October 10, 2014

This is a guest post by Christopher Jencks.  He is the Malcolm Wiener Professor of Social Policy at Harvard University and a member of the Scholars Strategy Network

This fall, candidates like Martha Coakley and Charlie Baker are talking about growing the economy and creating jobs. But what kind of jobs? Rising income inequality means that economic growth is failing to deliver real gains in earnings to most families. How best to confront that problem and make the economy work for everyone is an issue that should be at the center of the debate.

Income inequality has risen in almost every rich democratic nation since the late 1970s. What is more, although every affluent democracy uses some combination of taxes and government benefits to limit the level of inequality, some nations do far more than others – and the United States is among the countries doing the least.

According to the Luxembourg Income Study, inequalities in market income -- income that includes wages, salaries, earnings, private pensions, and income from assets like stocks and bonds -- are currently about the same in the six biggest rich democracies: Britain, France, Germany, Italy, Japan, and the United States.

But consider disposable income: the amount that families end up with after government benefits are added to market income, and after taxes on income and expenditures are subtracted. The U.S. national government does considerably less than the other five rich democracies to equalize disposable family incomes. As a result, disposable family incomes end up being more unequal in America than in any other rich democracy.

The problem is particularly worrisome in Massachusetts, which is one of the most unequal American states. Deep poverty in parts of Boston like Mattapan and in old mill cities is matched by amazing affluence in places like Cambridge, the Back Bay, and Weston.

Income inequality in the United States has risen in recent decades for three main reasons:

  • For many families, incomes are dragged down by declining job opportunities for less skilled workers, which have contributed to a dramatic increase in the fraction of children living in households without a male breadwinner.
  • The supply of college graduates has not kept pace with demand since the 1970s, so the income gap between the upper-middle class and people in the middle of the distribution has widened.
  • Deregulation, globalization, and financial speculation have doubled the share of income going to the top one percent of U.S. income earners, who have managed to do well in booms and after busts. Indeed, once the economy began to grow again after the 2008 financial meltdown, the top one percent raked in over half the income gains.

The private sector alone cannot solve the problem. Individual charity is fine, but only a small minority of the rich give away much of their money – and their gifts often go to privileged institutions. Voluntary corporate steps are not likely to work, either, because corporate boards have become convinced that their main goal should be to maximize “shareholder value” regardless of how that will affect their workers.

As a result, the problem must be addressed by government. Sadly, Washington gridlock means substantive national action is off the table for the foreseeable future.

That’s why state government leadership is necessary.

What could Massachusetts do? The state could tax corporate profits, individual capital gains, million dollar homes, or the incomes of the wealthy and use the revenue to supplement wages. Programs like the state’s Earned Income Tax Credit – which, like the federal EITC, helps low wage workers get ahead – could be expanded.The Bay State currently matches 15% of the federal EITC, even as New York, Connecticut and Vermont match 30% or more. Regulatory steps, building on the state’s recent move to increase its minimum wage, could be taken as well.

Secondly, investment in education can reduce achievement gaps – and perhaps long term income differences – between the children of the rich and poor. Preparation for college has to start early in life, by getting young children to start thinking about puzzling questions and continue to do so as they move through elementary and secondary school. Many cities and states are expanding their commitments to early childhood education, and Massachusetts could follow their lead.

To reduce inequality, college graduation rates must improve. Today, if a student attends a typical public college on borrowed money, he or she has a fifty-fifty chance of ending up with a lot of debt but no four-year degree. Thanks to financial sector lobbying, that trap can never be escaped by personal bankruptcy. No one should be surprised that so many students from less-than-affluent families skip college or end up dropping out.

The state can work to reform higher education to reduce the financial risks and help more students move through college in four years, with peers and friends on a shared track. 

State level policies like these – to counter various causes and types of growing U.S. income inequalities – could make a real difference in coming decades. But none of these policies will happen unless Americans decide that government can do what they say they want: limit windfalls flowing to the super-rich and enlarge opportunities for most workers and families to get ahead. This is the conversation we need to hear on the campaign trail this fall.

income inequality, Mass. Governor 2014

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