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Economic inequality limits opportunity

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Opportunity in Tucson

Economic inequality limits opportunity

Part four in a five-part series

  • Paul Ingram/

Tucson lacks opportunity – and the nation's and our city's growing inequality are making it worse.

Since 1990, the wealthiest households in Pima County have taken home a larger share of total income even as everyone else's shares have gotten smaller, according to an Arizona Daily Star article based on information from the U.S. Census Bureau.

As a result, in 2018 the wealthiest 20% of households in Pima County received more than 50% of the county's total income. The poorest fifth of households received about 3% of the county's income.

This divergence of lower and upper incomes cannot be ignored. Lower-income people find it necessary to spend even larger percentages of their income on health care, food, housing and education – if they can afford them at all. And they have even less money to invest in the effort to find and take advantage of opportunity.

Now, with the coronavirus disproportionately affecting the poor, the gap between lower and upper incomes is growing even larger, meaning that the health, social and economic consequences of this increasing inequality will be even worse.

A commonly held belief is that economic inequality results from poor people failing to take advantage of their opportunities. Yes, there is some truth to this. But numerous researchers have found the reverse also is true: Income and wealth inequality work to limit opportunities.

Rising inequality has resulted in an America more sharply divided by class, with the outcome that "rich Americans and poor Americans are living, learning, and raising children in increasingly separate and unequal worlds … with members of the upper middle class … unable even to recognize the growing opportunity gap," writes Harvard Professor Robert Putnam in Our Kids: The American Dream in Crisis.

"Bigger income differences seem to solidify the social structure and decrease the chances of upward mobility. Where there are greater inequalities of outcome, equal opportunity is a more distant prospect," add British researchers Richard Wilkinson and Kate Pickett in The Spirit Level: Why Greater Equality Makes Societies Stronger. Wilkinson is an expert in international inequality, and Pickett is a professor of epidemiology.

En español: La desigualdad económica limita las oportunidades

It is important to know inequality hasn't always been so high in America. From the end of World War II until the mid-1970s, most Americans' income grew at a fast pace, with both the wealthy and the poor sharing almost equally in the good times.

Then, after the 1970s, the gap began growing, with incomes of the lower- and middle-class earners stagnating, while the incomes of the top earners skyrocketed.

In fact, even these numbers understate the increase in inequality. In the five decades from 1962 to 2014, while the pretax income of the bottom 50 percent of earners grew by only 1 percent, the incomes of the top 1 percent of earners grew by 205 percent. And the income of the top 0.0001 percent grew by 636 percent.

Conventional wisdom gives many explanations for inequality: globalization, automation, the failure of education to adapt to the increasing number of jobs that require more education and greater skills, and demographic shifts, including the dissolution of the traditional family and declining work rates among males.

However, these explanations fail to account for the nation's dramatic increase in inequality.

These explanations fail to explain why the exceptionally high-income gains by the very top earners in the U.S. have eluded many similarly highly educated, highly skilled people just a step lower in income percentiles.

Moreover, the same trends occurred in other developed nations without the same increase in inequality. Europe and the United States both are highly developed. Both have been affected by the same technological changes. And both have exposure to global markets. Yet while economic inequality increased only moderately in Europe, it skyrocketed in the U.S.

Consequently, the United States now has one of the highest levels of inequality of any high-income nation, with the top one percent receiving more income than the bottom 40 percent and owning more wealth than the bottom 95 percent.

This raises the question, "What happened in the U.S. that didn't happen elsewhere?"

The answer is American politics and public policy, accompanied by corporate policy. Government, through what it did – and through what it chose not to do – became a major contributor to the increase in inequality.

Why inequality increased so sharply

Here are four reasons why economic inequality increased so sharply in the United States.

First, the collapse of progressive taxation. In 1950 the wealthiest Americans paid a combined federal, state and local tax rate of 70 percent. However, beginning in the 1960s, politicians began cutting every tax that fell most heavily on the wealthy. They cut taxes so much that in 2018, according to Berkeley economists Emmanuel Saez and Gabriel Zucman, the wealthiest 400 households paid a lower total tax rate than that paid by any other income group. When payroll taxes and sales taxes are taken into account, even the poorest of Americans paid a higher tax rate than the 23 percent paid by the wealthiest households.

Second, the erosion of the minimum wage. While the federal government has chosen to be actively engaged in cutting taxes for the wealthy, it has chosen to ignore a policy that affects the other end of the income scale: the minimum wage. When adjusted for inflation, the federal minimum wage peaked in 1968, at $11.55 an hour in 2018 dollars. Today, it is $7.25 an hour.

