduates, says Mr. Bernstein. The quality of US high schools has nothing to do with that, he says. Instead it's partly a function of overall monetary and fiscal policies. "Greenspan takes a very long term view of the situation," says Bernstein.

On the other hand, some conservatives label the whole inequality debate a myth. The media's recent focus on the subject stems from its liberal bias and clever press management by Democrats, they say.

Inequality studies often ignore the wealth created by rising house prices, for instance - and homes represent the most substantial investment by many, if not most, Americans.

Nor do US workers necessarily perceive themselves on the losing end of a rigged capitalist game. A recent New York Times survey found that while 44 percent of respondents said they had a working-class childhood, only 35 percent said they were working class today, points out Bruce Bartlett, a senior fellow at the National Center for Policy Analysis. Eighteen percent said they grew up lower class, while only 7 percent said they remained in that societal segment.

When Democrats today raise the inequality flag, they are simply trying to attack President Bush's tax cuts, albeit indirectly, says Mr. Bartlett. "A lot of this is driven by the estate-tax debate," he says.

And as Greenspan himself points out, by many measures the economy is doing well. Unemployment is down, GDP is up. Inflation still slumbers. Current standards of living are unmatched.

"So you can look at the system and say it's got a lot of problems to it, and sure it does. It always has," Greenspan told the JEC last week. "But you can't get around the fact that this is the most extraordinarily successful economy in history."