Let the gap get wider! Steve
January 24, 2000
Why Decry the Wealth Gap?
By W. MICHAEL COX and RICHARD ALM
T he economic expansion that began in 1991 will soon become the
longest in our history, yet last week Americans may have been
distracted by two reports reminding them of a widening gap between
the rich and poor.
The Center on Budget and Policy Priorities and the Economic Policy
Institute, two liberal research groups, put out a state-by-state
breakdown of Census Bureau data, which found nine states (led by
New York) in which the richest 20 percent of households now earn at
least 11 times the income of the poorest 20 percent. This indicated
a much sharper disparity between the top and bottom than existed
two decades ago.
Then the Federal Reserve Bank released its latest survey of
consumer finances. It showed that the average net worth of families
earning less than $10,000 a year had fallen by $6,600 over the past
three years, while households earning more than $100,000 a year had
seen their wealth jump by more than $300,000.
Our response is: So what?
Few of us should be surprised -- or threatened -- by statistics on
inequality. Some Americans believe the more equality the better,
but the fact is that the distribution of income and wealth isn't
arbitrary. It emerges from broad trends in the economy and is a
byproduct of a decade that created 17 million jobs and added 20
percent to median household net worth.
The unstated implication of the state-by-state report was that the
states where income disparities are lower are somehow "fairer" than
the states with high disparities. But the truth is that among
communities, states and regions, income and wealth will vary for
many reasons, several of them unavoidable and laudable.
Consider, for example, that income varies with education. According
to census data, high school dropouts in the work force earn an
average of $26,207, while workers with a professional degree
average $127,499. Census figures show that many of the states with
the widest income gaps have greater diversity in education levels
than states with smaller income gaps.
Twenty-six percent of those over the age of 24 in New York -- the
state with the greatest income disparity -- have at least a
bachelor's degree, whereas in Indiana, which was among the seven
states with the lowest income disparity, only 16 percent do. Should
we be lamenting that so many New Yorkers went to college?
Another non-nefarious cause of increasing income disparity may be
our ever-higher immigration rates. Immigrants tend to cluster in
low- and high-income groups. Thus it is no surprise that in the
seven most unequal states -- New York, Arizona, New Mexico,
Louisiana, California, Rhode Island and Texas -- about 13 percent
of the population is foreign-born (in California, it's 25 percent).
Among the seven states with the smallest income disparities, the
immigrant population is only 3.8 percent.
The shift away from manufacturing is also a factor. Service workers
span the gamut from hotel maids to brain surgeons, while the pay
range is generally narrower in the manufacturing sector. States
that are industrial tend to have more equal distributions of
income. Data from the Bureau of Labor Statistics show that about 10
percent of workers in Arizona, Louisiana and New York have
manufacturing jobs, whereas in more equal states like Indiana and
Wisconsin the figure is 23 percent.
Also, in the seven states with the greatest income inequality, more
than 80 percent of the population lives in or near metropolitan
areas. In states with the most equality, only about half does. If
we were to turn back the clock 100 years and again become a largely
rural nation, we might not see such large income disparities, but
that's because America's cities are our engines of wealth and offer
greater prospects for those who succeed.
And what of the poorest Americans' loss of ground compared to the
richest, as reported by the Fed? The apostles of equality consider
the rising inequality kindling for social unrest. But while that
would be true if most workers on the bottom rungs were trapped
there for generations, America isn't a caste society, and studies
that track individuals' incomes over time show that Americans have
a remarkable ability to propel themselves upward.
A 17-year study of lifetime earnings by the Federal Reserve Bank of
Dallas found that only 5 percent of people in the economy's lowest
20 percent failed to move to a higher income group. In a similar
study by the Treasury Department covering 1979 to 1988, 86 percent
of Americans in the bottom fifth of income earners improved their
status.
Inequality is not inequity. Artificial efforts to try to curb
wealth gaps invariably do more harm than good. Heavier taxation
might narrow the division between rich and poor, but it would be a
hollow triumph if it stifled the economy. What Americans ought to
care most about is maintaining our growth, not the red herring of
gaps in income and wealth.
W. Michael Cox, chief economist of the Federal Reserve Bank of
Dallas, and Richard Alm are co-authors of "Myths of Rich and Poor."
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