Thanks to Arizona voters, the state's minimum wage is now $12 per hour (and it's going up a few cents with the new year). That's high among the states. However, that is only half of what a Massachusetts Institute of Technology calculator says is a living wage in Arizona for one adult with one child — $24.56 an hour.

Third, the decline of unions. After World War II, unions expanded in the United States to the extent that by the mid-1950s, more than a third of private sector workers were union members. Since then, union membership has declined to the point that only one-in-nine employees is represented by a union, with the private sector union membership falling to just over 7 percent.

Why such a decline in union membership? Again, the answer is politics. In the U.S., unions for the last several decades have faced determined efforts to influence public and corporate policies against unions. Indeed, corporate-funded organizations have spent hundreds of millions of dollars lobbying against proposed laws that would have favored unions and, conversely, supporting laws, such as the Taft-Hartley Act of 1947, that restrict the activities and power of labor unions.

Fourth, an exorbitant increase in CEO compensation. In the 1980s, CEO pay began to shoot up, with the pace exploding between 1995 and 2000. During the same period, the pay of the average workers grew slowly.

The great increase in CEO compensation resulted in a dramatic increase in the ratio of CEO compensation to the average worker. In 1965, the average CEO of the 350 largest U.S. firms earned 19.9 times that of the average worker. By 2017, the ratio was 280.8 times as much as the average worker.

These high CEO salaries matter because they tend to pull up the pay of other executives and managers, further contributing to an increasing difference between managers and workers. An analysis by the Economic Policy Institute calculated that had wage inequality not grown, wages for the bottom 90 percent of workers would have grown nearly twice as fast as they actually did between 1979 and 2017.

So what if inequality increased? Does it really matter?

Does it really matter that inequality has increased so much and that such a relatively small group of people have so much more money than everybody else.

The answer is "absolutely." British researchers Wilkinson and Pickett studied the relative effects of poverty and inequality in several countries and in the 41 American states that had comparable information. They found that on many measures of social and health wellbeing, good or poor performance is more closely related to economic inequality than it is to average income.

In The Spirit Level they found a number of negative consequences in those U.S. states with higher levels of inequality:

  • Health and social problems are greater.
  • Women's status is lower.
  • Infant mortality is higher.
  • Life expectancy is lower.
  • Homicide rates are higher.
  • More people are imprisoned.
  • Teenage pregnancy rates are higher.
  • More children drop out of high school.
  • More children are overweight.
  • Math and literacy scores of eighth graders are lower.
  • More adults are obese.
  • Fewer people believe that "most people can be trusted."

Economic consequences of inequality

The economists behind much of the information in this series of columns even calculated the effect of inequality on opportunity in their 2016 report, "The Fading American Dream: Trends in Absolute Income Mobility Since 1940."

The researchers found that children born in 1940 had more than a 90 percent chance of earning more than their parents, while children born in the 1980s had only about a 50 percent chance of earning more than their parents.

Then they analyzed how that decline could have been reversed. The researchers found that higher growth rates – expanding the size of the pie – would have closed only 29% of the decline in upward mobility between 1940 and 1980. However, keeping the pie the same size but sharing it more equally would have closed 71% of the gap.

Their conclusion is that a broader sharing of economic growth does more to improve opportunity than increasing the rate of growth. This is a finding that should be of interest to Tucson's government, business and economic development leaders.

The complete 'Tucson Opportunity' series

Part 1: Opportunity in Tucson? Not so much

Part 2: A tale of two Tucsons

Part 3: Poverty is costly, and not only for Tucson's poor

Part 4: Economic inequality limits opportunity

Part 5: Restoring opportunity: What we can do

En español

Parte 1: ¿Oportunidad en Tucson? No tanto

Parte 2: Cuento de dos Tucson

Parte 3: La pobreza es costosa y no solo para los pobres

Parte 4: La desigualdad económica limita las oportunidades

Parte 5: Restaurando oportunidad: lo que podemos hacer

Jim Kiser is a former editorial page columnist and editorial page editor for the Arizona Daily Star. He has undergraduate and graduate degrees in education from the University of Arizona and an MBA from Stanford University.

About Jim Kiser

Jim Kiser is a former editorial page editor and columnist for the Arizona Daily Star. After retiring from the Star, he worked for the Southern Arizona Leadership Council. Previously, he spent three years as vice president of Finance for the Des Moines Register and Tribune Company, and he has an MBA from Stanford University. Though her name is not in the byline by her choice, his wife Shirley, a former nonprofit and public education executive and high school English teacher, is a full partner in the effort to call attention to Tucson’s lack of opportunity for the city’s young people. 

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