|Lisa A. Keister, Joel F. Handler, Lingsin Hao,
Mark R. Rank, Alan Reynolds and John Schmitt, First Panel: Rising
Wealth Inequality: Why We Should Care, 15 Georgetown Journal on
Poverty Law and Policy 437 (Summer, 2008) (61 footnotes ommited)
Lisa Keister: It is my pleasure to add my welcome to the
welcomes you have heard already and also to introduce the first
The first panel's job is to start to define the problem that we
are dealing with, to start to flesh out some of the details about
what wealth inequality is, how much wealth inequality there is, how
much there has been historically. Bob Kuttner was pretty quick to
say it has been increasing, but those of us who know the data--as I
am sure he does too--know that it is not actually that easy to say
that wealth inequality has been increasing. There are many nuances
that we need to flesh out, and what we are going to do in this first
panel is to start talking about some of the details.
I could spend the entire two hours telling you about the
wonderful panel that we have gathered here. But what I will do
instead is give you a very quick introduction to each of the
panelists. These are some very distinguished people and we are
extremely fortunate to have them with us.
The first person on the panel is Joel Handler, who is Richard C.
Maxwell Professor of Law and Professor of Policy Studies at UCLA.
Welcome Joel. Lingxin Hao is Professor of Sociology at Johns
Hopkins. Lingxin writes about social inequality and immigration, and
she has also done a lot of work on public policy. Mark Rank is
Herbert S. Hadley Professor of Social Work at the George Warren
Brown School of Social Work at Washington University in St. Louis.
We also have with us Alan Reynolds, who is a senior fellow at the
Cato Institute and former director of economic research at the
Hudson Institute. Lastly, we have John Schmitt, who is a senior
economist at the Center for Economic and Policy Research in
I will let them tell you in more detail what they are going to
talk about, but let me say a couple of words to whet your appetites.
Alan Reynolds is going to speak about wealth data, about how much
inequality we have. He will talk a little bit about income
inequality, I believe as well, but primarily he is going to present
some of the wealth data, to give us a sense how much inequality
there is. John Schmitt is going to talk about the way that we study
the wealth distribution and he is also going to address how we might
start addressing inequality through some other, more unusual, means.
Joel Handler is going to talk about workers who have moved into
low-wage jobs as a result of workfare. Lingxin Hao is going to talk
about another timely issue in terms of current affairs: immigrants
and where *438 they stand in the wealth distribution. Lastly, Mark
Rank is going to elaborate on the theme of why we should care about
Of course, there are lots of reasons why we should care, and I
hope that you will get a sense of some of those during this panel.
We will have a good long time for questions and answers after the
entire panel presents their thoughts, so hold tight with your
questions until then. Again, thank you for being here and I will
turn the panel over to Alan at this point.
Alan Reynolds: We were talking a few days ago in a
conference call about this session. The session is supposedly about
wealth inequality, but I said, "You know, what you folks mainly want
to talk about is income inequality, not wealth inequality."
As a result, I am only going to show one graph about wealth.
There are two different estimates in the first graph. One is from a
study by Wojciech Kopczuk and Emmanuel Saez--those are the smaller
numbers in light grey. The other figures are from the Survey of
Consumer Finances (SCF) from the Federal Reserve. The SCF is a very
in-depth survey of both income and wealth. That survey asks a lot of
hard questions and does not miss much. It shows much more wealth
concentration than the other estimates, but neither shows a clear
upward trend. The 1962 and 1983 figures came from John Karl Scholz
and are not entirely comparable with the others (the weights
changed). The Fed data from 1989 on are quite comparable.
When we talk about wealth inequality, it is most often measured
as how much wealth is held by the top 1 percent. The answer is--a
lot. But that has always been the case.
Basically, we have about 21 to 34 percent of wealth held by the
top 1 percent, depending how you measure it. People tend to think of
wealth as meaning stocks and bonds, but among the wealthiest it is
mostly privately held businesses. In some cases, the privately held
business goes public and the owners keep a few shares. For example,
Bill Gates has only about 8 percent of Microsoft stock still, but
that is enough to make him very wealthy. There were two young guys
who started a company called Google and they went public. The day
they went public, they each were worth $12 billion apiece, but
Google has gone from $300 to $700; now they are worth $20-some-odd
billion. But their wealth is the result of creating new products and
if it wasn't for Google, they would not be wealthy. We all use it. I
feel like I owe them some money, I use it so much.
The Kopczuk-Saez data go back to 1913. I started with 1939,
because it is the end of the New Deal and before World War II. The
top 1 percent's share of wealth actually went down, according
to their data, pretty much continuously. I am only showing a few
years because I am trying to match dates with the Fed series, which
only comes out every three years. What more could we say about
wealth, except perhaps that we should not focus so much on those who
have it (since *439 there does not seem be anything we are likely to
do about it) rather than on those who do not have any.
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Young people typically do not have any financial wealth. We have
"human capital" when we are young, future earnings. We draw upon
that to buy real capital--a home, a car, furniture and appliances.
As a result, young people are often deeply in debt for a while and
it is not until they get older that they accumulate more assets than
debts. People from forty-five to fifty-four have about ten times the
median wealth of people who are under thirty-five. Nobody should be
too surprised about that. I wrote a textbook called Income and
Wealth and in the introduction I quoted a well-known economist,
Edward Wolff, who referred to young people as "less privileged"
because they had not accumulated as much wealth as the middle-aged.
Yet it obviously takes time to accumulate a lot of wealth.
It's a funny thing: young people get older. When they get
older, they usually have more wealth.
*440 There are some people who never accumulate much wealth,
often because they are too poor to save even in their prime earning
years. But federal policy sure does not help. For example, if you
have $2,000 put away for a rainy day, you are not going to get food
stamps, you are not going to get Supplemental Security Income and,
in some states, saving "too much" can disqualify you for Medicaid
too. That strikes me as dangerous. We should be encouraging
low-income people to accumulate at least half a year's income. And
not just for retirement. People need savings long before they
retire: to deal with emergencies, to pay for schooling or job
training, to get a car to go to work.
Now, let's talk about income data. The second graph is
Census Bureau data. I do not go back very far, only to 1986. I will
explain why in a moment, because it is always wise to be skeptical
about economists cherry-picking certain dates to bolster their
argument. This graph shows the top 5 percent's share of family
income before taxes. The quote at the top says, "The impact of the
1993 change on measured income inequality is quite large." That was
not because the newly elected president, Bill Clinton, gave money to
the top 5 percent. It was because the Census started counting more
income at the top than previously. Census pollsters used to count
only part of it. For salary alone they counted up to $300,000 per
job (even less before 1985). In 1993, Census pollsters started using
computers and including up to $1 million per component of income.
