Income Inequality Gap Widens in US

This shows that the disaster of the Iraq war and the huge expenditures on defence and the war on terror have not hurt the ability of the rich to become richer--or perhaps of the poor to become poorer. Crony capitalisn survives and thrives.

Wall Street Journal - October 12, 2007

Income-Inequality Gap Widens
Boom in Financial Markets
Parallels Rise in Share
For Wealthiest Americans
By GREG IP

The richest Americans' share of national income has hit a postwar
record, surpassing the highs reached in the 1990s bull market, and
underlining the divergence of economic fortunes blamed for fueling
anxiety among American workers.

The wealthiest 1% of Americans earned 21.2% of all income in 2005,
according to new data from the Internal Revenue Service. That is up
sharply from 19% in 2004, and surpasses the previous high of 20.8%
set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004
and a bit less than their 13% share in 2000.

The IRS data, based on a large sample of tax returns, are for
"adjusted gross income," which is income after some deductions, such
as for alimony and contributions to individual retirement accounts.
While dated, many scholars prefer it to timelier data from other
agencies because it provides details of the very richest -- for
example, the top 0.1% and the top 1%, not just the top 10% -- and
includes capital gains, an important, though volatile, source of
income for the affluent.

The IRS data go back only to 1986, but academic research suggests the
rich last had this high a share of total income in the 1920s.

Scholars attribute rising inequality to several factors, including
technological change that favors those with more skills, and
globalization and advances in communications that enlarge the rewards
available to "superstar" performers whether in business, sports or
entertainment.

In an interview yesterday with The Wall Street Journal, President
Bush said, "First of all, our society has had income inequality for a
long time. Secondly, skills gaps yield income gaps. And what needs to
be done about the inequality of income is to make sure people have
got good education, starting with young kids. That's why No Child
Left Behind is such an important component of making sure that
America is competitive in the 21st century." (See article.)

Jason Furman, a scholar at the Brookings Institution and an adviser
to Democratic politicians, said: "We've had a 30-year trend of
increasing inequality. There was an artificial reduction in that
trend following the bursting of the stock-market bubble in 2000."

The IRS data don't identify the source of increased income for the
affluent, but the boom on Wall Street has likely played a part, just
as the last stock boom fueled the late-1990s surge. Until this
summer, soaring stock prices and buoyant credit markets had produced
spectacular payouts for private-equity and hedge-fund managers, and
investment bankers.

One study by University of Chicago academics Steven Kaplan and Joshua
Rauh concludes that in 2004 there were more than twice as many such
Wall Street professionals in the top 0.5% of all earners as there are
executives from nonfinancial companies.

Mr. Rauh said "it's hard to escape the notion" that the rising share
of income going to the very richest is, in part, "a Wall Street,
financial industry-based story." The study shows that the highest-
earning hedge-fund manager earned double in 2005 what the top earner
made in 2003, and top 25 hedge-fund managers earned more in 2004 than
the chief executives of all the companies in the Standard & Poor's
500-stock index, combined. It also shows profits per equity partner
at the top 100 law firms doubling between 1994 and 2004, to over $1
million in 2004 dollars.

The data highlight the political challenge facing Mr. Bush and the
Republican contenders for president. They have sought to play up the
strength of the economy since 2003 and low unemployment, and the role
of Mr. Bush's tax cuts in both. But many Americans think the economy
is in or near a recession. The IRS data show that the median tax
filer's income -- half earn less than the median, half earn more --
fell 2% between 2000 and 2005 when adjusted for inflation, to
$30,881. At the same time, the income level for the tax filer just
inside the top 1% grew 3%, to $364,657.

Democrats, on the other hand, have sought to exploit angst about
stagnant middle-class wages and eroding benefits in showdowns with
Mr. Bush over issues such as health insurance and trade.