INCOME INEQUALITY: SOME BASICS

We recently began discussing income inequality in America. We focused our first post on poverty

and who bears the most significant responsibility for attacking the problem of people in our society who don’t have enough for a respectable existence free of want. More recently, we identified and fleshed out barriers to freedom from poverty and income inequality. 

We look now at some of the policy reasons for the divide between those at the top and the rest of the population. A real gap exists between the wealthiest Americans and even the middle class, a circumstance producing anxiety and political instability that feeds our destructive partisan divide. In time, we’ll consider solutions and evaluate proposals offered by the 2020 presidential candidates and others. We think it important we help voters separate real, viable solutions from noise and platitudes.

The Depth of the Problem

We hear much about the “one percent” and how they’ve done better than everyone else.  The numbers tell a disturbing

story of a growing wealth gap in the United States. According to a report by scholars associated with the Roosevelt Institute, since 1980, the share of national income earned by the top 1% doubled, to 20% in 2014, up from 10%. That hasn’t happened in all western democracies. In Denmark, for example, the 1%’s share went up only from 5% to 6%. 

Governmental policies and actions affecting both the top and bottom parts of the economy contribute. At the top, reductions in tax rates gave the wealthy a windfall.  At the bottom, policies negatively affecting wages and job growth suppressed lower income individuals.

Most “tax reform” has benefited upper income tax payers, including the 2017 tax bill the Trump administration touts as its major achievemet. In the

1980s, the top marginal tax rate dropped from 70% to 28% and has remained below 40% since. Capital gains tax changes also heavily favored the wealthy, with 65% of the benefits going to the top 20% of tax payers. More than lower tax rates help the wealthy. Half of tax expenditures – deductions for 401K retirement accounts, mortgages, and the like – go for things from which only the top 20% of tax payers benefit.

Meantime, 80% of job growth has come in low wage service and retail jobs. Worker power through collective bargaining decreased as union membership declined. In 1960, 30% of U.S. workers participated in unions. That dropped to 20% in 1984 and to just over 11 % in 2014. Wages and other compensation stagnated with this development, rising only 19 % between 1973 and 2013, despite a 161% increase in worker productivity. 

 

Government Complicity

Politicians of all ideological stripes like saying government shouldn’t “pick winners and losers” in the economy. Fair enough as a theory, but the idea does not comport with reality or history. In addition to tax policy, government has long been in the business of picking economic winners and losers. Start, for example, with the racially discriminatory housing policies so devastatingly described by Richard Rothstein in his path breaking book The Color of Law: A Forgotten History of How Our Government Segregated America. We exhaustively detailed Professor Rothstein’s findings in a series of posts in 2018 and need not repeat them here in making the point that many governmental agencies frequently pick economic winners and losers. 

The Federal Reserve’s hyper focus on fighting inflation has had the same kind of effect. By tightening the money supply through higher interest rates at the first sign of upward price pressure, the Fed has stopped or reduced the job creating opportunities of large and small businesses and stymied start-up activity by making credit less available. Most progressive economists agree this made returning to full employment slower and more difficult, particularly impacting lower wage earners who have more difficulty insulating themselves from the whims of the business cycle. 

Then there’s the matter of the federal minimum wage. It stands now at $7.25 per hour and hasn’t gone up since July 2009. Opponents of a

higher federal minimum wage, mostly  Republicans, argue raising it kills jobs, despite evidence to the contrary developed by economists like Columbia’s Joseph Stiglitz, a leading income inequality scholar. Whatever the reality on that issue, keeping the minimum wage low disadvantages a large segment of the American economy, giving employers a victory and wage earners a loss. No basis exists for arguing the government hasn’t had a major role in creating our current measure of income inequality.  

Why?

Income inequality exists for many reasons. Some are purely political, like the election of Ronald Reagan and implementation of his tax cuts in the 1980s. Some emanated from fears based on historical events. The inflation of the 1970s, partly sparked by upheavals in international energy markets, helped start the Federal Reserve on its anti-inflation crusade. Some have roots in personal greed, “rent seeking” as economists call the efforts of manipulative players in the economy who extract financial advantage through exploitation.

The reasons for income inequality bring into play a variety of individual and societal factors. The good news is that more people, including some running for president, now think we should do something about the problem. We see paying attention to them in the coming months as a good idea.                    