Naturally, after pollsters began recording higher incomes in 1993,
the recorded income of the top 5 to 20 percent appeared to suddenly
If we went back to the early 1980s, top incomes were quite low,
making incomes look very equal by this measure (which, of course,
excludes 95 percent of all families). The stagflation of 1979-82 had
a devastating effect on bonds, stocks and small businesses, so the
top 5 percent's share of family income was already low in 1979 (15.3
percent) and it hit a record low of 14.4 percent in 1981. I am not
starting this graph with 1986 to conceal that. I am doing this to
show you that the top group's share was quite flat from 1987 to 1992
and fairly flat after that. The apparent jump in 1993 is largely or
entirely a statistical illusion--the figures "are not comparable"
before and after 1993. If we were to use this data to answer the
question, "Has top-tier income inequality increased since 1979 or
1981?" the answer is yes! But most of that rise occurred prior to
1987 or 1988.
What happened to income dispersion since Census survey methods
changed in 1993 is somewhat ambiguous. One broad measure of
inequality in disposable income--after taxes and transfers,
but including capital gains--is the Census Bureau's Gini coefficient
for their fourteenth alternative measure of income. That *441 has
been virtually unchanged, at 0.4 in 1994 and 0.421 in 2006.
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The next graph takes another look at income, using the same
Survey of Consumer Finance that we used before when talking about
wealth. Strangely enough, the Fed's survey is not often mentioned in
discussions of income inequality. I am only showing you two years,
the change between 1989 and 2004. But I think that's fair because
1989 was a cyclical peak.
This graph shows changes from 1989 to 2004 in average real,
inflation-adjusted incomes of the lowest fifth, second fifth, middle
fifth and so on. None of these numbers has grown very much. Average
incomes in the middle fifth grew only 14 percent over a fifteen-year
period, about 1 percent a year. You could use these figures to say
there has been a "middle class squeeze" if you like. But it is hard
to describe this as an increase in inequality. The SCF Gini
coefficient was *442 0.54 in 1989 and 0.54 in 2004. I take the point
that some of the increase in money income at the bottom may be a
consequence of welfare reform. It may well be that single mothers
are earning more money, but because they have to pay commuting
expenses and child care expenses, they may not be better off.
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But this is interesting data, just the same, because the SCF uses
a broader definition of income than the usual Census Bureau figures.
The Fed's survey includes capital gains and business income, as well
as Social Security and other transfer payments. There is a lot of
inequality in these figures, don't get me wrong. The median income
in the bottom fifth was only $11,100 in 2004 (up from $8,500 in
1995, measured in 2004 dollars). That means the bottom 10 percent
earned even less than $11,100. Median income for the top 10 percent
was *443 $184,800 in 2004, so the top 5 percent earned even more
than that. Still, the gains of real income among the top 10
to 20 percent from 1989 to 2004 were not quite as large as the gains
among the bottom 20 to 40 percent.
The reason the overall 1989-2004 gains look fairly small is that
there was a recession in 2001 and it usually takes about seven years
before incomes get back to the previous cyclical peak. Median
income, for example, did not get back to the 1989 level until 1996,
and was just barely above the 1989 level in 1997. Median income is
very similar to the middle fifth, however and these SCF figures show
that income increased more slowly in the middle than it did for the
other 80 percent of U.S. households.
The next graph is difficult. It came out of a paper I presented
at the Western Economic Association and I am still working on it.
The line at the top is the estimate by the Congressional Budget
Office (CBO) of the top 1 percent's share of income, including
capital gains. It is after tax, and uses a very broad definition of
This graph uses figures adapted from the tax-based estimates of
Thomas Piketty and Emmanuel Saez, which are similar to those of the
CBO but exclude transfer payments. Showing the gyrations in two
sources of top incomes is intended to illustrate just two of the
several points I made in a recent Wall Street Journal piece
about data problems with all of these tax-based income
The solid bars show how much of the top 1 percent's income
consists of business income. When the individual tax rate came down
in 1986 (and again in 2003), a lot of businesses and professional
organizations switched from reporting most of their income under the
corporate tax into Sub-Chapter S, limited liability companies (LLCs)
and partnerships. Today, more than half of business income is being
reported by such pass-through entities in individual income tax. It
just moved from one tax form to another, but to those who use the
individual tax returns to measure income (including the CBO) it
looks like more income at the top. Much of that income was always
there; it just used to be recorded on a different tax return. That
is the main reason the top 1 percent's share (the dark line) looks
larger in 2005 than it did in 1986. The main reason the top 1
percent's share appeared to fall from 1986 to 1995, however, was
that fewer capital gains showed up on tax returns while the capital
gains tax was 28 percent.
The lower, striped bar shows how much of the top 1 percent's
income comes *444 from capital gains that show up on tax returns (as
opposed to being unrealized or sheltered in an IRA or 401(k) plan).
One thing you can easily see is that the share of top incomes from
capital gains bounces up and down wildly--from the stock market boom
in 1997 to 2000 and the subsequent crash, but also with changes in
the capital gains tax rate. In 1986, everyone knew the capital gains
tax was going to be much higher in 1987. So there was a rush to
realize gains before 1987, resulting in a big spike in the top 1
percent's income as reported on tax returns. After the capital gains
tax rate rose to 28 percent, realizations of capital gains remained
very low until the capital gains tax was cut again to 20 percent in
1997. That did not mean the rich had fewer capital gains, but that
they did not realize as many of those gains by selling
assets. Together with the high-tech stock boom, *445 lower tax rates
on realized gains helped push reported top incomes skyward from 1997
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In all estimates of top incomes that include realized capital
gains (including the CBO data and the Census Bureau's estimates of
disposable income), the ups and downs in the dark line are telling
us more about the stock market and the capital gains tax than they
are about any "trends" in top incomes. That makes this "top 1
percent" income share very cyclical. The surest way to get the top 1
percent's share down is to toss the economy into a big recession.
That works every time. Unfortunately, recessions also shrink the
bottom 20 percent's share and incomes in general. In the 1980-82
stagflation, the Dow fell to 884 and long-term interest rates,
including mortgages, approached 16 percent. This prolonged
inflationary recession was indeed devastating to incomes at the top
(thus "reducing inequality") but also devastating to those at the
bottom. One of the problems with focusing too much on the top 1
percent is that it ignores what is happening to all other income
groups, unlike my previous graph from the Survey of Consumer
The general pattern of relative income gains in that SCF graph is
broadly similar to estimates the CBO produced in May for families
with children--using Census data to measure incomes for a change,
rather than (misleading) tax returns. That study showed that incomes
rose by 35 percent for the lowest fifth, by 53 percent at the top
and by only 17 percent in the middle. The CBO study started with
1991, which was a recession. And incomes do not show any improvement
between the cyclical peak of 2000 and 2005, which was likewise true
five years after the 1979 or 1989 peaks. That is why I started with
a peak year, 1989, rather than measuring income gains from the
trough of recession (1991) to a cyclical peak (2000). Still, the CBO
study of income changes for families with children is roughly
consistent with the SCF data for all households.
Finally, when we talk income distribution, people often quickly
switch to wage distribution, as if everybody worked and as if wages
were the only source of income--nobody has dividends, capital gains,
rent or, for that matter, transfer payments.
