Poor get poorer as recession threat looms: report

REUTERS The gap between rich and poor in many states has broadened at a quickening pace since the last U.S. recession, which could make it difficult for low-income families to weather the current economic downturn, according to a report issued Wednesday.

Since the late 1990's average incomes have declined 2.5 percent for families on the bottom fifth of the country's economic ladder, while incomes have increased 9.1 percent for families on the top fifth, said the report from the liberal-leaning Center on Budget and Policy Priorities and Economic Policy Institute.

The result is that the average incomes of the top five percent of families are 12 times the average incomes of the bottom 20 percent.

"The report's bottom line is that since the late 1980's income gaps widened in 37 states and have not narrowed in any states," said Jared Bernstein, one of the report's authors. "In fact, we've found that the trend toward growing inequality has accelerated during this decade."

Meanwhile, the middle class has remained virtually stagnant, with average incomes growing by just 1.3 percent in nearly eight years, the report said.

The report drew from 20 years of U.S. Census Bureau data collected from 1987 through 2006 on post-federal tax changes in real incomes, and is one of the few to record income inequality on a state-by-state basis. It did not include capital gains and losses in its calculations.

The technology boom and economic expansion of the late 1990's put many lower-income families in better positions at the start of the 2001 economic downturn than they are in now, when many economists say a downturn has begun, Bernstein said.

Elizabeth McNichol, another author of the report, said wages grew before the 2001 recession, but they did not increase much during the past several years of recovery. In a conference call with reporters, she pointed to Connecticut, which has had the greatest increase in income inequality since the 1980's, according to the report.

In Connecticut, incomes of the wealthiest 20 percent are eight times those of the poorest 20 percent, according to the report. New York has the greatest disparity, with incomes of the top 20 percent 8.7 times the bottom ones, followed by Alabama, where the top are 8.5 times the bottom.

Only recently has Connecticut begun recovering from the downturn of six years ago, according to Douglas Hall, associate director of research for Connecticut Voices for Children, who participated in the call. By August 2007 the state gained enough jobs to make up for those lost in the last recession, he said, but now it is losing them again.

Even though the study did not include capital gains, Bernstein said the effects of booming wealth on Wall Street for most of this decade did contribute to the spread between incomes, showing up as higher salaries.

Some have criticized income inequality studies. Writing for the conservative Cato Institute last year, Alan Reynolds said tax law changes skew the numbers. For example, executives once took stock options that were taxed as capital gains but now take nonqualified stock options that are taxed as salaries.

Bernstein said that if the report had considered capital gains, the disparities would have likely been greater, as capital gains generally affect higher-income people. [MORE]