income/wealth gap: Which reality?, The

Which of the following two descriptions better characterizes reality?

a) The American economy is robust, and its benefits are being felt widely and deeply. GDP growth, workforce participation, wages, income, consumer confidence and the stock market are all way up (as is stock ownership); unemployment and inflation are way down.

b) This rising ride is not lifting all boats income and wealth inequality have worsened. We're becoming a winner-take-all, have/havenot society; many people are running harder just to stay in the same place.

Which is more accurate? The answer, unsurprisingly, depends upon your data and upon your perspective.

The Poorest Are Left Behind

For example, a recent joint report from the Center on Budget & Policy Priorities and the Economic Policy Institute found that between 1988 and 1998, earnings increased 15% for the richest 20% of Americans, but only 1 % for the poorest 20%. As causes the report cities the shift to higher-skilled jobs, globalization, immigration, fewer factory jobs and declining unionization.

According to the Census Bureau, between 1995 and 1998, the share of total income going to the top fifth (quintile) of American households rose from 45.3% to 49.2%, while the share going to the lowest 20% fell from 4% to 3.6%.

Similarly, according to the Federal Reserve, between 1995 and 1998, households earning less than $25,000 annually saw their average net worth drop by 20% or more, while those earning over $50,000 saw their average net worth increase by 20% or more.

Case closed? Seen Another Way

Not at all. Here are other factors to be considered:

Income mobility is dramatic in the United States - as high as 40% a year in and out of any income quintile, or 85% over 10 years, according to the Urban Institute. In other words, most people at low income levels do not stay there. In fact, according to the same Federal Reserve report cited above, the share of families making less than $10,000 fell from 15.1 % to 12.6% between 1995 and 1998. The share making less than $25,000 also fell, proving income mobility even from the bottom of the economic ladder is possible with work.

The Census Bureau report cited above, which shows the top fifth of Americans taking in nearly $14 for every $1 garnered by those in the bottom fifth, fails to account for:

Taxes paid. In 1997, those in the top 25% of income earners paid 81.7% of all federal income taxes collected. The bottom 25% pay virtually no income taxes (payroll and sales taxes, yes, but with the Earned Income Tax Credit, low earners are eligible for offsetting cash payments).

Non-cash income. State and federal governments grant hundreds of billions of dollars every year in benefits and programs, such as welfare, unemployment insurance, housing subsidies, food stamps, Medicaid and Medicare, that constitute in-kind income for poorer households. In part this explains Labor Department figures that show spending of bottom-fifth households to be double their reported income.

Size of households. Although each quintile by definition has the same number of households, the top quintile has 24.3% of total population, the bottom quintile only 14.8%. So the top quintile's share of income supports 65% more people than the bottom quintile.

Number of workers per household and hours worked. Top quintile households contain an average of more than 2 full-time workers, 27.6% of all working age adults and nearly onethird of all hours worked. Bottom quintile households contain an average of less than 1 full-time worker, only 11.5% of all working age adults and only 5.6% of all hours of work performed in the economy. Obviously more workers working more hours produce more income.

When corrected thusly, according to the Heritage Foundation, the income ratio of top fifth to bottom fifth is not 14:1 but closer to 4:1.

There has always been and always will be wide income and wealth inequality between very top and very bottom. More important for our "middle-class society" is how the middle is doing, and these same research reports show the middle is doing very well indeed. Half of all American households now own stock and the average value of those holdings is $25,000. True, the wealthiest hold most in equity volume and worth, but those in the middle are increasingly participating: US average household net worth (which includes home equity) increased 25.7% between 1995 and 1998, from $224,800 to $282,500 (median net worth increased 17.6%, from $60,9000 to $71,600).

Growth Strategies Implications: Is everything fine? Not by a long shot. But what these research reports confirm is the direction in which public policy and private behavior must go for prosperity to reach all comers, sectors and levels of society. To wit: the poverty rate of Americans who are highschool graduates, married and working full-time - in any type job - is under 1%. Conversely, an unmarried parent heads 1 out of every 3 poor families in America.

In other words, increasing the wealth and income of less affluent Americans depends upon raising their educational attainment, marriage rates and work effort. Achieving these goals won't be easy, but improvements in these areas are the real answers to the wealth and income gaps.

Copyright FutureScan Feb 14, 2000
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