A new report shows that the income gap between rich and poor in America is at an eight-decade high — the largest differential since the period immediately preceding the Great Depression. And economists fear that the education and job-creation programs that could bridge this gap are lacking in the recessionary economy.

[Economy1] On June 25, the Center on Budget and Policy Priorities released a report on the growing income gap in the United States. While the data it studies are not new — the income stats end at 2007, just before the advent of the current recession — the report synthesizes both census and Internal Revenue Service information to paint a more complete picture of the finances of the various strata of American society.

“It’s given us the first clear, comprehensive picture of income distribution over the economic cycle that ended in 2007,” said Arloc Sherman, senior researcher at the CBPP. “Now we know definitively that income inequality grew in that cycle. Just before the recession hit, we know that inequality was heading into record-breaking territory.”

In 2007, 17.1 percent of all after-tax income in the country went to the top one percent of earners. According to Emmanuel Saez, an economist at the University of California, Berkeley, who used a slightly different methodology in calculating his figures, the proportion of the country’s income going to the top one percent is at its highest since 1928.

The CBO data studied by the CBPP show that in just under three decades, the after-tax income for the top one percent rose by 281 percent. By contrast, incomes for the middle quintile of income distribution rose a much more modest 25 percent over the same time period, while incomes for the bottom fifth increased by only 16 percent. If Americans in the middle fifth of the income distribution curve had seen their incomes rise at the same rate as those of the top one percent, that would equal an extra $13,000 in annual income for middle-class households, says Sherman.

A variety of factors, some stretching back a generation or more, have played a role in cultivating this inequality. Throughout the generation following World War II, incomes rose in a more evenly distributed manner, and a broad middle class was established. This trend reversed itself in the 1970s, when the income gains of the rich started outpacing those of the rest of the country.

Economists say there were several factors at play, some of which might have been unavoidable. The growth of technology rendered low-skill manufacturing jobs redundant. Globalization accelerated this decline as companies moved their production facilities offshore to take advantage of lower labor costs. The shift from a manufacturing to a service economy weakened the collective bargaining power of unions, a key force in establishing the wages on which America’s mid-century middle class was built.

“Union contracts helped bolster wages across the distribution, and the manufacturing sector was historically a highly unionized sector,” said Heidi Shierholz, an economist at the Economic Policy Institute, a think tank. Declining union membership since the 1950s has eroded manufacturing wages.

Industrial and corporate deregulation added fuel to the fire. Executive compensation swelled even as the minimum wage failed to keep pace with the rising cost of living. Shierholz said a robust minimum wage doesn’t only benefit those who are paid minimum wage. Rather, that baseline impacts lower-income wages across the board.

Tax policies also widened the income gap. While many point to George W. Bush’s tax cuts as a key accelerant in the runaway income growth of the wealthy, economists note that other, long-standing parts of the federal tax code played a role as well.

“Our housing policy, with the mortgage interest reduction, is absolutely ridiculous in that most of the subsidies go to the richest people,” said Dean Baker, co-director of the progressive Center for Economic and Policy Research.

The net result is that the middle class today is in a precarious position, and the working class even more so. For much of the past decade, loosening credit standards and rampant consumer lending fueled by the housing bubble camouflaged the increasingly skewed dispersal of resources.

“The notion that ever-increasing home prices are going to provide us with wealth is clearly not sustainable,” said Lawrence Katz, a professor of economics at Harvard University. “There was a mirage of consumption growth, so some of the growth of inequality didn’t fully show up in consumption rates,” he said.

While the drop taken by the stock market during the recession has diminished the level of inequality from the 2007 levels shown in the CBPP report, the middle class is struggling more than ever as a result of the housing crash. “It’s a huge issue,” said Baker. “They’re getting to retirement and seeing most of their wealth vanish, since most of that wealth was in their house.”

As problematic as this is for the middle class, the households at the bottom of the income ladder are even worse off.

“One of the things we know about the bottom fifth is that it’s harder for them to move up,” said Heather Boushey, senior economist at the Center for American Progress. “We talk a lot about encouraging people to work their way out of poverty, but without middle-class jobs, this consigns those at the bottom to staying there.”

Economists fret that the legacy of the wealth chasm will be greater than simply a shaky foundation for the country’s already-slowing recovery. Profound inequality sows the seeds for social unrest and widespread disenfranchisement.

“Politics have become increasingly rife with class conflict,” Boushey said.

