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Income Inequality: Is It Good for Everyone?

Tuesday, 8 Jan 2013 | 1:55 AM ET

Income inequality has been on the rise for three decades in the United States, according to the Congressional Budget Office, with the gap between the "haves" and "have-nots" currently at its widest point since 1967.

But as Democrats and Republicans wrangle over fiscal "fairness" and taxation, some experts argue that income inequality is not such a bad thing. They even go as far as saying that America's economy functions on the basis of it.

The debate on income inequality has featured heavily in U.S. politics. Prominent Republican and former runner for the GOP's presidential nomination, Rick Santorum said last February that income inequality was part of the fabric of American society, and long should it be so.

"There is income inequality in America. There always has been and hopefully, and I do say that, there always will be," Santorum said during a speech to the Detroit Economic Club. "Why? Because people rise to different levels of success based on what they contribute to society and to the marketplace, and that's as it should be," he added.

"We should celebrate like we do in the small towns all across America. You celebrate success. Why? Because in their greatness and innovation, yes - they created wealth, but they created wealth for everybody else. And that's a good thing, not something to be condemned in America," he said.

It was also prominent during the recent "fiscal cliff" discussions in arguments over taxation and the disparity in the contributions of the wealthy to the U.S. State.

Political negotiations are set to continue in the next coming months as the fiscal deal merely postponed spending cuts by two months. The government is also approaching its federal debt ceiling and arguments over raising the debt limit are likely to engender a Republican demand that social welfare spending is cut in return for their compromise over a taxation increase.

(Read More: The US Debt Ceiling: Where to Make the Cuts?)

"Though the issue of our high levels of income inequality won't be front-and-center in this debate, they're very much in the background," according to Jared Bernstein, Senior Fellow at the Center on Budget and Policy Priorities.

"The President and Democrats will need to stand firm against spending cuts that would seriously diminish vital services to those who've benefited little from economic growth over the past few decades," he added.

But many others see income inequality as not only natural and necessary, but desirable.

In his 1975 work "Equality and Efficient: The Big Trade-Off," the Harvard economist Arthur Okun argued that inequality was the price to be paid for an efficient economy. The view became the backbone of conservative policy.

Thomas Garrett, assistant vice president at the St. Louis Federal Reserve, wrote in 2010 that income inequality in the U.S. was "not so bad."

"Although many people consider income inequality a social ill, it is important to understand that income inequality has many economic benefits and is the result of - and not a detriment to – a well-functioning economy," Garrett wrote, insisting that U.S. Census statistics "exaggerate the degree of income inequality."

One problem, in particular, he said, was that the "statistics do not include the non-cash resources received by lower-income households [such as the tens of billions of dollars in subsidies for housing, food and medical care] and the tax payments made by wealthier households to fund these transfers."

Income inequality, he adds, is "a by-product of a functioning capitalist society" and the wealthiest had more, because they were more productive, Garrett affirmed.

He is not alone. Edward Conard, a former partner at asset management firm Bain Capital argued that inequality was actually good for economic growth. In his book,"Unintended Consequences: Everything You've Been Told about the Economy is Wrong," Conard said that concentrating wealth in a skilled investor class helps fuel U.S. innovation, a tenet of the "American Dream".

(Read More: Is the 'American Dream' in Danger?)

It is an argument that does not sit well with movements such as the "Occupy Wall Street", which has decried what is sees as preferential treatment of the so-called "1 percent, referring to the country's wealthiest taxpayers.

The Congressional Budget Office reported in 2011 that between 1979 and 2007 the top 1 percent of households saw their income grow by 275 percent, while for the bottom 20 percent, income grew by just 20 percent. For the middle 60 percent of Americans, average incomes grew just under 40 percent.

The OECD also recognizes that unequal income distribution can forge a spirit of determination within a populace, and a desire to succeed, but at the same time warned of its effects.

"On the one hand,inequalities in income distribution may create incentives for people to improve their situation through work, innovation or acquiring new skills," its November report stated. "On the other hand, such income inequalities are often viewed as being linked to crime, poverty and social exclusion," the OECD warned.

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