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Declining equality of opportunity and its costs

Rochester Business Journal
December 28, 2012

Nearly every weekday my route to and from work takes me past Washington Square Park in downtown Rochester. A year ago the southern end of the park was filled with Occupy Rochester's encampment, a collection of bedraggled tents and protest banners.
 
The tents and signs have been gone since spring, but not what brought the Occupiers to the park. Economic inequality remains; in fact, all evidence suggests it has grown worse.
 
Census data released a few months ago show that from 2006 to 2011, the mean household income of the poorest quintile in the city of Rochester fell 6 percent to $5,120, while income for the top one-fifth increased more than 12 percent to $110,078.
 
Poverty statistics show the same trend. The poverty rate for city households jumped nearly 18 percent to 35.5 percent, and the share of Rochester children living in poverty surged to 53.9 percent from 41.1 percent-an increase of nearly one-third.
 
You might think this is an urban problem, but it's not. For the lowest quintile countywide, household income was unchanged at $10,379, while the top quintile pocketed a 12.8 percent increase to $165,573. The county's overall poverty rate rose to 16.7 percent, up more than one-quarter, and children living in poverty increased 39.3 percent to just shy of 25 percent.
 
Not everyone believes economic inequality has risen nationwide over the past few decades. Some argue that any increase that had occurred was wiped out by the Great Recession. One of the nation's leading experts on income and wealth, economist Emmanuel Saez of the University of California, issued a paper this year that showed the richest Americans indeed took the biggest income hit from 2007 to 2009.
 
But the cause of their drop during the recession-chiefly the impact on realized gains from crashing stock prices-soon turned sharply to their advantage as the market rebounded. In 2010, the last year for which data are available, "top 1 percent incomes grew by 11.6 percent while bottom 99 percent incomes grew only by 0.2 percent," he wrote. "Hence, the top 1 percent captured 93 percent of the income gains in the first year of recovery." It is likely, he added, that these uneven gains have continued.
 
Still others acknowledge that income inequality exists but say it is healthy. They argue that the gap between rich and poor is a strong motivator, driving a desire in those on the lower rungs to find a way up the ladder. I don't doubt that can be true, but even more compelling to me is the evidence that a widening gap is harmful-to low-income individuals and to the economy.
 
A decade ago, Princeton University economist Alan Krueger wrote a piece titled "Inequality: Too Much of a Good Thing?" His point: Yes, disparities in rewards are inevitable and even necessary, but too much of a gap between rich and poor has negative effects.
 
Krueger, now chairman of the White House Council of Economic Advisers, delivered a forceful, updated argument early this year for narrowing the income gap. Calling the shift in income distribution "mindboggling," he said the share of all income going to the top 1 percent from 1979 to 2007 increased by the equivalent of $1.1 trillion annually. That means the increase in the share of income going to the wealthiest 1 percent over this period "exceeds the total amount of income that the entire bottom 40 percent of households receives."
 
In a nation with high income mobility, such disparity might be acceptable. And who's rich in America is not set in stone. A 2007 report by U.S. Treasury Department researchers showed that more than half of the richest 1 percent in 1996 had fallen to a lower income group within a decade.
 
But in comparison with other economically developed countries, Krueger said, access to opportunities to succeed is much greater here for children of wealthy families than for children whose parents are poor.
 
Fairness is one reason we should care that a yawning wealth gap reduces equality of opportunity. But here's another one: It hurts the economy. Concentration of income in a very small group means most people have less to spend-unless they borrow beyond their means to do so.
 
Income inequality is not an easy nut to crack. The factors behind it are numerous and complex, ranging from tax policies that favor the wealthy to the impact of technological change and the skills gap.
 
But surely as a first step we should stop looking the other way. Did anyone notice that very little of the $96.2 million awarded to the Finger Lakes region in the latest round of state economic development grants targets training programs that might help low-income residents obtain the skills needed to earn more? Without question, it's crucial to develop knowledge economy assets such as the University of Rochester's Health Sciences Center for Computational Innovation, which received $5 million. But let's not forget that Rochester has one of the highest rates of children living in poverty-and more high-tech jobs alone will do little to change that.
 
Nor did pitching tents in Washington Square Park-and to be honest, I was glad when the Occupy Rochester encampment ended and everyone could enjoy the park again. It is one of my favorite parts of the city and filled with history-a place where Frederick Douglass delivered many speeches. One day a couple of weeks ago I walked through the park and noticed a few leaflets taped to benches; a group that works with the homeless was going to hold a free winter coat distribution there.
 
Yes, the poor will always be with us. But increasing wealth inequality is inevitable only if we do nothing to change it.

12/28/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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