Income Inequality in a Dynamic Economy

 

I have pointed out in a recent post that, not only is the U.S. the world’s most competitive large economy, but also that our per-capita GDP is growing faster than for our nearest rivals.
A particularly vivid example of this dynamism is ecommerce where both the adjusted (gains minus losses) size of the workforce and the average wage are increasing rapidly.
We also know that incomes in the U.S. are rising faster at the high end rather than further down (see chart below).  What to do about this has become a major political issue.


Here are my ideas (in rough order of importance):

  • Economic growth is too slow, averaging just 2% per year since the end of the Great Recession in June 2009. It is reasonable to expect that the regulatory reform already underway and the tax reform under consideration in Congress can increase growth to 2.5% per year.  Together with our low unemployment rate of 4.2%, this is already leading to more and better paying jobs.
  • Improve educational opportunities by, for example, making early childhood education widely available to low-income families and attracting the best teachers to the poorest performing schools with targeted bonus pay.
  • Better vocational and retraining programs to prepare the unemployed and underemployed for the millions of skilled jobs now going begging for a lack of qualified applicants.
  • Attempt to address the social inequality associated with income inequality, see here.  Marriage rates, civic involvement and public trust have all declined significantly in recent years for the lower class. A very difficult problem to solve!

Conclusion.   In a free society like the U.S., providing self-help opportunities for advancement is the natural and preferred way of lifting up people who need assistance. The U.S. does a okay job in this respect but there is plenty of room for improvement.

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A Fiscal Conservative with a Social Conscience

 

My last two blogs were “Why racism exists in America” and “Educare and the Academic Achievement Gap.”  I often describe myself as a fiscal conservative but it would be more accurate to say that I am a fiscal conservative with a social conscience.
Capture0By this I mean:

  • First and foremost I want to shrink our annual federal budget deficits enough so that our national debt begins to decline as a percentage of GDP. Right now the public debt (on which we pay interest) is at 74% of GDP which is the highest it has been since the end of WWII. This high level of debt is unsustainable and will inevitably lead to a new and much worse financial crisis if it is not put on a downward path.
  • Closely related to the first goal is the need to get our economy growing faster than the 2% average rate of growth since the end of the Great Recession in June 2009. This will have the twin benefits of producing more tax revenue which will make it easier to shrink our annual budget deficits as well as creating more and better paying jobs for everyone.
  • A third goal is to reduce income inequality. The best way to do this is not with more income redistribution from those with higher incomes to those with lower incomes but rather by achieving faster economic growth which will raise incomes for all. Yet another critical way of making American society more equal is to focus on:
  • Reducing social inequality. There are many different forms of social inequality  in our society but let’s focus on one of the most severe aspects: black-white racism.  America will be a more peaceful and prosperous country if we can reduce the glaring inequalities between the two races.

I am sufficiently optimistic to think it is possible to make progress on all of these fronts at the same time. It won’t be easy but momentum is slowly but surely building in this direction.

Why Racism Exists in America

 

The First Unitarian Church of Omaha, to which I belong, has formed a sister church relationship with a predominantly black church in north Omaha, Clair Memorial Methodist Church. On Saturday we held a joint workshop, “Confronting Racism” at Clair. Several people said that we should “celebrate diversity, transcend race, and hope that things will be better in twenty or thirty years from now.”
I think the problem is much more fundamental and difficult than this. First of all, there are two main reasons why racism is so prevalent in America, one obvious and one perhaps less obvious:

  • The obvious reason is the very different colors of our skin.
  • The other reason, equally important, is that there are huge socio-economic differences between the two races. Whites are, by and large, better educated and more affluent than blacks. They also have a more stable family structure, with far fewer single parent families. People tend to live in homogeneous residential areas and associate with others of similar socio-economic background. All of these social factors serve to separate the races into largely non-interacting groups of people.

