How to Reverse Rise Of Income Gap in US
Overall, income inequality in 1995 was unchanged from 1994, the United States Census Bureau reports. Over the longer run - since 1967 - the well-to-do have been getting richer and the poor relatively poorer.
Many citizens regard this long-term trend as bad. And economists have been searching for causes of the problem, especially in the last three years or so, with an eye toward remedies.
But reasons for the growing disparity in incomes are still somewhat of a puzzle, says Katharine Bradbury, an economist at the Federal Reserve Bank of Boston. "Despite all the research, we don't know why it is happening."
Ms. Bradbury has written a lengthy article on the growing inequality of family incomes - even worse than that for individual incomes - in her bank's latest New England Economic Review.
She comes to the conclusion that the "most promising" remedy would be faster economic growth and facilitating and encouraging more people to work. "Boosting employment growth and labor-force participation and reducing unemployment and (involuntary) part-time work are likely to raise the incomes of the poorest families," she writes. More single-parent families and blacks and Hispanics might move up the income ladder, reducing the spread in incomes.
To Jeff Faux, president of the Economic Policy Institute, a left-leaning Washington think tank, that growth solution implies the Fed should lower interest rates, rather than keeping unemployment above 5 percent to avoid inflationary wage growth. Mr. Faux cheers the more rapid growth in wages in recent months.
Solid economic growth and declining unemployment, however, didn't stop the worsening of the distribution of income in the 1980s, after the 1981-82 recession, or in the last few years. But Bradbury has found that in regions of the country where growth was most rapid, the trend toward inequality was less pronounced.
One factor in growing income inequality has been the increased income premium given those with college educations. About 75 percent of the work force lacks a college degree.
"Education is probably the most important lever for enhancing growth and reducing inequality," Bradbury maintains. "If the supply of college-educated labor grew faster than the demand, the premium would fall." The payoff in reduced inequality from boosting the quality of primary and secondary education for the poor so they are better prepared for college is "likely to be large."
Faux advocates much higher government spending on schools, public transport, water supplies, and other infrastructure in the inner cities. This would create public jobs and stimulate private investment that would lift the incomes of the poorest, he says.
Another way to reduce income inequality is for the government to just give the poor money.
This is shown by Census Bureau analysis. The bureau found that the most prosperous 20 percent of households had 48.7 percent of income in 1995, up from 43.8 percent in 1967. The poorest 20 percent had 3.7 percent in 1995, down from 4 percent in 1967. The middle 60 percent of households (with incomes of $14,401 to $65,124 in 1995) saw their share of total income decline from 52.3 percent in 1967 to 47.6 percent in 1995.
Then the bureau looked at what income inequality would be if cash and noncash government "transfers" of income were eliminated from the income numbers. The bureau also examined the effect on the distribution of income of the progressive individual income tax (higher rates for the well-to-do), the earned-income tax credit that helps the poor, Social Security taxes that hit every earner, and state taxes. The bureau concluded that government transfers (welfare, food stamps, etc.) at present have "a significantly greater impact on lowering income inequality" than taxes.
But today's political mood is to cut transfers, not raise them.
Another way to reduce income inequality, Faux says, would be to make it legally easier for trade unions to organize workers and thus strengthen their bargaining power in wage negotiations.
Another factor behind inequality is the economic progress of women. Bradbury says families with two earners, working long hours at high wages, have been prospering. The top 10 percent of families, many in this category, earned in 1994 about nine times as much as the bottom 10 percent of families, many headed by one person, with no spouse present, working shorter hours at low pay. In 1973, that gap was 5-1/2 times.