The last graph shows the percentage of full-time workers by
income group last year. Basically, there were five times as many
full-time workers in the top fifth as there were in the bottom
fifth. If that sounds like a politically incorrect statement, it is
not meant to be. People do not work for good reasons. The number one
reason is they are retired. There are fewer people in bottom fifth
than in the top fifth. There are more singles and widows in the
bottom and more two-earner couples with kids at the top.
The second most important reason why people do not work is that
they are in *446 school--there are a lot of college students in the
bottom fifth. Another reason people don't work is disability.
Another is temporary unemployment or illness. There many good
reasons why people don't work in any particular year. But the fact
there is so little work going on in the bottom fifth is one of the
reasons the annual income numbers are as skewed as they are.
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That is about all I have to say. I do not do this research as a
means of peddling policy advice. On policy, I agree with some of the
things Bob Kuttner said. I agree with many comments from the
audience. But I want to get the numbers right first. Then we
can discuss what is really going on, and why, and what private and
public agencies might be able to do to make things better. Thank you
*447 John Schmitt: I am an economist and as my three, much
more creative siblings will tell you, that means I am pretty
literal-minded sometimes. What I am going to talk about today is the
wealth distribution and I want to be clear about what I mean when I
am talking about this.
There are three important economic distributions that economists
look at. One is the wage distribution. That is how much money a
person makes per hour of work, sometimes with, sometimes without
benefits, and how that is different across different kinds of
occupations and different kinds of people. A second important
economic distribution is the income distribution, that is, how much
money a person receives in an entire year from all sources: from
work, from stocks and bonds, from rental apartments owned and a
whole host of other things. The third distribution is the wealth
distribution. That is the amount of assets you have at any given
point in time, minus the liabilities you have. It is the value of
your house minus the outstanding mortgage. It is adding up all of
your checking accounts and saving accounts and subtracting your
student loans or your credit card debt. Net wealth is what is
left--that is the distribution I am going to talk about today.
I will say, parenthetically, that in Alan's talk, while he
touched upon all three of these economic distributions, he talked
mostly about the income distribution. I have many disagreements of
opinion and fact with respect to his interpretation of what happened
with income trends. If, however, we focus on the wealth
distribution--even though Alan publishes in the Wall Street
Journal and I come from a very different political perspective
than what you generally find on their editorial page--his reading of
the wealth distribution numbers is actually one that I share. But I
am going to give that reading a very different interpretation.
Basically, I will make three points today. First, wealth
inequality in the United States is actually staggering in its scale.
And it is very resistant to change. The second point I am going to
make is that unfortunately, I think our ability to address wealth
inequality directly is very limited. As pessimistic as that sounds,
my third point is that there is, fortunately, an alternative to
dealing directly with wealth inequality. The alternative, however,
involves recasting the problem and thinking about wealth inequality
in a different way.
So with the help of Alan's data, and some extensions of that same
data, let me make my first point, which is that wealth inequality in
the United States is breathtakingly unequal. If we look at the data
from the Survey of Consumer Finance for 2004, the top 1 percent of
households had about 34 percent of all the wealth in the country.
The top 1 percent had more than one-third of all the wealth. The
next 4 percent had 25 percent of the wealth, a fourth of the wealth.
That means, taken together, the top 5 percent of households had 60
percent of all the wealth in the country.
*448 An even harsher way of looking at that level of inequality
is to note from the same data that the bottom 80 percent had just
over 15 percent of the wealth. We are talking about enormously
unequal distributions, far more unequal than the income
distribution, far more unequal than the wage distribution.
The point that Alan's data made very well is that distribution is
actually pretty resistant to change. We can understand why this is
the case--and it is not because there are, as Alan suggests, some
young people and some old people. It is because wealth and power are
absolutely, inextricably interlinked and people who have wealth have
power, and they are often able to make sure that they continue to
have both wealth and power.
I want to illustrate what we are up against by an example that I
have repeated many times since I first heard it at a conference on
wealth inequality in New York City in 2000 or 2001. A commercial
banker was speaking to the conference participants and he made a
very interesting point. He said in 2000, the median wealth holdings
of African-American households were about 13 percent of the median
wealth holdings of white families. He observed that in 1865, when
the slaves were freed, you could roughly assume that
African-American median household wealth was about zero percent of
whites, since they had the clothes on their back and not much else.
He then commented that in 135 years, we had come 13 percent of the
way towards equality along this dimension.
That is what we are up against when we are talking about wealth
inequality. It is a very difficult thing to move. If you look at the
last 135 years, we had political, economic and social events, such
as the civil rights movement, for example, that massively increased
African-Americans' participation in society. We are not likely to
see changes on that scale again. The next 87 percent of the way
toward equality along this dimension is likely to be much harder
than the 13 percent we have achieved so far.
Of course, wealth inequality is not just an issue for
African-Americans. As we saw earlier, the share of the top 1 percent
has been roughly unchanged over the forty-five years from 1962 with
about 33 or 34 percent of all wealth held by the top 1 percent.
Now the second point that I want to make today is that it is very
difficult for us, if we confine ourselves to conventional policy
tools, to address this kind of inequality. The difficulties are
related to the scale of wealth inequality: when 80 percent of people
only have 15 percent of the wealth, there is a lot of
redistribution that is needed. But the difficulties are also related
to the issue of power. The people at the top who have 60 percent of
the wealth are very resistant to change. Let me give you an example
of how difficult redistribution is in the wealth context.
*449 One of the most common things that people propose to deal
with wealth inequality is asset-building programs. My comments
reflect a point raised in Bob Kuttner's remarks earlier and I want
to elaborate. Hillary Clinton, for example, recently proposed a
$5,000 per child bond or gift or credit that would be given to all
citizens when they turned eighteen. The idea is to give everyone at
least a small stake in society. Let's do a simple experiment,
though, which is even bolder than what Hillary Clinton proposed.
Let's take the 2004 wealth distribution that I mentioned earlier,
and let's give the bottom 40 percent of households in the country
$10,000 each. That is essentially giving $10,000 to 45 million
households. When you add that all up, it is almost a half a trillion
dollars, which is more or less what we have spent on the Iraq War so
far. This is the order of magnitude of the expenditures that we are
What does that do? You run the numbers--it does not take very
long in a spreadsheet--and, if you take all of the money for the
redistribution from the top 1 percent of households, the share of
total wealth held by the richest 1 percent would fall from about 34
percent to about 33 percent. What happens to the share of the bottom
40 percent? It goes from .2 percent to about 1.2 percent of the
total wealth distribution.
We are enacting a wealth redistribution program which is beyond
any of our wildest dreams and you can barely tell the
difference on any of the graphs of the wealth distribution that Alan
showed you earlier.
That is pretty depressing; at least it was to me. We can deal
with the issue of wealth inequality, but to do so, we have to recast
the problem. We have to ask why it is we care about wealth
inequality. We care about wealth inequality because we care about
economic security. We know when somebody has some money in the bank
that they can weather a divorce, a serious illness, a death in the
family, the loss of a job. We know that with that money in the bank
that they can get by. We also know that wealth gives families the
money to make an investment, for example, in college education,
which is one of the most important things people can do to get ahead
economically (although it is certainly not an economic policy
without its problems--but that is a separate discussion).
