The Dilemma of Income Inequality - Brief Article

USA Today (Society for the Advancement of Education), May, 2000 by Robert J. Bresler

FOR MORE THAN 30 YEARS, according to the Census Bureau, income inequality in America has widened. The standard statistic to measure such inequality is called the "gini index." The greater the number, the wider the disparity between the rich and the poor. The index ranges from zero, where everyone receives an equal share, to one, where one recipient holds all the income. During the post-World War II boom, there was a broad sharing of prosperity, and the gini index declined from .376 in 1947 to .340 in 1969. Since then, the gap has widened and the index has been on a steady incline, rising to .456 in 1998. The share of aggregate household income controlled by the lowest 20% decreased from 4.1% in 1969 to 3.6% in 1997, while the share of household income controlled by the richest five percent increased from 16.6% in 1969 to 21.7% in 1997. A 1999 Census Bureau report maintains that much of this increase in income divergence is related to two major factors: changes in the nation's labor market and the composition of its households.

There has been a substantial widening of wage disparities between low-skill jobs and those that require more education and training. The high-tech information economy is growing at a rate of almost 10 times the older industrial economy, and its employees have seen some spectacular gains, particularly if they hold stock options or have 401(k)s. The share of income by the richest 20% increased from 40.5% in 1969 to 49.2% in 1998. Between 1995 and 1998, over 1,000,000 Americans entered the ranks of millionaires. Starting salaries for lawyers in Silicon Valley are between $125,000 and $150,000; in New York City, between $100,000 and $120,000.

Divorces, marital separations, out-of-wedlock births, and the increase in age of first marriages have brought about a reduction in the percentage of married couple households and an increase in single-parent and non-family households. Fewer married couple households simply means more households to divide income, and non-married couple households have fewer earners.

For example, a divorce in a family making $50,000 a year with young children and a stay-at-home mom turns into two families with $25,000 each, at least in the short run. A single teenage mom is destined to spend many years in poverty, and each such occurrence adds to the number of poor households.

The increase of females in the workplace, particularly married women, also plays an important role in adding to the disparity. People often marry those from the same economic class. If two lawyers making $70,000 marry, the household income goes to $140,000. If two blue-collar workers making $40,000 each marry, their household income goes to $80,000. What was once a $30,000 disparity between households when these people were single is now a $60,000 disparity.

If one measures inequality by household wealth, rather than income, the gap is even wider. The market boom has fattened stock portfolios to the extent that, as of 1997, 90% of the value of all stocks and mutual funds was held by 10% of the households.

The information is not all grim. As Stephen Moore of the Cato Institute has pointed out, low-income families (the bottom 20%) are making gains in real income, with an increase of $300 from 1995 to 1998 and or $1,100 from 1980 to 1995. While the rich are getting richer, at least the poor are not getting poorer. It is important to realize that these statistics are really a snapshot of a dynamic situation and not a portrait fixed for all time. Many of those in the bottom quintile will not be there in five or 10 years. A number are young people in their first jobs moving up the ladder. Many of those classified as poor in 1980 were more likely to be in the top quintile by 1990 than still in the bottom one.

Various liberal politicians and policy analysts make this evidence of income and wealth disparity the centerpiece of their case for redistributionist policies. Here, one must tread lightly. In many ways, inequality is the price of economic progress. The boom in entrepreneurship since the Reagan years has indeed created, as writer David Frum puts it, "history's first mass upper class." It has also created new industries in computers, the Internet, biotech, and telecommunications and millions of new jobs, new careers, and new professions. Just as the Industrial Age brought with it the great fortunes of the Rockefellers, Carnegies, Mellons, Morgans, duPonts, and Fords, it also brought new jobs and technologies that improved the lives of practically all Americans. These new industries and new fortunes allowed millions to climb the ladder of economic success.

Once, the definition of the poor meant people without adequate food, in homes without indoor plumbing and electricity, and with little education beyond the eighth grade. Today, most of those classified as poor have television sets, VCRs, automobiles, and access to education and health care. This is a product of an ever-growing economy fueled by entrepreneurship and technology.