The EPI’s Shierholz concurs. “When you have both high inequality and low mobility, we’ve turned into a place that’s inconsistent with American values,” she said. “It becomes a set class system.”

Even though the recession has put a small dent in the income gap, most economists agree that if the status quo holds, the trend will continue apace when the economy rebounds. Following the dot-com crash and 2001 recession, the incomes of the top one percent dropped from 20.6 times that of the middle fifth to 14.3 times as high. But this flattening of the income distribution disappeared when the economy recovered. In 2007, the top one percent earned 24 times as much as the middle fifth.

Economists say there’s no silver bullet for narrowing the income gap, but a number of policies and programs could help. First up, says Chad Stone of the CBPP, is letting the Bush-era tax cuts expire on schedule. “That will return rates at the top to approximately where they were at the boom of the 90s,” he said. Some say the imbalance could be partially offset by a more progressive federal tax code, a higher minimum wage and legislation that gives workers more bargaining power, while CEPR’s Baker suggests what he terms a “financial speculation” tax to capture some of the outsize profits generated by Wall Street and the financial sector.

But economists say the real key to regaining lost ground, especially for the middle class, is cultivating large numbers of jobs in new and growing industries like green technology and health care, and providing unfettered access to higher education so middle- and lower-income Americans can train for these careers.

“I think it’s widely agreed that education plays a huge role here and more so than in the past,” said Ron Haskins, an economist at the Brookings Institution. “The problem is a lot of people don’t have skills, and that’s because our high school dropout rates are high and people don’t go to college.”

The flip side of that coin is having jobs available for young people after they’ve invested in their education. “There’s potentially a lot of growth in health care and skilled manufacturing, but we need to do a much better job of providing access to training,” said Harvard’s Katz. “The traditional jobs that have provided wages to the middle class are clearly not doing well in today’s economy and are unlikely to come back. We need to think about a different middle class.”

“What we need is a policy conducive to innovation and entrepreneurship,” said Will Marshall, president of the Progressive Policy Institute, a think tank. “You need the energy of invention just as we saw in the late 90s. We need another spurt of innovation-fueled growth.”

“Inequality is one of the great structural challenges facing America,” Marshall continued. “It raises questions about whether the American dream still works. … That’s why it demands attention from policymakers as something we’ve got to squarely face.”

“As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another,” Obama said. “But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

But a second term for Bernanke didn’t inspire the same reaction from everyone. Via Real Time Economics, here’s Andrew Leonard at Salon:

Maybe Obama realizes that the really hard part is only just beginning. Unwinding the vast expansion of the Fed’s balance sheet and figuring out how to tighten the screws on the money supply without plunging the country into an another economic contraction will be a tremendous challenge. Why saddle that grief on some up-and-coming Democratic economist? It’s Bernanke’s mess. Let him clean it up.

Michael Shedlock was much harder on Bernanke, contending that he launched a self-promotional media blitz that led to his successful reappointment. He also included a video compilation of inaccurate statements Bernanke has made about the economy in the past.

Unfortunately, Bernanke’s win is everyone else’s loss.

Many economists included in the Real Times Economics roundup generally supported Bernanke’s reappointment, however. One of the more balanced views came from Calculated Risk, summing up the pros and cons of Bernanke’s tenure:

As Fed Governor Bernanke supported the flawed policies of Alan Greenspan – he never recognized the housing bubble or the lack of oversight – and there is no question, as Fed Chairman, Bernanke was slow to understand the credit and housing problems. And I’d prefer someone with better forecasting skills.

However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed’s role to provide appropriate liquidity. Bernanke met that challenge, and I think he is a solid choice for a 2nd term (not my first choice, but solid).

Bernanke’s nomination still requires Senate approval, and he’s likely to get tough questions from senators about the Fed’s actions and its expansion of power during the crisis, Bloomberg noted. But Bernanke will very likely be approved, given the almost universal agreement that while he may not have been perfect, he probably did enough to stave off an even more severe financial meltdown. And in a crisis like this, keeping things from getting even worse than they already are is considered a measure of success.

A sampling of the lyrics:

When Paul goes on The NewsHour,
To talk to old Jim Lehrer
He looks so sad and crestfallen
It’s more than I can bear

I guess Krugman can add “inspirational source for artists” to his list of accomplishments. How many other economists have been the subject of songs and music videos? It seems that Krugman’s consistently negative outlook for the economy — a recent New York Times column entitled “That ’30s Show” warned President Obama that he needs a bigger stimulus plan “or you’ll be facing your own personal 1937″  — strikes a chord with artists. And their audiences.