We care about wealth inequality because we care about economic
security. If what we care about is economic security, we know how to
provide economic security, even if we have difficulty changing the
wealth distribution in any meaningful way. The way to provide
economic security is to expand and deepen the social safety net that
we have. There is probably no single action that we could take to
improve the economic security of people in the United States,
particularly for people in the middle and the bottom of the income
distribution, than to provide some sort of national health
insurance. One of the biggest causes of bankruptcy and economic
anxiety is the inability of families to deal with health care
The second thing we could do is reform the unemployment insurance
system. The unemployment insurance system now is very stingy by
international *450 standards and it hardly covers any workers. The
current system does not cover a lot of non-standard workers
(part-timers, temporary workers), recent returnees to the labor
force and young people; when it does cover them, it provides very
low levels of financial assistance relative to what we as a very
rich country are capable of giving.
We could also reform welfare reform. We could actually provide a
system that gives financial support and work supports to women who
have children and not the punitive and underfunded measures that we
have had in place since 1996.
We could give people free college tuition, which is basically
what most of the rest of the rich countries in the world do. We are
richer than they are, so why can't we afford to do it, too?
Now all of this is probably a pipe-dream. I will conclude by
saying that we are past the point of needing good ideas. We have a
lot of good ideas. We do not really have problems of policy. We have
problems with politics. It is not going to be more and better ideas
that get us anywhere on the wealth distribution or economic
insecurity. It is going to be more and better organizing. Women got
the vote and unions got the weekend and African-Americans got civil
rights because they organized. That is what we need to do if we are
going to make any headway on this. Thank you.
Joel Handler: I am going to talk about one segment of the
working poor. It is not the majority segment but it is one of the
main focuses of our country, and that is the single mother family.
The United States is unique among the developed world in
demonizing the single mother family. This started from day one
during the colonial period. There were a lot of single mothers
then--due to men lost at sea, the Indian/colonial wars--and if it
was a white single mother, they would board the children out, give
her some support. If it was a black or Indian single mother, they
would say, "Get out of town!"
During the nineteenth century, this hatred was focused first on
Irish immigrant families, then Catholics, Jews, Italians and Greeks
in the latter part of the century. The mothers' pensions system,
which basically provided a subsidy to white widows with children,
started in 1910. Blacks did not appear on the radar screen until the
post-World War II period for a whole variety of reasons. The welfare
rolls exploded and welfare started its journey into crisis. Ronald
Reagan coined the term "the welfare queen," which invoked the image
of the inner city black woman, having children to stay on welfare;
children having children to stay on welfare; substance abuse,
crime--welfare recipients as a criminal class. Finally, President
Clinton, in 1996, "ended welfare as we know it" with the Personal
Responsibility and Work Opportunity Reconciliation Act (otherwise
known as *451 the Welfare Reform Act).
A curious thing happened when we "ended welfare as we know it":
poverty dropped off the political radar screen. It rose a little bit
during Katrina but it essentially dropped off. Robert Kuttner says
there is some movement there, but except for John Edwards, it is
really not talked about.
What did welfare reform do? I will go over this briefly, because
it is now ten years old. It dramatically expanded the states'
ability to design their own welfare programs for poor families. The
states received block grants; in exchange, they had to have a
certain percentage of their welfare recipients working, a percentage
which has gradually increased over the years. Welfare was no longer
an entitlement. People had responsibilities instead of rights. And
it expanded the states' ability to reduce cash aid if a welfare
recipient violated the program.
One of the most important features of the block grant system was
that states were allocated welfare money based on the number of
welfare recipients they had in 1992 and 1993, and if somebody
subsequently left the welfare rolls in the state, the state would
keep the money. Under the prior program of a grant-in-aid, the state
would lose half the federal grant. So there were financial
incentives for states to reduce their rolls.
One of the key assumptions of welfare reform was that the state
welfare agencies would become active employment services, or
education and training services, for welfare recipients. In fact,
the state offices for decades had been staffed by overworked,
undertrained eligibility technicians. They were concerned with
making sure that people were financially eligible and that they
abided by the rules. Now, under Temporary Assistance for Needy
Families (TANF), they were also supposed to create individualized
work plans and determine family behavioral requirements and family
However, instead of creating individualized work plans, many
workers go through the forms and assign clients on the basis of
their quickest assessment. A 2001 study of the Wisconsin TANF
program found that casework managers used informal impressions to
make important decisions. In Wisconsin, which became the model for
the country, and in fact for the world, clients could be placed in
four different tiers, depending on their abilities. Most of the
clients were placed in the lower community service jobs tier because
it was the easiest choice.
According to the same study, at the initial client interview in
Wisconsin, the caseworkers were expected to complete up to 480
screens on a computerized system to place the clients. I tell my
class in Los Angeles, "All of the stories you *452 have read about
the FBI and CIA computer systems, can you imagine the computer
system for the Los Angeles County Department of Welfare, where you
have to go through 480 screens?"
Evelyn Brodkin's study of work programs in Chicago found that
eligibility determinations are based on statistics and quotas; they
are rarely based on client needs and goals. In addition to this,
welfare offices have to monitor the clients' compliance with the
work requirements. During a 2003 study in Wisconsin, researchers
tried to reach recipients for follow-up interviews. Less than 80
percent of the women selected for their study could be found.
Multiple reasons exist for the poor performance of clients and
when clients are reported to be out of compliance by the computer
system, caseworkers have the discretion to sanction clients and
change their checks. Thirty-seven states have a full-family
sanction: the client and her family are cut off completely. The
other states have partial penalties. Studies found that the sanction
rates have gone up 50 percent in some areas. Many welfare recipients
who are sanctioned have no idea that they were sanctioned and do not
remember any discussion of the work requirements. You can understand
how that happens: a mother with kids comes into the office, they are
desperate and they are focused on what they are going to get
and what they have to do. Many of the caseworkers also do not
understand the sanction policies.
There also has been an extensive amount of privatization of the
welfare functions. The idea is that the private companies--you know
the ideology--are more efficient and can produce better outcomes
that result in cost savings for the government. Jason DeParle did a
study of the Wisconsin privatization program called American
Dream that found cooking the books, keeping the surpluses, *453
using the surpluses to bid on other states.
The reason for this, as John Donahue points out, is that
privatization only works when you have competition and government
agencies are willing to examine performance and to put the contract
out for another bid. This rarely happens in state welfare divisions.
It is similar to the Defense Department--if you want a certain kind
of jet fighter now, you have to go to Lockheed. It is the same with
privatization in the welfare case: the states, for the most part,
ignore what is going on and simply re-do the contracts.
So what has been happening to all of these people who have left
the welfare rolls? We have heard from Robert Kuttner and John
Schmitt about what has been happening to the low-wage labor market.
At any one point, 40 percent of welfare leavers are unemployed.
Those who are employed make between $5.67 and $8.42 an hour. The
average annual income is between $8,000 and $15,144, leaving most of
them in poverty. They work in temporary jobs, shift work. The number
of hours worked per week is relatively high but still there are
substantial periods of unemployment and many of them are worse off,
even including the benefits from the earned income tax credit.
