4 Reasons Why the Income Gap Increased in 2009

New income data from the Census Bureau today likely has egalitarians angry. The income gap between the richest and poorest Americans in the U.S. grew in 2009, to its widest level yet. The only thing shocking about this report on inequality increasing is that anyone is shocked.

Here's the news blurb via the Associated Press:

The top-earning 20 percent of Americans -- those making more than $100,000 each year -- received 49.4 percent of all income generated in the U.S. That's compared with the 3.4 percent earned by those below the poverty line.

In fact, absent an aggressive government planning effort to prevent inequality by spreading the wealth around, inequality will generally increase -- it's inevitable. The exception to this rule would be in a recession where asset price declines overshadow unemployment -- which aptly describes 2008. At that time, the wealth gap shrunk, because the rich got poorer due to the values of their assets plummeting due to the financial crisis.

Stocks and Other Securities Rallied

In 2009, however, that changed. The stock market had a glorious run, up 16%. Corporations saw profits swell, but didn't anticipate much consumer demand to justify expansion. So executive compensation rebounded while unemployment remained high.

All of these factors lead to the wealthy becoming wealthier. Americans with higher income generally have more extra money to save and invest. So when the market improves, they get richer. Meanwhile, less affluent Americans more often live paycheck to paycheck. As a result, their income doesn't reflect the strong gains in asset prices as much.

Real Estate Continued to Struggle

Moreover, if lower-class Americans have any savings, it's often in their homes. But real estate didn't do as well as other assets like stocks in 2009. So again, the rich would benefit more last year from the specific asset classes that did well since their wealth isn't as highly concentrated in real estate.

The Effect of Unemployment

Unemployment also has taken a toll on less affluent Americans. Lower-skilled workers have more trouble rebounding after losing their jobs. And there's a correlation between income and skill-level. Again, this will help to widen the income gap.

Debt Shrunk But Persists

Although we saw household debt shrinking throughout 2009, it still remains quite high. Of course, debt places a larger burden on the poor than the rich. If you have more income, than it's easier to pay off debt sooner. But if debt must be paid off slowly, then additional interest will require more income and less can be invested or saved so that it can grow in the future.

While unemployment will eventually decline, the other three factors above aren't likely to change much going forward. Stocks and other securities will likely continue to outperform real estate and debt will continue to plague poorer Americans. As long as that's the case, we can expect the gap between the rich and the poor to continue to widen.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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