Emmanuel Saez, a professor of Economics at UC Berkeley has raised concern about income inequality in the United States. In his recent article, he stated that the income gap is at an all time high; exceeding levels during the Great Depression. His research provides us with a candid look at a telling issue.
Professor Saez states that 2007 was a good year for both the rich and the bottom 99%, who experienced a rise in income by 2.8%. But since the 2001 recession, the top 1% captured two thirds of overall income growth. Thus, the main question is why the rich thrive in any economy, while income for the rest of us grows at a snail's pace?
The article mentions that the growth of the upper class does not derive from previous wealth handed down through family, but from highly paid employees and entrepreneurs. "Hyper compensation" in highly competitive industries began in the 1980s with Wall Street and grew into a culture we've seen get out of control. In 2003, for instance, New York Stock Exchange chief executive Richard Grasso's $140 million pay package made headlines. And this trend continues, despite the recession. I personally see nothing wrong with the "working rich", but I do worry about the effects of income inequality for the poor and middle class. The poor are left to bare the brunt of survival. Their income can't keep up with the rate of inflation, and with the rising price of commodities, even grocery shopping taxes the budget. The long term effect is a growing income gap.
Why do the rich continue to get richer, at an accelerated rate? Well, history helps to explain this. In the years leading up to the Great Depression, most of the newly rich acquired their income from equity. Now of course, we all know that came crashing down, but the ones who survived or returned to the game had a sophisticated financial mindset.
The modern rich, and the ones who are destined to thrive from this economic mess, are mainly speculators who understand the fundamentals. If you pay attention to the markets, follow what the government is doing, you can profit. Of course a small percentage of us actually devote careers, let alone some time, to figuring this out and how it works. The level of sophistication is not for the average Joe, which is why the rich are growing richer at a pace that far exceeds the income growth for the rest of us. If you want to break away from the status quo, you have to figure out how to make your money work for you. Now that's a study I wouldn't mind reading.
For more on what makes the rich richer, listen to Walletpop's Big News Podcast: Who's afraid of our growing income inequality gap?
What's your investing game plan?View Course »