Closing financial gap takes center stage

As 2016 election nears, both parties focus on closing the financial divide.

By the numbers

* The richest 5% of U.S. households have 63% of nation's wealth.

* The bottom 50% of Americans hold just 1% of nation's wealth.

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Three years after Mitt Romney crippled his quest for the presidency by declaring that low-income Americans would not vote for him, politicians from both parties are scrambling for plans aimed at reducing the growing financial gap between the wealthy and the majority of people.

During his State of the Union address last month, President Barack Obama asked whether Americans would “accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”

Last week in Detroit, former Florida Gov. Jeb Bush, who is seeking the 2016 Republican presidential nomination, said frustrated Americans “see only a small portion of the population riding the economy’s up escalator,” adding that “tens of millions of Americans no longer see a clear path to rise above their challenges.”

It is a sign that both political parties are readily embracing the threat posed by a yawning gap between the richest of people and the middle class not seen in American since the 1920s.

“We all seem to be more or less on the same page now,” said Michael Madowitz, an economist for the Democratic Party leaning Center for American Progress in Washington.

While the richest 5 percent of American households held 63 percent of the nation’s wealth last year compared to 54 percent in 1989, the share held by the bottom half of Americans has dipped from 3 percent in 1989 to just 1 percent last year.

The Federal Reserve Bank said last year the 2008 recession aggravated that trend, reporting that while income share for families in the top 5 percent have increased from 2010, the bottom 50 percent endured a decline during that same time.

“The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression,” Federal Reserve Board Chairwoman Janet Yellen said in a speech last October in Boston.

Yellen acknowledged that “some degree of inequality in income and wealth” would always occur in the U.S. economic system, but she warned that “to the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality.”

How to close the income gap

While both parties agree that the income gap exists, they diverge on what causes it. Many Democrats blame international trade agreements for wiping out millions of good-paying manufacturing jobs. They cite a decline in union membership for private companies, predatory lending by mortgage companies, and a sharp decline in income tax rates since 1980 for upper-middle class and upper income Americans.

Conservatives contend that the gap has widened because the Obama administration has adopted policies that slow economic growth, such as raising taxes on the wealthy and business investments, and swamping small companies, and the health and financial industries with a maze of new regulations.

Although wages for most people have been stagnant through the economic recovery of the past five years, there is no question that all Americans today have far higher living standards than a century ago.

As recently as 2009:

* 99 percent of those living in poverty had a refrigerator,

* 98 percent had color TV,

* 92 percent a microwave oven,

* 54 percent a cell phone.

“It is true that the income distribution has widened, but that’s a separate issue on whether people are better off,” said W. Michael Cox, a professor of economics at Southern Methodist University and former economist for the Federal Reserve Bank in Dallas. Cox said. “Today’s under class has so much more stuff than did yesterday’s.”

“They work fewer hours, have more stuff, have better working conditions and less pollution than in 1920,” Cox said. “They have more safety and security and life expectancy is many years longer.”

Education is the key

Both parties seem to agree that education is a key to closing the gap. Thirty years ago, a high school graduate could land a job at a manufacturing facility with the promise of high wages and excellent benefits.

Analysts say that is no longer true for the very fact that U.S. industrial output is at a record high and yet because of stunning advancements in automation, companies need fewer – but better skilled — workers to produce more goods.

“The amount of learning you get from K through 12 isn’t enough to get you into the middle class,” Cox said. “The approximate cause of income inequality is education.”

In his speech in Detroit, Bush said to close the income gap the nation needs “to give every child from every neighborhood a great education. This won’t happen overnight. Trust me, I know.”

“But it takes every tool we have — accountability for teachers and school administrators, assessment for student learning, high rigorous standards, and school choice across the board — these are the key elements that make education work for more and more of our students,” Bush said.

By contrast, Democrats are deeply skeptical of school choice, where low-income parents receive federal dollars to send their children to private schools. Instead, Obama has pushed for early childhood education, greater access to student college loans and a 10-year, $60 billion plan to provide students with two years of tuition-free community college.

Yet Democrats regard education as but one of a broad swath of solutions, with Madowitz saying “we’re not huge believers in the silver bullet of income inequality.”

They argue increasing the minimum wage will get money into the hands of low-income people. They want financial help for Americans to pay for day care, which they point out would make it easier for married couples to remain in the work force.

And while some progressives are urging even more aggressive steps, former Treasury Secretary Lawrence Summers co-wrote a report for the Center for American Progress that attempts to navigate a middle ground.

“While some on the left seek to turn away from globalization and technology, that is not a realistic option,” wrote Summers, who served as an adviser for both Obama and former President Bill Clinton. “No country can prosper in isolation.”

But he also dismissed “those on the right who argue for a return to laissez-faire, trickle-down economics – cutting taxes at the top, stripping out regulations, and making deep cuts to public services – do not provide a viable alternative.

“Developed countries cannot succeed through a race to the bottom in which companies simply compete on cost as workers see their job security erode and their living standards decline,” he wrote.