Economic gains in the U.S. have been spread less equally in recent years as a result of factors including globalization, technological change, the decline of labor unions, changing social norms, and government trade and tax policies, say economists such as the World Bank's Milanovic.
"We have inequities," David Plouffe, a senior White House adviser said on "Fox News Sunday" Sept. 25. "The American people are screaming out saying it's unfair that the wealthiest, the largest corporations who can afford the best attorneys, the best accountants, take advantage of these special tax treatments."
Not everyone shares that view. Economist Tyler Cowen, a professor at George Mason University in Fairfax, Virginia, says concerns over income inequality are exaggerated. "I don't think it matters one way or another for macroeconomics," he says.
Cowen, who also writes the "Marginal Revolution" blog, says only the most extreme manifestation of inequality involving the top 1 percent of the income distribution is worrisome. And that, he says, is almost entirely a function of distorted incentives in the financial industry. "Fix the financial sector and inequality will take care of itself," he says.
In the aftermath of the 2007-2009 financial crisis, the fortunes of labor and capital have diverged. After plunging in the two years leading to December 2008, total corporate profits have roared back to a new high of $1.5 trillion, 6.5 percent above the previous peak reached in September 2006.
The typical American household, meanwhile, has yet to regain the ground it lost during the recession. The median income of $49,445 at the end of 2010 remained below the level reached in 1997.
The widening chasm between haves and have-nots has tangible consequences. Societies with a narrower gap between rich and poor enjoy longer economic expansions, according to research published this year by the International Monetary Fund. Income trends in the U.S., where the wealthy over time have pulled away from the rest of society, mean that future U.S. expansions could last just one-third as long as in the late 1960s, before the income divide began widening, said economist Jonathan Ostry of the IMF.
Expansions -- or what Ostry and coauthor Andrew Berg label "growth spells" -- fizzle sooner in less equal societies because they are more vulnerable to both financial crises and political instability. When such countries are hit by external shocks, they often stumble into gridlock rather than agree to tough policies needed to keep growth alive.
'Increased Inequality'
"Increased inequality is likely to diminish the duration of expansions," Ostry said in an interview.