We expect the chairman of the Federal Reserve to be on top of what’s happening with the economy, but his latest public pronouncement is a long time coming. Last week, in remarks during a Joint Economic Committee hearing, Alan Greenspan noted that the income gap between the rich and the rest of the US population has become so wide, and is growing so fast, that it might eventually threaten the stability of democratic capitalism itself. It’s good that Greenspan is finally picking up on this development, but now the question is: what’s the Fed (or anyone else in the government) going to do about it (if anything)? And will conservatives start paying more attention, now that someone who’s hardly a flaming liberal is pointing out the gravity of the problem?

The rich are getting richer, and the poor are getting poorer. It may sound trite before we start to see a reversal, but it’s all too true. According to a recent study by Isaac Shapiro of the Center on Budget and Policy Priorities, Congressional Budget Office data show that the top 1 percent of the population received 11.4 percent of national after-tax income in 2002, up from a 7.5 percent share in 1979. By contrast, the middle fifth of the population saw its share of national after-tax income fall over that same period of time, from 16.5 to 15.8. “Income is now more concentrated at the very top of the income spectrum than in all but six years since the mid-1930s,” asserts Mr. Shapiro in his report. (See Christian Science Monitor article.)

The New York Times has recently been featuring a special series, entitled “Class Matters.” It acknowledges the basic American premise that “There are poor and rich in the United States, of course, the argument goes; but as long as one can become the other, as long as there is something close to equality of opportunity, the differences between them do not add up to class barriers. (See Shadowy Lines article.) However, when we lose mobility between classes, and create vast gaps between the rich and the poor, there are societal consequences. Amherst president Anthony W. Marx explains it this way: “If economic mobility continues to shut down, not only will we be losing the talent and leadership we need, but we will face a risk of a society of alienation and unhappiness. Even the most privileged among us will suffer the consequences of people not believing in the American dream.”

The Times demonstrates graphically just how limited economic mobility has become, concluding “Some families do move up and down the income spectrum, but it does not seem to be happening quite as often as it used to.” (See How Class Works graphic.) The only group showing considerable upward mobility: the hyper-rich: the 145,000 individuals who comprise the top one-thousandth of earners. The average income for the top 0.1 percent was $3 million in 2002, the latest year for which averages are available. That number is two and a half times the $1.2 million, adjusted for inflation, that group reported in 1980. No other income group rose nearly as fast. (See Richest article.)

This gap will only be exascerbated by so-called tax reform: While President Bush said during the presidential campaign that most tax cuts went to low- and middle-income Americans, in fact, most – 53 percent – will go to people with incomes in the top 10 percent over the first 15 years of the cuts. And more than 15 percent will go just to the top 0.1 percent, those 145,000 taxpayers. The 400 taxpayers with the highest incomes – a minimum of $87 million in 2000, the last year for which the government will release such data – now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. (See Richest article.)

According to Greenspan, the solution to this problem is education: the growing pay gap reflects the “skill premium” commanded by relatively higher-educated, better trained workers, and represents “a major problem of matching skills of workers to the technological base of the economy, which I believe is an education issue and requires that we address that as quickly and broadly as we can.” (See Statement to Senate Banking Committee, July 2004.) However, it is unlikely that we can make significant changes to the educational system quickly enough to affect the wage gap anytime soon. As Jared Bernstein of the Economic Policy Institute argues, “Greenspan takes a very long term view of the situation.”

Despite what passes for alarm coming from the ever-so-placid Greenspan, he doesn’t appear inclined to take specific action to resolve this problem any time soon. He concluded his remarks by noting, “Every decade or so, we look forward and it looks awful, but we somehow, by some means, seem to re-create ourselves.” The chairman, acting as if he were a mere spectator in economic policy, said he had “trust” that the country would deal with the problems this time, too. “My inclination is just to say, ‘I don’t know how it’s going to happen, but we’ll do it.’ ” (See Washington Post article.)

What will we do, and what will it take for it to happen? Must we face a serious “threat to the stability of democratic capitalism” first?