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Crisis Focus
UPDATED: September 19, 2010 NO. 38 SEPTEMBER 23, 2010
Bolstering the U.S. Middle Class
Income inequality in the United States becomes entrenched

Making every attempt to boost the sluggish U.S. economy, U.S. President Barack Obama has pledged incentive programs including tax cuts for the middle class that have "for generations, made our economy the envy of the world." But the program may not be a panacea as income inequality in the United States becomes entrenched. Zhang Monan, a researcher with the State Information Center, discussed this issue in an article recently published in the China Securities Journal. Edited excerpts follow:

In the past two years, Obama has made every effort to improve the U.S. economy, including economic stimulus, health care reform and a new energy plan. But the efforts have yet to fully pay off as the U.S. economy remains fragile. More disturbing, though, are growing concerns among Americans about their decreased standard of living. The middle class—the mainstream of American society—is disappointed as the unemployment rate hovers around 10 percent, resulting in a record low approval rating for Obama.

Obama's new program targets unemployment and a middle-class tax cut, but it can't change the fact that the middle class is shrinking.

Since the 20th century the middle class has gained clout as a force of the U.S. economy, but their challenges grew as well, especially after the 1970s.

Slow wage growth tops the list of concerns. In the late 1990s, wage growth stagnated and real incomes even decreased. Inflation-adjusted median household income has remained below its 1999 peak every year since then, according to research from the Pew Research Center, a Washington-based nonpartisan fact tank. What's worse is the liquidity of their income also decreased, providing fewer opportunities for them to increase their income.

Meanwhile, an income divide is growing from within. Research conducted by the State University of New York showed that 80 percent of the increased wealth in the country since 1979 went to a miniscule 1 percent of the population. The Gini coefficient, an effective measure of income inequality, also grew to 0.47 in 2007 in America, from 0.43 in the 1980s and 0.39 in the 1960s.

Increasing financial pressures forced middle class Americans to rely on debt to continue their current lifestyles. Meanwhile, thriving financial innovations on Wall Street have encouraged their lifestyle of high debt and high consumption. The median debt-to-income ratio of the middle class families climbed to 1.19 in 2004 from 0.45 in 1983. So basically, credit-supported over-consumption of the middle class laid the groundwork for U.S. economic prosperity over the past three decades.

It should be no surprise then that the middle class took the brunt of the beating when the financial crisis struck. More than 8 million people have lost their jobs and at least 2 million lost their homes after they couldn't pay their mortgages.

If the current wealth distribution situation remains, the future of the middle class will not be as promising as it used to be. Obama needs a more radical approach to help middle class Americans.

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