March 2003

Income Inequality Gap Growing

By ROBERT PEGG

A recent report issued by the Federal Reserve Board has found that even as incomes rose during the boom years of the 1990s, income inequality among Americans increased markedly. As a whole, by the end of 2001, Americans were richer, earned more money, owned more stocks, and had debt levels less as a percentage of total assets than in 1998. Unfortunately, not everyone enjoyed similar increases in wealth and income across the land, nor did everyone enjoy more manageable levels of debt.

In terms of net worth, for example, the wealth in the top 10 percent of incomes surged more than the wealth of any other group. The net worth of families in the top 10 percent of the income scale increased 69 percent to $833,600 in 2001 from $492,400 in 1998. By contrast, the net worth of families in the lowest fifth of the income earners rose 24 percent to $7,900. In terms of family income, the median (the statistical middle part of all families) increased 9.6 percent to $39,900. However, some groups did not enjoy a significant rise in median income. For example, non-white and Hispanic heads of households had median incomes that were up only slightly.

The report found that stock ownership has been on the rise despite the uncertainties in the equity markets. Almost 52 percent of families in the nation had exposure to stocks either through direct ownership or owning stocks through mutual funds or pensions. That figure represents the highest percentage recorded by the Federal Reserve Board since it started regularly tracking stock ownership in 1983. Nonetheless, the highest income earners held a disproportionate amount of stocks, with ownership rates highest among the families in the top 40 percent of the income distribution. In terms of home ownership, the number of families who owned their primary residence increased to 67.7 percent from 66.2 percent between 1998 and 2001. The median value of a home rose 12.1 percent to $122,000. However, median values in and around the New York City area were considerably higher.

While the report found that certain measures of debt declined, the report may have understated some signs of trouble. For example, the percentage of low-income households more than 60 days past due on some form of debt, such as a credit card or a mortgage, increased to 13.4 percent in 2001 from 12.9 percent in 1998. New data provide evidence that lower-income households are under considerable financial stress. Personal bankruptcies, automobile repossessions, mortgage foreclosures and other measures of bad debts reached record proportions in 2002.

As usual, the report found that American consumers provided much of the backbone for economic growth, despite the run up in debt. Today, however, consumer spending is under severe pressure. The consumer is concerned with a war in Iraq, a nuclear standoff with North Korea, increasing energy prices and an uncertain stock market.

However, the good news is that wages are growing again, having advanced almost four percent in 2002. Strong productivity gains have allowed employers to increase the wages of those workers who are still on the payrolls. Many economists expect that productivity gains will continue and that firms will resume hiring later this year as profits improve and some of the international uncertainties are resolved.

Another important component of future income growth may come from tax cuts. The proposed tax cut being advanced by the Bush Administration includes relief of $102 billion, virtually all of which is earmarked to go to households. The program includes extension of emergency unemployment benefits (already passed by Congress), accelerated reductions in tax rates, dividend tax relief, marriage penalty tax relief, an increase in the child tax credit and alternative minimum tax reductions.

The downside is that despite the possible infusion of money, consumers need little reason to cut back, as they have limited pent up demand, are burdened with high debt service loads and have been chastened by the stock market. Spending could also be threatened with higher energy prices. Historically, prices in excess of $40 per barrel of oil have led to recession. While OPEC has pledged to keep prices below that level by increasing output, events in the Middle East are hardly predictable.

About the author: Mr. Pegg is president of Kirkbride Asset Management, the New York City-based investment advisory firm which serves businesses, institutions and private individuals.