Government belt tightening hurts the budgets of the 99 percent more than those of top earners, a recent study finds.
Income inequality rises when countries use spending cuts instead of tax hikes to deal with budget deficits, according to a new paper from researchers Luca Agnello and Ricardo Sousa. The paper analyzes data from 18 countries between 1970 and 2010.
The findings come after a 12-member congressional panel failed to agree on measures to reduce the budget deficit in time to avoid triggering $1.2 in spending cuts starting in January 2013. What deadlocked the committee? A stalemate over whether to use spending cuts or tax hikes to reduce the deficit.
"During periods of fiscal consolidation, income inequality significantly rises," the researchers wrote in the study. "Moreover, fiscal adjustments that are led by spending cuts tend to have a more detrimental impact on income distribution than those driven by tax hikes. Similarly, we show that the top 1% income share in total income increases after consolidation."
Spending cuts are a controversial around the globe right now. In Greece, unions are planning a mass strike on December 1 to protest the 2012 austerity budget as lawmakers grapple with a sovereign debt crisis. Greece's negative reaction to the budget may be because they could face government salary cuts or lose some social services if the budget is passed.
The majority of residents of France, Germany and Spain -- like their Greek counterparts -- say that it's important to make sure no one else is left in need.
But if European leaders implement an austerity budget while the economy is weak, it may have less of an effect on income inequality, the study found. Fiscal austerity that takes place during banking crisis episodes leads to a negligible effect on income inequality, while budget tightening in the absence of crises boosts the income gap. Nations that implement austerity after a banking crisis is resolved experience an "amplified" effect on income inequality.
The wealth gap in the U.S. has skyrocketed in the last thirty years. The top one percent of earners saw their incomes grow by 275 percent between 1979 and 2007, according to the Congressional Budget Office, while the bottom fifth of earners saw their incomes rise by 20 percent.
Americans' annual median wage fell for the second year in a row in 2010 to $26,364, while nearly half of households lack access to basic needs. At the same time, the 400 richest Americans control as much wealth as the bottom 50 percent of earners.
CORRECTION: An earlier version of this post misstated that the U.S. median income fell to $26,364. The U.S. annual median wage fell to $26,364.