One Year Later, No Sign of Improvement in America's Income Inequality Problem

Last July 4, I wrote that we needed to get our independence from Wall Street, whose roughly 300,000 highest-earning employees often benefit from government policies that have put the other 309.2 million of us in a weaker position.

Current efforts at financial reform seem unlikely to reverse this trend. And more generally, since the current bill nearing passage grants $500 million a year more to a Washington that for the past two decades has mainly served the interests of the wealthy, I have even less hope for change than I once did.

A Decade of Surging Income Inequality Shifts Economic Pain To The Bottom

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.

We are still living in the aftermath of the debt crisis and the cost of that bust has also been distributed unequally. For one thing, unemployment is hurting the bottom swath of the population more than the top. While U.S. unemployment is now 9.5%, the bottom 40% of the labor force suffers from a 17% unemployment rate. In the top 30% of the labor pool, that rate is just 4%, according to Harvard Magazine. Meanwhile, Wall Street -- which includes a solid share of the top 1% -- paid itself near record bonuses -- up 17% in 2009 to $20.3 billion -- and is on a hiring binge.

The Pew Research Center highlights the specific pain this recession is causing those below the top. It notes that out of the 13 U.S. recessions since the Great Depression, "none has presented a more punishing combination of length, breadth and depth than this one." More than a quarter of the people Pew studied suffered a work-hour reduction; 23% took a pay cut; 12% were forced to take unpaid leave; and 11% were ordered to either leave or accept a part-time assignment.

Where Will Increases in Consumer Spending Come From?

People are struggling to get by and the nature of their struggle does not sound promising for an economy that depends on consumer spending for 70% of its growth. Pew points out that 71% of the people it talked to are buying less expensive brands; 57% cut back or canceled their vacations; 30% spent less on alcohol and cigarettes; and 20% had problems paying the rent or mortgage. While many of these steps represent prudent financial decisions, none will help the economy grow.

With lost income and rising expenses, many people might hope to be able to make up the difference through investing. But the reality is different. According to the Boston Globe, with stocks down in the last decade and market volatility at gut wrenching levels -- thanks to High Frequency Trading's dominance of daily market activity -- people with hopes that investing will help fund their retirements face harsh choices.

Many have concluded that they're better off dumping their stocks and putting the cash in money market funds that earn near zero returns. The Globe interviewed a 57-year-old architect who sold all his stocks after the market lost $1 trillion in value on May 6 -- he thinks he's saved $90,000 in lost portfolio value by avoiding stocks' subsequent decline.

Unfortunately, for this architect and those who follow his lead, returns on low-interest money market funds will not make up for all the lost stock market value and the lower income that people have suffered in the current recession.

Only New Innovation Will Reverse These Trends

I think the best hope for re-balancing our economy is technology-led innovation that creates jobs for many more Americans. This year on July 4, it's even more urgent that America find a way to reignite the innovation engine.