Some economists can look for all the green shoots they want. People don’t have to buy it. Krugman’s more pessimistic views are the ones catching the imagination.

We tend to think of the Depression as a time when families pulled together to survive huge job losses. The divorce rate, which had been rising slowly since the Civil War, suddenly dropped in 1930, the year after the Depression began. By 1932, when nearly one-quarter of the work force was unemployed, it had declined by around 25 percent from 1929. But this does not mean that people were suddenly happier with their marriages. Rather, with incomes plummeting and insecure jobs, unhappy couples often couldn’t afford to divorce. They feared that neither spouse would be able to manage alone.

Today, given the job losses of the past year, fewer unhappy couples will risk starting separate households. Furthermore, the housing market meltdown will make it more difficult for them to finance their separations by selling their homes.

Before this gets cast as a positive development, however, Cherlin, a sociology professor at Johns Hopkins University, points out that the family unity is only temporary. When hard times end, so do troubled marriages, in many cases. For example, the divorce rate began to rise in 1934, when employment began to increase.

Millions of American families may now be in the initial stage of their responses to the current crisis, working together and supporting one another through the early months of unemployment. During the Depression this stage seemed to last a year at most. Today, it might last longer. Wives now share with their husbands the burden of earning money, and the government provides more assistance.

But history suggests that this response will be temporary. By 1940 the divorce rate was higher than before the Depression, as if a pent-up demand was finally being satisfied. The Depression destroyed the inner life of many married couples, but it was years before they could afford to file for divorce.

Cherlin suggest the same trend could play out this time around, as families feel financial stress, or lose their homes, or their jobs. Just because couples are sticking together now doesn’t mean the togetherness will continue after the economy picks up. When it comes to families surviving an economic downturn, as history shows, green shoots aren’t always a sign of better times ahead.

The decline in the gross domestic product reflected dwindling inventories and further problems in the housing sector, according to Bloomberg. And if all this isn’t scary enough, here’s more:

Should the economy shrink again in the second quarter as projected by economists surveyed this month by Bloomberg, the recession that began in December 2007 would be the longest since the Great Depression.

With fresh evidence of a contracting economy, that Great Depression reference seems a little too close for comfort these days.

If you read TWI nine weeks ago, you knew that Republicans were at a loss as to how to stop Democratic health care reforms. Want to find out if they’ve made progress? Check the update in yesterday’s Politico. And if you read TWI three weeks ago you found out about the just-introduced Parental Rights Amendment, which the Politico slightly oversold as “the new wedge issue” five days later.

The only relevant comparison is to Herbert Hoover… Beginning and ending in recession, the Bush presidency added a net of 407,000 private sector jobs over eight years, less than 51,000 a year, the worst eight-year record since 1927-35, which includes the first six years of the Great Depression.

By January 2009, the average workweek had fallen to 33.3 hours, the lowest since record keeping began in 1964.

From Jan. 31, 2001, through Jan. 31, 2009, 4.4 million manufacturing jobs, 26 percent of all of the manufacturing jobs in the United States, disappeared.

Buchanan’s solution to all of this: more economic protectionism, and expunging the “hoary myth that Reed Smoot and Willis Hawley caused the Great Depression.”

You remember the story: Monty Brewster (Richard Pryor) is forced to spend $30 million in 30 days in order to inherit $300 million from a rich old uncle he never knew he had. The catch is that he’s not allowed to own anything at the end of the 30 days, forcing him to find all sorts of creative ways to get rid of the cash.

Fast-forward 24 years. Economists are warning lawmakers that, unless Washington injects the economy with hundreds of billions of dollars quickly another Great Depression looms on the other side. Some are pushing for a spending package of $1 trillion, or seven percent of GDP.

Many of these experts agree that spending the money on public works projects like roads, bridges and sewers would provide the best “bang for the buck,” in terms of creating jobs and bolstering the larger economy. But there’s a snag: There simply aren’t enough “shovel-ready” infrastructure projects in the country to account for the levels of spending being suggested. In Rhode Island, for example, which has one of the highest unemployment rates in the country, only about $55 million in DOT projects are ready to launch immediately, according to a state Department of Transportation list compiled in October.

“There’s a limited amount you can spend quickly,” said Dean Baker, co-director of the Center for Economic and Policy Research, in a phone interview last week.

