Why Decry the Wealth Gap?

Stephen E Philion philion at hawaii.edu
Mon Jan 24 15:26:56 PST 2000


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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