Now, when they lose their jobs or jobs disappear, they usually do
not qualify for unemployment insurance. The reason for this is that
they usually do not have sufficient earnings per quarter to get
unemployment benefits. As John Schmitt *454 pointed out, the vast
majority of workers who are unemployed do not get unemployment
insurance. Previously, the single mother family would go back on
welfare until the mother got a job, using welfare to trampoline
effect. The idea that most welfare recipients were long-term
recipients is a myth. Only about 15 percent of welfare recipients
stayed on welfare for five years or more. Most were on welfare for
about two years, getting a job, losing a job. But now they no longer
There is a whole range of issues facing these poor mothers in
poverty. It is not just money and wealth. Housing has become a
huge issue. But I am going to end by talking about child care.
Many of you in this room are parents or if you are not parents, you
are aunts and uncles and have nieces and nephews. Think about the
importance, even before a baby is born, of communication. Think
about communication when that infant is born, and the brain is
developing, the stimulation an infant needs. Now imagine a child,
that infant, in a room with 12 other infants, and the only contact
with an adult is getting fed and changed a couple of times a day. Or
imagine that infant dozing in a chair, the television set is on, the
grandmother is babysitting and she is asleep because she worked all
night. Think of what happens to those children in the years before
they even enter school, how far behind they are. This is not only
cruel and unjust, this is national suicide. We have millions of
children growing up in these conditions.
Lingxin Hao: As a sociologist, I focus on social groups,
and wealth inequality by social groups. Today, my presentation
focuses on wealth stratification by race, ethnicity and nativity. My
goal is to deepen our understanding of the degree of wealth
inequality along the color line. Because other panelists have
defined key terms, I will skip the definition for net worth, assets
First, I want to let you know what data sources I used to look at
wealth stratification. My data comes from the Survey of Income and
Program Participation, 1984 to 2003, and all values are in 2001
I use a different way to look at wealth inequality. Here I will
promote the notion of asset poverty. Take a moment to imagine a
scenario first: a household's breadwinner loses a job or gets sick.
Then the income stops, so the household has to liquidate its assets
to survive. A convenient (but conservative) threshold for survival
can be borrowed from the official poverty line, which is set by the
Department of Health and Human Services. In 2001, for a household of
three, the poverty line was set at $14,100 for the whole year.
With that as a backdrop, we introduce the asset poverty concept.
Robert *455 Haveman and Edward Wolff defined asset poverty as the
lack of sufficient net worth to continue a standard of living at the
official poverty line for three months, should a household's income
end. In the example of the household of three, the threshold for
asset poverty in 2001 is $3,525, which is one-quarter of the
official poverty line. So with respect to John's experiment, giving
the lower tier of households $10,000 can really lift them up out of
asset poverty. I also want to call attention to the notion that
assets include home value, which is a form of illiquid asset, as
well as retirement accounts, which are a quasi-liquid form of
Unlike income poverty for a specific year, asset poverty actually
reflects past saving and past asset building. More importantly, it
captures the minimum, the real minimum, economic security that could
indicate whether a household can withstand a small spell of
unemployment or sickness. Keep that in mind as we look at the data
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT
The left panel of Figure 1 shows the racial gaps of the asset
poverty rate. Here, the four bars from left to right are for white,
black, Hispanic, and Asian. We see that about 18 percent of white
and 21 percent of Asian households live in asset poverty; the
percentages for black and Hispanics are much higher--44 percent and
42 percent, respectively. In other words, almost half of the black
and *456 Hispanic households do not have enough of an economic
buffer to deal with the emergency of unemployment or sickness.
From this left panel, we see that race/ethnicity is an important
factor of wealth stratification. But studies on wealth tell us that
other factors also contribute to wealth distribution. These include
human capital, measured by years of schooling; life cycle, measured
by age; household types--married, with or without children, single
heads of families, single men, single women, and then lastly, the
number of children also matters. These factors definitely confound
with race/ethnicity. For example, Hispanics are lower in education,
younger in age and higher in fertility. In order to get a sense
about what is the impact of race and ethnicity on wealth inequality,
we need to adjust for these factors.
On the right panel of Figure 1, the bar for whites is the same as
the observed bar because here we take whites' composition of
education, age, and other characteristics as the benchmark. The bars
of the minority groups indicate the asset poverty rate as if they
had taken the characteristics for whites. Here we see that after
adjustment, the racial gaps are smaller. However, the gap for blacks
and whites remains large and significant: the gap for blacks is
reduced from 44 percent to 32 percent; and for Hispanics it is
reduced from 42 percent to 28 percent. Among Asians, you don't see
much change after the adjustment; I will provide an explanation in a
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In the next step, I break the data down for high school dropouts
and high school *457 graduates, so there are two categories of
education: less than 12 years of education, and the other is 12
years of education or more. Here, the purpose is to show that
education does matter. If you look at the left two panels of bars,
you can see that those groups in the lower education categories do
much worse than their higher educated counterparts.
I also want to call your attention to look inside the adjusted
lower education categories. There we see, as before, that the racial
gap for blacks and whites drop, but this time, we also see that the
gap between Asians and whites drops after adjustment. However, all
racial minorities still have a higher asset poverty rate than
Within the higher education categories, we see that the asset
poverty rate increases, after adjustment, for educated Asians. This
pattern reflects that Asians are more educated than whites. If you
take together the lower educated and higher educated Asian group,
the change cancels each other, so that for Asians as a whole, you do
not see much change after adjustment.
The common pattern that emerges from this examination is that the
minority groups' asset poverty rates are higher than whites within
each education category.
The next pattern I want to show you deals with immigration and
introduces more complexity to the patterns. There are many reasons
why it is imperative to consider immigrant groups by country of
origin. For example, some immigrants are self-selected, some
positively selected, others negatively so; some intend to stay in
the U.S. permanently, others do not, they stay temporarily. Also,
with a very small exception, most immigrants come to the United
States and start to accumulate wealth from zero, because they
usually do not bring savings or inheritances with them. Immigrants
differ from natives also because their income generation differs,
given their concentration in ethnic economies, entrepreneurship and
contract work. They bring their lifestyles to the United States, so
their consumption patterns are different, their tastes differ, their
portfolio allocations are different. Lastly, some groups also stay
in the United States for longer time than other groups.
Here we want to look at how the country-of-origin groups of
immigrants are doing. Let us focus on Hispanics. Here we have the
native-born whites as the benchmark and we also compare with the
native-born Hispanics. I identify three Hispanic immigrant groups:
Mexican, Cuban and Dominican. First, it impresses you immediately
that initially there is a big variation between immigrants from
different origins. Interestingly, after adjustment, Mexican, Cuban
and native-born Hispanics have almost identical asset poverty rates
and, in fact, the asset poverty rate for the more-educated Mexicans
and Cubans drops below that for native-born Hispanics.
One last point about the Asian immigrant patterns, since my time
has already run out, one important note here is that they have a lot
of variations and after adjustment, the poverty rate actually
increases for a number of ethnicities. For example, most strikingly,
the asset poverty rate increases for four Asian groups *458 with
twelve of more years of education, after adjustment.