The situation has caused Obama’s economic team, like Monty Brewster, to search creative places to put the money — including a proposal for $300 billion in controversial tax cuts. Indeed, on Saturday, two members of that team — Christina Romer and Jared Bernstein — issued a report conceding as much:

Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases. However, because there is a limit on how much government investment can be carried out efficiently in a short time frame, and because tax cuts and state relief can be implemented quickly, they are crucial elements of any package aimed at easing economic distress quickly.

The New York Times’ columnist Paul Krugman writes today that the downturn will likely last long enough that Obama and his team should not ignore longer-term projects as part of their stimulus strategy. But time, Krugman warns, is of the essence:

Right now the investment portion of the Obama plan is limited by a shortage of “shovel ready” projects, projects ready to go on short notice. A lot more investment can be under way by late 2010 or 2011 if Mr. Obama gives the go-ahead now — but if he waits too long before deciding, that window of opportunity will be gone.

In the film version, Brewster ultimately barrelled through the cash to win his inheritance. (I think he even won the girl in the process). We can only hope that Obama’s spending bill also meets its objectives.

The plan already has critics upset over the scale of government spending it involves. Including, somewhat surprisingly, over at the Wall Street Journal’s Real Time Economics blog, they don’t think Obama is going far enough.

If economists are that nervous about things, maybe we should all be. From the blog:

The problem is not that this stimulus is too large, but rather that the entire Obama strategy now seems to be insufficiently bold.

Economists at Real Time say the Federal Reserve should adopt an aggressive, pro-inflation policy that makes wages and prices rise rather than fall; that the government should push to recapitalize banks or take them over; and that government should take a leading role in refinancing mortgages and managing foreclosures. Add all that to a stimulus plan, and it should work, they say:

The current emphasis on fiscal stimulus as the primary means of recovery is reasonable if we think that deflation is unavoidable or that any kind of moderate inflation would be an unacceptable price to pay for avoiding the Second Great Depression. The potential problem lies in failing to create the necessary conditions — positive inflation expectations, a healthy banking system, and an end to the housing bloodbath — for the fiscal stimulus to be successful.

So don’t just take Obama’s word for it today. When the WSJ economists start calling for bold action, you know things are bad.

President Franklin D. Roosevelt signs the Tennessee Valley Authority Act in 1933. (tva.gov)

President-elect Barack Obama is confronting a cascading economic crisis, which seems to worsen by the day, not the week. As venerable banking houses collapse, once-mighty industries teeter on the brink of oblivion and unemployment mounts, the air thickens with recollections of the Great Depression of the 1930s, and comparisons between Obama and President Franklin D. Roosevelt.

But let’s define our terms. So what exactly was the Great Depression, and what did FDR do about it?

Illustration by: Matt Mahurin

The short answer is: The Great Depression was a rare political opportunity, and Roosevelt made the most of it — to the nation’s lasting benefit.

A longer answer would acknowledge that the Great Depression was a catastrophic economic crisis that Roosevelt failed to resolve – at least not until World War II came along, some eight years after he took office.

A still longer answer would recognize the connection between FDR’s short-term economic policy failure and the New Deal’s long-term political success. Much misunderstanding surrounds this matter.

“At the heart of the New Deal,” the distinguished historian Richard Hofstadter once wrote, “there was not a philosophy but a temperament.” In a kind of caricature of Hofstadter’s view, a New York Times writer not long ago said that Roosevelt “threw a slew of policies at the wall, and whatever stuck became the New Deal.”

That accepted view of the New Deal — as a kind of harum-scarum frenzy of random, incoherent policies that failed to slay the Depression demon — has become deeply embedded in our national folklore. But it is woefully and mischievously mistaken.

The fact is that Roosevelt purposely forged in the crucible of the nation’s most harrowing economic crisis a set of reforms that cohered in a more systematic pattern than is dreamt of in most philosophies. The essential logic of that pattern fairly leaps from the pages of the historical record. It can be described in a single word: security.

A Great Depression bread line, as depicted at the FDR Memorial in Washington, DC (Flickr: Tony the Misfit)

It is altogether fitting and proper that the New Deal’s most durable and consequential reform bears that very word in its title: the Social Security Act of 1935. A even greater measure of security was the New Deal’s gift to millions of Americans — farmers and workers, immigrants and blue-bloods, children and the elderly, as well as countless industrialists, bankers, and merchants, not to mention enormous tracts of forest, prairie, and mountain.

