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Monday, December 12, 2016

Income Inequality -- Killing Generations of American Dreams

Americans uphold the notion that hard work and personal skill are the main ingredients for success. Of course, their belief is based on the fact that a high degree of social mobility defines American culture. American History is rich with examples of those from simple, poverty-stricken beginnings who, through incredible perseverance and industry, climb the ladder of success and eventually attain the ever-popular, metaphorical American Dream.

Yet, are people today realizing their ambitions with the same regularity of those in the not-so-distant past? Who can now attain the American Dream of success, happiness, and material comfort traditionally sought by those in the United States?

According to a recent working paper authored by researchers from Stanford and Harvard universities and the University of California, Berkeley, since the 1940s, it has become less and less likely that children will grow up to earn more than their parents.

Children born in 1940 had a 92 percent chance of taking home more income than their parents, the research shows. By contrast, someone born in 1984 – who is 32 years old today – has just a 50 percent likelihood of making more than his or her parents.

Put another way: “Only about half of 30-something Americans earn more than their parents.”
 
(Etehad and Natalie Kitroeff. “American dream slips out of reach for millennials, study finds.” Los Angeles Times. December 08, 2014.)

The study found income inequality is really driving the problem. In the past, new income was spread more evenly across the economic ladder than it is today, when a disproportionate share of the country's gains are going to the very richest Americans.

The country's highest earners have seen their pay balloon by 35 percent, according to a 2015 report by President Barack Obama's Council of Economic Advisors.

Making growth more equal would help middle-class people the most. But it would also deeply affect wealthy Americans.

People whose parents are among the top earners in this country would see their likelihood of making that much money increase by more than 30 percentage points, if growth were more balanced.

“Broadly shared economic growth affects rich people too,” said Nathaniel Hendren, the assistant Harvard assistant professor who coauthored the study.

There are those who claim pointing out income inequality is simply employing the politics of envy; however, this inequality in the United States is greater than in any other advanced country. It is evident that much of the poverty at the bottom of the income spectrum is due to economic discrimination and the failure to provide all Americans with needs like adequate education and health care. Statistics support the reality that nearly one out of five children in the country grow up poor.

(“Family Characteristics of School-Age Children.” National Center for Education Statistics. May 2016.)

 

Income Inequality – The Impact on the Economy

A study by the Organization for Economic Co-operation and Development found income inequality has an impact on the economy overall. There is and has been a reduction of economic growth because of the growing concentration of income among a smaller portion of the global population.

According to the OECD, the gap between the richest and poorest in most member countries is at its highest in the last 30 years. In addition, a broader measure of inequality called the Gini constant (0 when everyone has the same income and 1 when a single person has all income) has been on the rise.

The U.S. is at the top of the scale except for Mexico, which has by far the worst income inequality of the OECD states.

The new OECD analysis found a "negative and statistically significant" correlation between income inequality and economic growth.

(Erik Sherman. “Income Inequality Hurts Economic Growth.” Forbes. December 09, 2014.)
 
Other Dangers of Income Inequality

Living in a community with high income inequality poses health risks.

A study from researchers at the University of Wisconsin Population Health Institute examined a series of risk factors that help explain the health (or sickness) of counties in the United States. In addition to the suspects people might expect – a high smoking rate, a lot of violent crime – the researchers found that people in unequal communities were more likely to die before the age of 75 than people in more equal communities, even if the average incomes were the same.

Inequality effects, over and above average income, are pretty well established,” said S.V. Subramanian, a professor of population health and geography at Harvard, who has studied the phenomenon. We know that inequality tends to concentrate income in fewer hands, creating more low-income households – and people in low-income households don’t live as long. But what causes the drop in life expectancy is debatable.

(Bridget Catlin “Income Inequality and Health.” Institute for Research on Poverty Dispatch. April 03, 2015.)


Income inequality can breed corruption.

The effect on corruption may be especially true in democracies, where wealth and political power can be more easily exchanged, according to a study of 129 countries by Jong-Sung You, a graduate student at the Kennedy School of Government at Harvard, and Sanjeev Khagram, a professor of public affairs at the University of Washington in Seattle.

The wealthy have both greater motivation and more opportunity to engage in corruption, whereas the poor are more vulnerable to extortion and less able to monitor and hold the rich and powerful accountable as inequality increases.

Corruption, of course, can hurt growth by reducing the efficient allocation of public and private resources and by distorting investment. That may end up creating asset price bubbles.

(You Jong-sung and Sanjeev Khagram. “A Comparative Study of Inequality and Corruption American Psychological Review. February 2005.)

Unchecked income inequality may also tend to create still more inequality.
 
Edward L. Glaeser, a professor of economics at Harvard, argues that as the rich become richer and acquire greater political influence, they may support policies that make themselves even wealthier at the expense of others. He said, "If the rich can influence political outcomes through lobbying activities or membership in special interest groups, then more inequality could lead to less redistribution rather than more."

(Edward L. Glaeser. “Corruption in America Journal of Public.” Economics 90. 2006)

The crime rate has also been shown to be correlated with inequality in society.

Most studies looking into the relationship have concentrated on homicides since homicides are almost identically defined across all nations and jurisdictions. There have been over fifty studies showing tendencies for violence to be more common in societies where income differences are larger. Research has been conducted comparing developed countries with undeveloped countries, as well as studying areas within countries. 