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To wrap up, there are three points I want to make here. One is
the importance *459 of the effect of race/ethnicity on asset
poverty; we have good evidence for that. The second point is the
importance of race/ethnicity does not negate the importance of
education. Third, when we study race/ethnicity, we have to look at
individual immigrant groups, because a very big proportion of the
households of Hispanics and Asian are inhabited by immigrants. Thank
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Mark Rank: I want to take my time here on the panel to
talk about three things: the extent of economic inequality and
poverty in this country; why we should be concerned about these
issues; and finally, some thoughts on altering the direction that
this country has been heading with respect to poverty and
Let me start off by giving a bit of background on the extent and
magnitude of economic inequality and poverty in the U.S. The United
States has always had relatively high levels of economic inequality
compared to other developed countries. But over the past forty years
we have seen a dramatic rise in that inequality, so that today the
U.S. has among the highest levels of economic inequality in the
The well-known economist Paul Samuelson, writing in the first
edition of his Introductory Economics textbook in 1948, noted
that if we made an income pyramid out of a child's building blocks,
with each layer representing a $1,000 of income, the peak would be
somewhat higher than the Eiffel Tower but most of us would be within
a yard or so of the ground. That was in 1948. By the time of the
2001 edition of Samuelson's textbook, most of us would still be
within a yard or so of the ground, but the Eiffel Tower would now
have to be replaced with Mount Everest in order to represent those
at the top of the income distribution.
Over the last four decades, the magnitude of both income and
wealth inequality have been rising to levels not seen since those of
the Gilded Age during the late part of the nineteenth century. On
the one hand, we have seen the paycheck of the average American
stagnate over the past thirty years. For example, the median
earnings of men working full-time in 1973, adjusting for inflation,
were just over $44,000. Fast forward to 2006, and their median
earnings stood at around $42,000. Consequently, over a period of
thirty-three years, the median worker in the United States has
actually lost ground in terms of *460 their real income.
On the other hand, the income of an American in the top 5 percent
of the income distribution, and particularly the top 1 percent, has
soared over this time period, according to the U.S. Census Bureau.
Nearly all of the economic gains that have happened over the last
thirty-five years have been concentrated in the top 20 percent of
the income distribution.
Or take what has happened with respect to the distance between
the average CEO's salary and the average worker's salary. In 1980,
the average CEO of a major corporation earned around 42 times of the
average worker's pay. Today it is approaching 400 times. Adding
insult to injury, from the 1980s onward, an increasing number of
companies have demanded concessions from their workers, including
pay cuts and the reduction or elimination of benefits, particularly
If we look at patterns of wealth accumulation, we see that these
patterns are even more skewed than income. Today we find that 1
percent of the U.S. population currently own approximately half of
the entire financial wealth in this country. Financial wealth
includes your assets minus your debts but does not include your home
equity. So 1 percent of the U.S. population currently holds half of
the entire financial wealth (stocks, bonds, savings, and so on). The
bottom 60 percent of Americans hold less than 1 percent of the
country's financial wealth, while the bottom 40 percent are actually
in debt. As a result of these and many other patterns, the United
States currently leads the developed world in terms of the extent
and degree of its economic inequality.
With respect to poverty, the story is much the same. Whether we
look at overall levels of poverty, children's poverty, or poverty
among the elderly, the pattern is similar. That is, of all the
advanced industrialized nations in the world today, the United
States ranks at the top in terms of poverty.
Let me now turn to why these dynamics are important to the vast
majority of Americans and to the country as a whole, or as the title
of this session suggests, *461 "Why We Should Care." This is one of
the subjects that I deal with fairly extensively in my book, and
although I do not have time to go into a lot of detail, let me just
mention a couple of reasons for why I think we really ought to care
about this issue.
The first one, which is probably the most powerful, is that it is
in the self-interest of most Americans to do so. There are at least
two ways of thinking about this. The first is that whether we
realize it or not, we wind up paying a very steep price for having
such high rates of poverty and inequality. Widespread poverty is
associated with a host of social problems and economic costs. Each
of us pays a tremendous price for allowing so many of our citizens
and communities to be mired in poverty. What we basically wind up
doing is spending our money on the back end of the problems of
poverty and inequality, which is assuredly a much more expensive
approach to take in the long run than prevention on the front end.
Poverty is associated with higher health care costs, loss of
productivity, stunted growth, economic blight, increased costs
associated with crime and incarceration and so on.
For example, it requires a lot more money in the long run to
build prisons and put people away for years at a time than to
alleviate the conditions that lead to crime in the first place. It
is no coincidence that the United States has both the highest rates
of economic inequality and poverty in the Western world, and that we
also have the highest rates of incarceration in the world. In short,
each of us pays dearly for letting poverty exist at such levels.
But there is also a second way of thinking about reducing poverty
and economic insecurity as being in our own self-interest. That is,
what are the chances that an average American will directly
encounter poverty at some point during their lifetime? As I began
thinking about this question several years ago, we knew very little
about what that risk actually was. By using a long-running, large
panel data set, my colleague Tom Hirschl at Cornell University and I
have been able to begin to answer that question. It turns out that
the number of Americans who are touched by poverty during their
lifetimes is exceedingly high. Between the ages of twenty and
seventy-five, nearly 60 percent of Americans will experience at
least one year below the official poverty line, while three-quarters
of Americans will experience a year either in poverty or near
Perhaps even more surprising, it turns out that between the ages
of twenty and sixty-five, two-thirds of Americans will use, at some
point, a welfare program such as food stamps or Medicaid, and 40
percent of Americans will use such programs in five or more years,
scattered throughout their working age adulthood.
*462 Now you might ask, "Why are these numbers so high?" It turns
out that the numbers are high because during the course of a
lifetime--and we are talking about forty or fifty years here--a
variety of things can happen to people. Many of these are unexpected
and detrimental, such as losing a job, a family splitting up or
Rather than a risk that affects a few on the fringes of society,
it turns out that poverty and the use of welfare are events that
will actually strike the vast majority of American citizens. It also
turns out that recent research has shown that this life-course risk
of poverty and economic instability has been rising over the last
thirty years. More and more families, including middle class
families, are experiencing greater volatility and downward swings in
their income as a result of greater instability in the labor market
and the lack of benefits, such as health and unemployment insurance.
So there is a powerful case to be made that the majority of
Americans should be concerned about rising levels of inequality and
poverty because it is very much in our self-interest to do so. But a
second reason for why we should care about these issues revolves
around the critical question that we must all ask ourselves. That
is, what kind of society do we want to live in and create for our
There are at least two paths that could be chosen. The first is
the route that we appear to be on now. This path will likely lead to
an increasing division between the haves and the have-nots. The top
of society will continue to prosper, the middle will struggle and
the bottom will fall further behind. The ongoing concentration of
wealth and income will escalate into the future, fueled by
government policies slanted toward the well-off, with the democratic
process being largely a tool that provides for the needs of the
wealthy and powerful. The privileged top of society will physically
separate themselves from the middle and the bottom, as the social
and economic conditions for the bottom two-thirds stagnate and
We can see such patterns now, in the rise of gated communities,
residential segregation, increased prison construction, growing
private school enrollments, increased expenditures on private
security and so on. The United States will begin to reflect the
bifurcation patterns more typical of Third World countries, and at
the same time, we will continue to blame the less fortunate for
their economic and social woes, arguing that government should do
less and less in order to provide the necessary incentives for them
to get ahead. And we will embrace all this with phrases and slogans
such as "the ownership society," "the importance of family values,"
and "the necessity of tax relief."