Forget about the colorful creations of the decidedly frenzied and much ballyhooed Hundred Days — like the Civilian Conservation Corps and the National Industrial Recovery Act. Most of them were attended by much sound and fury, but signified little, and strutted the briefest of hours on history’s stage.

But all the New Deal reforms that endured – the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Federal Housing Administration, the National Labor Relations Board, the Fair Labor Standards Act and, above all, the Social Security Act — had a common cardinal purpose. Roosevelt’s goal was not simply to end the immediate crisis of the Great Depression, but to make life less risky, to temper for generations thereafter what FDR repeatedly called the “hazards and vicissitudes” of life.

The New Deal provided more assurance to bank depositors (FDIC), more reliable information to investors (SEC), more safety to lenders (FHA), more stability to relations between capital and labor (NLRB), more predictable wages to the most vulnerable workers (FLSA), and a safety net for both the unemployed and the elderly (Social Security).

Those innovations re-wove the very fabric of national life. They profoundly shaped the fates of Americans born long after the crisis of the Great Depression had passed. With the exception of the FDIC, none dates from 1933.

Had economic health been miraculously restored in the fabled Hundred Days, a swift return to business as usual might have meant politics as usual as well — and none of those landmark reforms would have come to pass. Indeed, there would have been no New Deal as we know it.

Roosevelt understood this. He was a deeply strategic political actor and an astute student of history. He keenly appreciated what the engines of history had wrought and what they might be made to yield in the uniquely enabling circumstance of the Depression.

FDR had sketched the broad outline of his grand design well before the Great Depression descended. Proposals for old-age pensions, for example, dated back to the platform of the Progressive Party in 1912, which nominated for president his beloved cousin and political role model, Theodore Roosevelt. FDR publicly endorsed the idea as early as 1930.

But FDR also told his fellow Democrats throughout the 1920s that his comprehensive reform agenda must wait “until the Republicans had led us into a serious period of depression and unemployment.” He eventually confronted a more dangerous depression than he could have anticipated — but he realized the opportunity that it afforded.

The Chinese character for “crisis,” we are told, is a melding of the characters for “danger” and “opportunity.” FDR did not read Chinese, but he appreciated the logic of that etymology.

In his extraordinary second Inaugural Address, delivered Jan. 20, 1937, Roosevelt crowed about the actually quite modest recovery since 1933. “Our progress out of the depression is obvious,” he said. Then he added something altogether novel in the annals of presidential addresses: “Such symptoms of prosperity may become portents of disaster!” Roosevelt went on to describe the “one-third of a nation ill-housed, ill-clad, ill-nourished,” whose plight made a mockery of the American dream.

The context made it clear that he was not then speaking about the victims of the transient depression crisis, which he saw as ending, but about the accumulated social and human deficits spawned by more than a century of let-‘er-rip, swashbuckling, unregulated American capitalism — deficits not yet fully redeemed.

Solving that problem was what he meant when he said that “this generation of Americans has a rendezvous with destiny.”

“We are going to make a country,” Roosevelt once remarked, “in which no one is left out.”

In that unadorned sentence, Roosevelt summed up his highest purposes and his lasting accomplishments. The New Deal’s legacy was to give countless Americans, who until then had never had much of it, a strong sense of security. And with it, Roosevelt gave them a deeper sense of having a stake in their country and a bond with their countrymen.

Obama’s chief of staff, Rahm Emanuel, seems to have taken this essential history lesson on board. “You don’t ever want a crisis to go to waste,” he said recently. “It’s an opportunity to do important things that you would otherwise avoid.”

Like Roosevelt, Obama faces an urgent economic crisis. Like Roosevelt, Obama must use the (now considerably greater) powers of government to restore economic health. But like Roosevelt, Obama will ultimately be judged not simply on whether or how he ended this crisis, but on how he used it.

We have our own accumulated social and human deficits. Some, like the lack of universal health care, have been begging for attention since Roosevelt’s time. Others, including a crumbling infrastructure, struggling public schools, climate change, energy dependence, environmental degradation, widening income disparity and illegal immigration, have been festering merely for the last several decades.

If this generation is to have its own rendezvous with destiny, and if Obama wants to stand in FDR’s company, those matters can no longer be avoided.

David M. Kennedy is the Donald J. McLachlan Professor of History at Stanford University. He won the 2000 Pulitzer Prize for History for “Freedom From Fear: The American People in Depression and War, 1929-1945.”