OUR TURN: Jones Walker Wiley on the Rothstein Solutions

We now conclude our look at Richard Rothstein’s The Color

of Law: A Forgotten History of How Our Government Segregated America.  His book shows, without real room for debate, that governmental action created the substandard housing African Americans have lived with and in for over 100 years.  We reported his solutions last time with little comment on what we think of them other than recognizing, as he does, many are controversial and have little chance of enactment in our divided political environment.  Still, he’s put good ideas out there and they merit discussion. 

Henry’s thoughts

As Rothstein notes, “We have greater political and social conflict because we must add unfamiliarity with fellow citizens of different racial backgrounds to the challenges we confront in resolving legitimate disagreements about public issues. …[R]emedies that can undo nearly a century of de jure residential segregation will have to be both complex and imprecise.  After so much time, we can no longer provide adequate justice to the descendants of those whose constitutional rights were violated.  Our focus can be only to develop policies that promise to fully untangle the web of inequality that we’ve woven.”  

Nevertheless, two suggested solutions at least attempt to fray the Gordian knot.  If we can explode the myth of de facto residential segregation, focused remedies might lead to informed understanding.  Development of transportation infrastructure allowing citizens to flow in and out of urban and suburban areas without currently existing barriers might

reduce suspicions based on unfamiliarity.  If we get to know one

another we can move toward dialogue, understanding, shared interest, and solutions.  A minimum wage that provides economic stability, and other incentives and remedies suggested below, might also produce progress.

Woodson’s ideas

I have White and African American friends who believe America’s ghettos, and the poor housing many African Americans live in, result from genetic and sociological pathologies inherent to African Americans. They remain unaware laws – local, state, and federal - made it illegal for lenders to loan money to African Americans in communities where property values would appreciate. These friends do not know for more than a hundred years it was illegal for most African Americans to live in integrated neighborhoods, though the major method for wealth building in America has been and remains the freedom to buy a home where the value of that home appreciates over time.  White and African Americans must know these facts, if we are to have any chance in enlisting both in the fight for equality.

Ultimately, this information must make its way into primary, secondary, and college curriculums. I suggest the President of the United States should, by Executive Order, create a commission that would travel the nation, holding hearings on where and how governmental policies have impacted housing in minority and majority communities and exploring the impact of de jure and de facto segregation.

I would model this commission on the Truth and Reconciliation Commission (TRC) created following the end of apartheid in South Africa. The TRC took testimony from victims of apartheid and its beneficiaries. It sought to reconcile historical adversaries so they could find a path forward, correcting the wrongs of the apartheid past. Similarly, the American commission could examine housing discrimination, educate the public on its history, and analyze solutions. The commission’s end goals: (1) correcting the history books; (2) affecting the curriculum of public and private schools; and (3) helping and encouraging legislative bodies in addressing past injustices.

A remedy that might come from this process involves a calculation of the monetary damages African American home buyers suffered by being denied FHA financing and the opportunity to buy homes in integrated neighborhoods. A simple mathematical calculation defines this point. The commission could identify homes of African American home buyers and calculate the current value of those homes had African Americans been able to purchase homes in white neighborhoods with FHA guaranteed financing. The federal government would pay the damage claim. The devil is in the details, but that’s the case with all damage claims.  Congress is unlikely to appropriate money for such a program  unless and until the public more completely understands the government’s complicity in damaging the African American home buyer, making the educational piece all the more important.   

   

Rob’s View

I am most intrigued by zoning reforms Rothstein suggests.  Substantive and practical

reasons make me think those ideas might achieve something.  Substantively, banning exclusionary zoning ordinances that require very large lot sizes for single-family homes in neighborhoods could and should open more areas to moderate income people and, therefore, make those neighborhoods less racially homogeneous.  I also see the merit in “fair share” zoning proposals that provide developers incentives to build more housing for moderate and low income buyers.  

Practically, I find these proposals attractive because zoning-based solutions don’t require changes in federal law.  State and local action could get such programs in place.  Cities and towns prove every day, on energy and environment matters, federal disinterest or hostility doesn’t have to mean nothing gets done.  Given Washington’s current dysfunction, little chance exists for meaningful federal action on housing discrimination.  States and municipalities can enact zoning measures on their own.

As we said at the outset, we see Rothstein’s book as essential for understanding how we got to where we are on race in America.  Housing discrimination isn’t, of course, the whole story, but it’s a big part of it.  We hope our exploration of The Color of Law will encourage our readers to read it themselves and reach their own conclusions.  What say you?