This appears to be the path that we are traveling on now. We can
choose to *463 remain silent, go about our business and continue
down this slope. However, I do not know about you, but I am tired of
this direction that the country has been going. I am tired of being
told that there is simply not enough money to provide for the health
care needs of low-income children but there is always enough money
to cut taxes at the top. I am tired of people talking about homeland
security and yet for the people of New Orleans and their
security, it took months after Hurricane Katrina before they could
even get a trailer to live in, if they got one at all. I am tired of
presidents telling the poor to pull themselves up by their
bootstraps, when they have been handed a silver spoon throughout
their lives. And I am tired of people getting away with this
hypocrisy and turning America into a country that no longer even
tries to live up to its promises and ideals. Shame on them, and
shame on us for allowing this to occur. I don't care if your
politics are left, right or upside-down, this is fundamentally
wrong, a reason for concern, and it is high time for a change.
It is time for a new vision and a new reality for America. I hope
that this conference and these two centers in the future can play a
leading role in working toward such a vision. One that understands
that the judgment of a society depends not on how it treats its most
wealthy and powerful, but rather on how it treats its most
vulnerable. One that places the concerns and the needs of everyday
Americans, rather than those of special interest groups, at the top
of its policy agenda. And one that realizes that investing resources
on the front end of a problem is always a smarter and more effective
solution than spending money on the back end. It is time for us to
wake up and begin to put America on a more humane, livable, and just
direction. That is a reason for why we should care.
Let me end my thoughts here on a historical note that I think is
very relevant for us today. The week before he was killed in March
of 1968, Martin Luther King gave a final Sunday sermon at the
National Cathedral in Washington. I don't know how many of you have
been there, but it sits on the highest part of the city and it is a
very impressive and inspiring place. The title of his sermon that
Sunday was "Remaining Awake Through a Great Revolution," and he
began by recounting the well-known story of Rip van Winkle. Everyone
here is familiar with the tale but what many people forget in terms
of the story is that Rip slept through a revolution. Before going up
the mountain, a picture of King George III had hung in the local
tavern. When he returned after his twenty year sleep, a portrait of
George Washington had replaced King George. Rip was thoroughly lost
because he had slept through a revolution and never knew it.
Perhaps we are also guilty of sleeping through a revolution, only
in this case, it is a revolution that has been leading us backwards.
It is a revolution that is threatening to undermine the very fabric
of this country. We need to awaken from our national slumber and
begin the process of halting the widening inequality and economic
insecurity that this country is heading towards.
When Dr. King got to the end of his sermon that morning, he
mentioned the Poor People's Campaign that was about to arrive in
Washington during the *464 following months. People were gathering
from around the country to demand that the nation begin to address
the issues of poverty and economic inequality. Dr. King remarked,
"Let me close by saying, we have difficult days ahead in the
struggle for justice and peace, but I will not yield to a politic of
despair. I'm going to maintain hope as we come to Washington in this
campaign. The cards are stacked against us. This time we really will
confront Goliath. God grant that we be that David of truth set out
against the Goliath of injustice, the Goliath of neglect, the
Goliath of refusing to deal with the problems, and go on with the
determination to make America the truly great America that it is
called to be."
Let us here at this conference and at these two centers begin to
put forth a vision and an inspiration for where this country should
be going. Let us awaken from our twenty years of slumber. Let us
venture down a new road to a country where no American will be
denied basic health care coverage because their wallet is not big
enough. A country where not just some children, but every American
child receives a first-rate education. A country where if you work
full-time, you won't have to worry that you and your family will
still be living in poverty. A country where we respect and take to
heart the principles, not of liberty and justice for some, but of
liberty and justice for all. A country that we can be proud to call
the United States of America. Thank you very much.
Lisa Keister: Thank you all very much. Those are great
comments. I am sure we will have lots of questions to ask you. I
have the privilege of being able to ask the first questions--that is
one of the advantages of being moderator. I am going to ask a couple
of questions and then open the floor for general questioning.
The way I think of this first panel's task is to introduce three
issues. Those issues, as I see them, are: how much inequality is
there and has it changed? Why do we have that much inequality? And
what can we do about it? Three very basic questions.
I am going to ask one question in each of those categories and
present it to the panelists and let each of you react. Then I will
open it up for questions.
In the first category, how much wealth inequality do we have? I
will stick to wealth inequality to focus us. Thinking about Alan's
first slide, showing inequality in net worth: I want you to react to
a pair of statements. The statements are that inequality is extreme,
there is no question about it. We have absolutely extreme levels of
wealth inequality in the United States. However, it hasn't changed.
So, inequality has been relatively stable. True or false, and what
do you think?
Lingxin Hao: My answer to the question whether the wealth
inequality is severe is we have already documented that. I agree
that over time, the inequality levels do not change, they persist
*465 Mark Rank: I would say wealth inequality as was
mentioned before, is extreme, and it has not changed that much,
because it has been so extreme. The figures I mentioned earlier were
dealing with financial wealth, showing 1 percent of the population
holding about 50 percent of the entire financial wealth. With income
inequality, I would say there have been significant changes over the
last forty years. U.S. Census Bureau data shows that there has
definitely been a concentration of income inequality.
John Schmitt: As I said in my talk, wealth inequality is
enormous. I think it has been relatively stable. The one thing that
I would point out is that the main and best source of data on wealth
inequality is the Survey of Consumer Finance, which, by design,
explicitly excludes anybody that is on the Forbes 400 list. If you
are on that list, you cannot be in the survey, so the worst
offenders--if you think of it in those terms, or the people
contributing the most to society's innovation if you want to think
of it that way--are not allowed to appear in the Survey of Consumer
Finance. So the available data on the wealth distribution for the
most recent years, by design, understate wealth inequality.
Alan Reynolds: A minor disagreement about that: the Survey
does include people who make enough to be in the Forbes 400 list.
John Schmitt: But they are not on the list.
Alan Reynolds: They are not literally on the list, for
obvious reasons of privacy. There was a subtle concept of human
capital and that has become more widely dispersed. In 1960, about 8
percent of those over twenty-five had a college education and now it
is closer to 28 percent. And human capital is not to be discounted
lightly. Leaving housing capital out is just goofy, because that is
where so many housing billionaires have been made-- unfortunately to
the detriment of young folk, and I am not one who thinks that
housing prices should always go up. Some of them should go down to
give the first-time homebuyer a break.
