Americans on losing side of pay gap run out of ways to cope

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Posted: Thursday, January 2, 2014 12:00 am | Updated: 11:25 am, Tue Mar 25, 2014.

Rising income inequality — the gap between what high- and low-earning Americans make — is starting to hit home for many households as they run short of places to reach for a few extra bucks.

As the gap widened over the past three decades, families at the bottom found ways to deal with the squeeze on their earnings: Housewives increasingly joined the workforce. Husbands took second jobs and worked longer hours. Homeowners tapped into the rising value of their properties to borrow spending money.

Those strategies finally may have run their course. Women's participation in the labor force has peaked, and the bursting of the house-price bubble has left many Americans unable to borrow against their homes.

“We've exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama's Council of Economic Advisers. “They weren't sustainable.”

The result: a downsizing of expectations.

By a ratio of almost 2-to-1 — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to the latest Bloomberg National Poll. That lack of faith is especially pronounced among those making less than $50,000 a year; about three-quarters of that group in the Dec. 6-9 survey said the economy was unfair.

Adding to challenges now for lower-income individuals is the loss of long-term unemployment benefits, which were supporting 1.3 million jobless before they expired Dec. 28. Congress did not pass another extension of the benefits, but Democratic lawmakers say they will try again soon, perhaps as early as Monday.

People's diminished expectations have implications for the economy. Workers cling to their jobs as prospects for getting a higher-paying one fade. Households are socking away more money and charging less on credit cards. And young adults are living with their parents longer.

In the meantime, record-high stock prices are further enriching wealthier Americans, worsening the polarization and helping push income inequality onto the political stage as a hot issue.

“The basic bargain at the heart of our economy has frayed,” Obama said in a Dec. 4 speech. “This is the defining challenge of our time: Making sure our economy works for every working American.”

Republicans aren't ceding the issue.

“The American dream is certainly more in doubt than in decades,” House Speaker John Boehner of Ohio agreed in response to Obama's speech. “But after more than five years in office, the president has no one to blame but himself.”

Income inequality has been rising fairly steadily since the mid-1970s. The recession actually interrupted this trend, temporarily narrowing the gap between rich and poor. That's because wealthy Americans were hurt by the bear market in stocks, while the poor benefited from increased payments from Medicaid and other government programs.

But the gap has resumed widening since the recovery began in mid-2009.

The richest 10 percent of Americans earned a larger share of total income last year than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution made at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

Economists offer a variety of explanations. Manufacturing companies moved once high-paying jobs abroad. Technological advances led to the loss of clerical and office work, especially involving routine tasks. The decline of unions has given bosses an advantage at the expense of employees.

“The middle has really collapsed,” said Lawrence Katz, a Harvard economics professor and former chief economist at the U.S. Labor Department.

Obama has proposed a raft of policies to attack the widening wage gap — from simplifying the tax code and increasing exports to enhancing worker training and boosting pre-kindergarten education. Yet in a divided Washington, he hasn't made much progress pushing them through.

Critics say his focus on income inequality has more to do with politics than policy.

“It's great politics to demagogue income distribution and complain about the rich getting ahead and the poor falling behind,” said Douglas Holtz-Eakin, president of the American Action Forum, a self-described center-right institute in Washington.

“The substance of what he's actually done doesn't match the enormity of the problem as he's portrayed it.”

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