(Martin Daly et. al. “Income inequality and homicide rates in Canada and the United States.” Canadian Journal of Criminology. April 2001.)

And, the worst effect is that increasing gaps in academic achievement and educational attainments have accompanied the growth in income inequality. 
 
Very young children tend to be completely dependent on their families to provide what they need for healthy development. Children growing up in families with greater financial resources score higher on many dimensions of school readiness upon entering kindergarten. An obvious advantage of a higher family income is that it provides more resources to buy books, computers, high-quality childcare, summer camps, private schooling, and other enrichments.

In the early 1970s, high-income families spent just under $3,000 more per year (in 2012 dollars) on child enrichment than low-income families. By 2006, this gap had nearly tripled, to $8,000. Spending differences are largest for enrichment activities such as music lessons, travel, and summer camps. Differential access to such activities may explain the gaps in background knowledge between children from high-income families and those from low-income families that are so predictive of reading skills in the middle and high school years.

(N. Kaushal, K. Magnuson, & J. Waldfogel, J. (2011). “How is family income related to investments in children’s learning?” In G.J. Duncan & R.J. Murnane, Whither opportunity? Rising inequality, schools, and children’s life chances. 2011.)

(G.J. Duncan & R.J. Murnane. “Introduction: The American dream, then and now.” Whither opportunity? Rising inequality, schools, and children’s life chances (pp. 3-26). 2011.) 
   
(C. Snow. Reading for understanding: Toward a research and development program in reading comprehension. 2002.)
 
Differences in the reading and math achievement levels of low- and high-income children are much larger than several decades ago, as are differences in college graduation rates.

In addition to growing differences in the resources spent by poor and rich families on their children, declining real incomes for low-income families have affected maternal stress, mental health, and parenting. storing the educational opportunities that children from low-income families need if they are to lead productive and fulfilling lives.

Peer problems, geographic mobility, and challenges in attracting and retaining good teachers have made it difficult to provide consistently high-quality learning experiences in schools serving a large proportion of low-income students.

Given the importance of academic preparation in determining educational success, it should come as no surprise that growth in the income gap in children’s reading and mathematics achievement has contributed to growth in the corresponding gap in the rate of college completion.

(Greg J. Duncan and Richard J. Murnane. “Growing Income Inequality Threatens American Education.” Phi Delta Kappan. March 28, 2014.)

Among children growing up in relatively affluent families, the four-year college graduation rate of those who were teenagers in the mid-1990s was 18 percentage points higher than the rate for those who were teenagers in the late 1970s. In contrast, among children from low-income families, the graduation rate was only 4 percentage points higher for the later cohort than for the earlier one.

Analysts differ in their assessments of the relative importance of college costs and academic preparation in explaining the increasing gulf between the college graduation rates of affluent and low-income children in the United States. However, both cost burdens and academic performance are rooted, at least in part, in the growth in family income inequality.

Martha J. Bailey and Susan M. Dynarski. “Changing Inequality in U.S. College Entry and Completion.” National Bureau of Economic Research. 2011.)

The children of the poor can afford neither the advanced degrees that are increasingly required for employment nor the unpaid internships that provide the alternative route to “good” jobs. 

Looking For Solutions

If the United States is the land of opportunity and fair play, why do the richest often pay a smaller percentage of their income in taxes than those less well off?

What new directions might help alleviate the vast income inequality. Allow me to close this entry with the words of Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. Stiglitz has received more than 40 honorary degrees, including from Harvard, Oxford, and Cambridge Universities. He says ... 
 
If we just imposed the same taxes on the returns to capital that we impose on those who work for a living, we could raise some $2 trillion over ten years. “Loopholes” does not adequately describe the flaws in our tax system; “gaps” might be better.

Closing them might end the specter of the very rich almost proudly disclosing that they pay a tax rate on their disclosed income at half the rate of those with less income, and that they keep their money in tax havens like the Cayman Islands. No one can claim that the inhabitants of these small islands know how to manage money better than the wizards of Wall Street; but it seems as though that money grows better in the sunshine of these beach resorts!

... And because so much of the money at the top comes from exploitation (or as economists prefer to call it, “rent seeking”—that is, seizing a larger share of the national pie rather than increasing its size), higher taxes at the top do not seem to have much of an adverse effect on economic performance.

"Then there’s our corporate tax rate. If we actually made corporations pay what they are supposed to pay and eliminated loopholes we would raise hundreds of billions of dollars. With the right redesign, we could even get more employment and investment in the United States...

"If we required the banks to pay but a fraction of the costs they have imposed on others, we would then have further funds to undo some of the damage that they caused by their discriminatory and predatory lending practices, which moved money from the bottom of the economic pyramid to the top. And by imposing even slight taxes on Wall Street’s speculative activities via a financial transactions tax, we would raise much-needed revenue, decrease speculation (thus increasing economic stability), and encourage more productive use of our scarce resources, including the most valuable one: talented young Americans...

Similarly, by taxing land, oil, and minerals more—and forcing those who extract resources from public land to pay the full values of these resources, which rightly belong to all the people, we could then spend those proceeds for public investments—for instance, in education, technology, and infrastructure—without resulting in less land, less oil, fewer minerals. (Even if they are taxed more, these resources won’t go on strike; they won’t leave the country!)

(Joseph Stiglitz. “How Inequality Is Killing the American Dream...And What We Can Do About It.” The Washington Monthly. November 17, 2014.)

 


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