The deepest downturn in the U.S. economy since the Great Depression may finally shrink the gap between the very best-off Americans and everyone else.
If so, it won't be by lifting up the bottom. It will be by pulling down the top.
Over the past 30 years, chief executives, Wall Street bankers and traders, law-firm partners and such amassed ever-greater incomes, while the incomes of factory workers, teachers, office managers and others in the middle grew much more slowly. In 2007, the top 1% of U.S. families accounted for 23.5% of all personal income in the U.S., according to economists Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics. That was a level not seen since the Roaring '20s.
The top 1%'s share appears to be falling fast. Saez and other economists expect income going to the top 1% of taxpayers -- currently, those with about $400,000 a year -- will drop to somewhere between 15% and 19% of all income by 2010. That still would leave income distribution more top-heavy in the U.S. than in many other countries.
One early indication: Median CEO pay at companies in the Standard & Poor's 500 Index ($INX) fell 15% in 2008 (to $7.3 million), according to University of Southern California pay expert Kevin Murphy.
"Based on past experience, it looks like inequality will go down and change the long-term trend of America becoming a less egalitarian society," says Ariell Reshef, a University of Virginia economist and another student of the equality issue.
This is among several potentially far-reaching changes wrought by the bursting of the housing and credit bubbles and the deep recession that ensued.
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The relationship between employers and employees may shift, and some workers will never fully recover from the blows they have suffered.
Borrowing will be harder for many, and, in any case, reducing debt instead of increasing it will hold new priority, possibly for a long while.
In time, the past two years may be seen as a watershed in Americans' behavior and the nation's economic life.
At the same time, the income gap, after narrowing during the 1991 and 2001 recessions, quickly widened again later. That could happen again.
New York University economist Edward Wolff says that if efforts in Washington to rein in executive pay, impose new regulations and raise tax rates on capital gains don't succeed, investment and CEO riches could snap back.
Still, the recession that began in December 2007 has been of a different animal from those of 1991 and 2001, in that it followed a credit bubble that had sent incomes of finance executives soaring far above those of engineers and other highly skilled people.
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The finance and insurance industries, which accounted for 5.9% of gross domestic product in 1990, rose to 8.1% in 2006, according to Moody's Economy.com. That fell to about 7.5% of the economy in 2008, the company says; it estimates the figure will slip to 7.2% this year.
New York University economist Thomas Philippon and Virginia's Reshef estimate 30% to 50% of the extra pay received by finance-industry workers reflected a bubble in the sector.
Continued: 'Wall Street doesn't need as many people'
