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Businessweek Archives

Not Enough Is Trickling Down

Economic Trends

Not Enough Is Trickling Down

How income gaps rose in the '90s

Tight labor markets and minimum-wage hikes in recent years may well have halted, at least temporarily, the rise in income inequality plaguing the U.S. economy. But as a new analysis of income data makes clear, the long-term trend toward greater income dispersion has hardly been affected.

In the late 1990s, report the Center on Budget & Policy Priorities and the Economic Policy Institute, the average pretax income of the top 20% of U.S. families was 10.6 times as large as that of the bottom 20% of families. Two decades ago, the multiple was just 7.4. And the average income of the top 5% of families has jumped to 18.3 times that of the bottom 20%, from 11 times as large in the late 1970s.

The 1990s were especially good to the top 20% and top 5% of families. During the decade, their average real incomes before taxes grew by $17,870 and $50,760 (1997 dollars), respectively, while those of the bottom and middle 20% of families edged up by only $100 and $780.

Since these numbers don't include capital gains, upper-income groups undoubtedly made out even better. On the other hand, most low-income families don't pay income taxes and many receive cash supplements via the earned income tax credit. Still, even on an aftertax basis, Congressional Budget Office projections indicate that the income gaps between poor and affluent families rose between 1989 and 1999.

As for individual states, two-thirds saw income gaps rise during the 1990s. Those with the greatest inequality (income ratios of over 11.5 between the top and bottom 20% of families) are New York, Arizona, New Mexico, Louisiana, California, Rhode Island, and Texas. The states with the least inequality (income ratios under 8) are North Dakota, Iowa, Indiana, and Utah.

The report notes that rising income inequality seems to have many causes, including a shift to higher-skill jobs, globalization, immigration, fewer factory jobs, and declining unionization. Like many economists, the authors worry about rising inequality--not only on moral grounds but also because it makes problems like poverty and crime more intractable, and undermines the political base of democratic capitalism.

If the economy slows or falls into recession, income disparities could well worsen again. With surplus revenues at hand, the authors think the states and federal government have a unique opportunity to craft tax changes, minimum-wage hikes, and other measures to keep that from happening.By Gene KoretzReturn to top

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Medical Costs of the "Old Old"

Better health hasn't cut the tab

A number of studies have shown that older Americans are not only living longer but also doing so with fewer diseases and disabilities. Yet Medicare spending per beneficiary has doubled in real terms in the past two decades. In a new research paper, David M. Cutler and Ellen Meara of Harvard University probe the reasons for this huge, seemingly paradoxical rise in outlays.

The two economists report that recent spending growth has been especially pronounced among the oldest old--those in their eighties and beyond. From 1985 to 1995, real per capita outlays for oldsters over 85 rose by 53%, compared with 22% for those 65 to 69. At the same time, mortality and hospitalization rates declined among the elderly at all age levels, and disability rates fell particularly sharply among the oldest old.

In prior decades, surging medical spending on the oldest old reflected the growing intensity of acute care services they received--mainly inpatient hospital care. But since 1985, the study shows, it has mainly reflected greater use of post-acute care services such as skilled nursing, home health care, and rehabilitation facilities. Between 1985 and 1995, average outlays on such services for people over 85 exploded from just $240 per person (in 1995 dollars) to nearly $2,000.

Since government rules on the use of post-acute services by the elderly were substantially eased in the late 1980s, part of the rise in such outlays was predictable. Some hospitals may also have shifted inpatient care to separate facilities on their premises to maximize revenues. More worrisome, note the authors, is the possibility of growing outright fraud by home health-care providers, whose services are poorly monitored and who now account for 13% of Medicare spending.By Gene KoretzReturn to top

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