How do we confront and attack such deeply entrenched racism in our society? We need an approach which is more fundamental than programs like “welfare to work” or “residential integration.” Even equalizing educational opportunity is not enough. What we need is a long term effort to improve educational outcomes for blacks and other children from low-income families.
Capture9As the above chart of Nebraska data shows, children from low-income families, who thus receive free or reduced price lunch (FRL), are already behind in reading proficiency by third grade and they just keep falling further and further behind in the later grades. This means that they need major intervention before they even get to kindergarten. In fact what they need is early childhood education, beginning no later than age 3.
Conclusion: Racism is deeply embedded in American life and can only be eliminated with a long term fundamental effort to greatly improve educational outcomes for blacks.  I will discuss proof that this can be done in my next post.

Social Inequality vs Income Inequality

 

There is today in the U.S. much concern about income inequality and I have devoted many posts to this topic recently such as “Are economics and Social Progress Related to Each Other?”,How to Expand Economic Mobility”, and “Richer and Poorer.”
CaptureThe above CBO chart shows that income inequality has not changed much in the last 30 years once government transfers and federal taxes are taken into account. Along the same line, the Manhattan Institute’s Oren Cass makes a strong case in, “The Inequality Cycle,” that Americans should be paying at least as much attention to the social aspects of inequality as to the economic aspects.
For example:

  • As Charles Murray shows in “Coming Apart,” (http://www.amazon.com/Coming-Apart-State-America-1960-2010/dp/030745343X) the upper class has remained stable with respect to marriage rates (94% in 1960, 84% in 2010), civic involvement, and trust in society while for the lower class marriage rates (84% in 1960, 48% in 2010 and dropping), civic involvement and public trust have all declined significantly.
  • Children in the lower classes are five times more likely to face abuse, violence, addiction and the death or imprisonment of a parent.
  • By the time they reach kindergarten, 72% of middle class children know the alphabet compared with only 19% of poor children.
  • The fraction of children with a single parent is the best predictor of upward economic mobility in a particular region, whereas the level of income inequality is not a significant predictor.

Mr. Cass suggests that public policy should focus on these social problems at least as much as on income inequality. For example:

  • Education reform should be focused on both ends of the K-12 spectrum: early childhood education to ensure that all children are ready to learn when they get to school and better vocational education in high school so that graduates can find a good job if they’re not going to college.
  • Remove onerous regulations on the workplace so that employers are not pushed unnecessarily into independent contractor arrangements.
  • The federal government should be more supportive of marriage (e.g. with tax policy), and the participation of religious organizations in the delivery of public social services (to improve their quality).

Conclusion: Being poorly raised does more to cut off opportunity than being raised poor.

Can We Do More to Help Blacks Improve Their Lot?

 

Nebraska is a progressive state in many respects.  Last fall we raised our state minimum wage.   The Nebraska Legislature is now on the verge of eliminating the death penalty.  Seven years ago the Legislature established the Learning Community in metro Omaha, whose purpose is to eliminate the academic achievement gap between children from the middle class and those living in low-income families.
CaptureI am an elected member of the Learning Community Coordinating Council which oversees the work of the LC.  As such I give a lot of thought to the plight of the low-income black community in north Omaha.  My own answer to the question in the title is yes, of course, there is more we can do but it needs to be carefully directed.  I have written several previous posts on this topic. Here and here.
For example, the Hamilton Project has an excellent program, ”Policies to Address Poverty in America,”  which calls for a highly focused effort along the lines of:

  • Promoting Early Childhood Development
  • Supporting Disadvantaged Youth
  • Building Skills
  • Improving the Safety Net and Work Support

Mr. Robert Balfanz, the Director of the Everyone Graduates Center at John Hopkins University in Baltimore, suggests focusing on the toughest 660 out of 12,600 high schools in the U.S. which fully one-half of non-graduating students attend.  More specifically:

  • Refocus these high poverty high schools in order to identify by the middle of the ninth grade the students most likely to drop out.
  • Set up early warning systems so that adults can step in at the first sign that a student is in trouble.
  • Employ additional adults to support students who need daily nagging to succeed, especially during the key transitional years in the sixth and ninth grades.

These two programs have lots of similarities and are focused on at-risk inner-city youth.  Massive black underachievement is a huge social problem, and ultimately a huge drain on our entire economy as well.  More than just good intentions are necessary for effective intervention.  An intelligent and focused approach as described here would be a good way to proceed.