12:31 PM EDT on Monday, July 10, 2006

By Danielle DiMartino / The Dallas Morning News

Income inequality is one of the biggest social and economic forces at play today.

Everyone can work on the social aspect of the problem in his own way. If you're Warren Buffett, you can give your billions to charity and rightly accept the world's accolades.

Separately, I know Mr. Buffett would want us as investors to understand the economics of the situation. So it was that I read Goldman Sachs' recent report on the topic with great interest.

The takeaway: Income inequality is having foundational effects on the economy – some are good, and some are bad. None are to be ignored.

How big is the income growth gap? Suffice it to say the very highest income earners – the few who populate the top one-tenth of 1 percent – have seen their incomes quadruple over the last 25 years.

Casting a wider net, income gains have not been so extreme. The top 5 percent have seen their incomes merely double over the same period.

Compare that to the bottom 60 percent of earners – yes, the majority of the population – who saw their incomes rise by 20 percent between 1979 and 2004. That amounts to annual raises of only 0.75 percent.

For the record, we're talking here about those who earn incomes – not the idle rich.

"The increasing dispersion of incomes in recent years is mostly due to an explosion of wages and salaries at the high end of the income scale; despite a huge boom in equity wealth, capital gains and dividends on existing wealth are a much smaller factor," Goldman's report said.

So we're comparing apples to apples – or paychecks to paychecks.

The upside to wealth

The $64 million-annual-salary question is, are soaring incomes at the upper end of the scale good for the economy as a whole?

The answer, according to Goldman: Yes, in some ways.

A very real benefit of the rich getting richer has been on interest rates, Goldman said. Because higher-income earners have the wherewithal to save more, they create demand for savings products, such as Treasury bonds. The increased demand for savings vehicles in recent years has helped prop up the prices of bonds, which in turn has held interest rates down, to everyone's benefit.

Another upside: Goldman figured that the taxes that have been collected at higher rates padded Uncle Sam's wallet to the tune of about $50 billion last year. So even the government has been better able to weather increases in spending as a result.

"This could help explain why we've had fewer recessions in the past 20 years," said Jan Hatzius, chief economist at Goldman Sachs.

Calming effect

All in all, the huge concentration of income at the high end seems to have a calming effect on the $13 trillion U.S. economy.

"People in the upper quartile of the economy are saving 20 to 25 percent of their income," explained Peter Morici, a professor at the University of Maryland, "so they can adjust their spending to compensate for the ups and downs in their incomes and the economy. They consume according to their 'permanent' as opposed to their 'cyclical' income."

It follows that, because the top earners have been increasing their share of the overall U.S. income pie, their influence on the overall economy has likewise increased. That in turn sheds light on the perception that the U.S. consumer is bulletproof.

Remember the recession of 2001? Economists were baffled, at first, that consumer spending never fell.

Tuesday: The downside