Joel Handler: I think it has persisted, but taken slightly
different forms. The reason I discussed the colonial example is the
persistent racism in the United States. It has taken different forms
at different times. But we have talked about the prison population,
African-American males, Hispanic discrimination; there is also a
very big low-wage Asian population that is just beginning to appear
on the radar screen.
Lisa Keister: We are going to run out of time, so I better
skip to question number three. We have less time and there
was more agreement on that question than I anticipated! Which is
good, we have a good starting point then. That is one of the things
we want to accomplish on this panel, is to get a little agreement
about how much inequality there is.
What to do about it then. There will be a lot of questioning
about why over the *466 next couple days, I am sure. But let's talk
about what to do about it. A couple of you have raised questions or
potential answers and I will let you talk about those answers. But I
want to raise the possibility of changing the estate tax. So let me
frame the question as: would you change things? And if so, would the
estate tax be a mechanism by which you might change things?
Joel Handler: I don't have a clue about the estate tax. I
would start at the low-wage labor market.
Lisa Keister: You would? Well, elaborate on that, then.
Joel Handler: I think it is what Bob Kuttner talked about
in the opening address. Most of the people we are talking about are
in the low-wage labor market and there are lots of reforms that have
to be done and that you all know about. There has to be much more
security, many more jobs, there has to be a right to a decent job
and there has to be support for people who are working.
Alan Reynolds: The estate taxes are not always going to be
Lisa Keister: It gives you good data.
Alan Reynolds: I don't think it gives you very good data.
That is one of the reasons I don't like the data. I mean, people can
always hand their kids an education, they can hand them a bag of
uncut diamonds or gold coins or dollar bills. There are limits to
how far you can go with estate tax and nobody has been very
successful in pulling in a lot of money with it.
I like the focus on the bottom; that is part of my point. I think
that we are wrong to treat inequality and poverty as the same thing:
they are not. When the top 1 percent fell and the top 5 percent fell
in income as their share in 1980-1982, so did the bottom 20 percent,
folks who were relatively vulnerable because they lost jobs. Lower
incomes are not primarily a problem of wages because the vast
majority of the bottom 20 percent are not working, for reasons I
explained. If you are not working, raising the minimum wage doesn't
John Schmitt: I would want to go beyond just dealing with
a low-wage labor market. It is important for us to keep in mind that
the kinds of economic insecurity issues we are talking about now go
well into the middle class. I did an analysis recently where I asked
the question, "How many people make at least $17 an hour," which is
what the median male made in 1979, "have health insurance at their
job and have a pension at their job?" Only about 25 percent of the
U.S. workforce makes that cut. That is $34,000 a year, health care
and a pension. That leaves 75 percent below or outside of that in
one way or the other. The economic insecurity questions we are
talking about, we need to work from the bottom up to the middle. The
estate tax is great, I think we should have more of it. But I do
think there are lots of problems with evasion.
Alan Reynolds: Just a factoid: 15 percent of the federal
budget goes to means-tested transfer payments; whether I'm for those
programs or not, it is not a *467 big number. People say, "How can
we afford to spend more on the poor?" Quit putting so many
victimless people in prisons and end the war in Iraq!
Mark Rank: A couple things about this. One, it is obscene
that in a country with this wealth and this amount of resources, we
treat the bottom 20 or 30 percent of the population the way we do.
We talk about the importance of work and yet do we really value
that? I would say definitely not. It is absolutely wrong that
somebody works full-time in this country and cannot support a family
of three on that income.
The other thing is thinking about the issues of inequality and
equality of opportunity. In my book I talk about the economic
situation that we have in this country. We like to think of our
system as a game of Monopoly in which everybody is starting at the
same point, and who wins and loses at this game is determined by an
individual's skill and the roll of the dice. Yet what we actually
have is a modified game where one player is starting with $5,000 and
properties already built up, one player has the standard $1,500, and
a third player is starting with $200. Now who is going to win and
lose? Nine times out of ten, the winner is going to be that first
person in this altered game of Monopoly, and that is the situation
we have this country.
From a policy point of view, what can we do to at least
somewhat even out those opportunities? We say that equality of
opportunity is so important in this country. Yet, at the same time,
we have school districts that are absolutely horrendous and other
school districts that are first rate. They are all American children
and yet they are not all entitled to equality of opportunity. That
is fundamentally wrong.
Lingxin Hao: I would like to call attention to the
historical root of the racial wealth gap. This root is in slavery
for blacks and indentured labor for Asian and Hispanic immigrants.
Contemporary racial wealth gaps are sustained by continuous
institutional and personal discrimination: in the labor market, in
the housing market and in the lending market. In addition, some
policies or practices, they are not created in racial terms but they
are more likely to fall onto the bottom as a burden for racial
minorities, as we know with subprime predatory lending. My
suggestion is to address the key question, the root question.
Also, I want to call attention to residential racial segregation.
This type of segregation really contributes a lot to the amount of
wealth different groups own and it contributes to wealth inequality.
Living in the inner city, the housing values are low and they
continue to depreciate. So we have a very serious residential racial
segregation issue and Hispanic groups are also experiencing high and
rising segregation. We need to pay attention to these issues, too.
Lisa Keister: As much as I would like to ask the rest of
my questions, I will control myself and open the floor for questions
from the audience.
*468 Q: This question is mostly for John and Mark because
you explicitly asked the question, "Why do we care?" And it goes to
whether we care about inequality in and of itself, for its own
reason, or is it really a proxy for a worry about the absolute
status of the lower and middle classes. In other words, if we could
come up with a public policy initiative that would guarantee poor
people and middle class people a measure of dignity and growth, an
improvement in their absolute quality of life over time, would you
support it, if it also meant that the richest among us got richer at
Mark Rank: I would agree with what you are saying, as long
as some of those gains are being redistributed. This is the argument
that John Rawls makes: it is okay that you have inequality as long
as some of those gains are going to the bottom and to the middle.
For me, the real question is the severity of inequality on top of
these extreme conditions at the bottom. As we have been talking
about today, economic troubles are affecting more and more of the
population: economic volatility and economic insecurity are more
widespread, so that we are talking about 60 or 70 percent of the
population affected by this. From my perspective, your second
scenario is really the one I would focus on.
John Schmitt: I think the economic inequality issue is one
that I am concerned about "in and of itself" to the extent there is
a lot of social alienation associated with having individuals or
groups being vastly different from each other within the same
society. I think there is a lot of evidence, for example, of
national health outcomes being related to income inequality.
Let me make one other point about economic efficiency. One reason
some economists are in favor of a lot of economic inequality is
because it motivates people to do things. That is, in principle, why
we have given Bill Gates $40 billion or $80 billion or whatever it
is today, depending on Microsoft's stock and whatever other stock he
happens to hold. But I ask the question: would Bill Gates, working
from his garage at the time, have given us the Disk Operating System
for $4 million? I think he probably would have. Would he have done
it for $40 million? I am pretty sure he would have done that. Once
we get to $400 million or $4 billion, we can all be pretty sure that
he probably would have given us MS-DOS. All of the extra money we
have given him is socially inefficient, economically inefficient. We
could have elicited that work and had a whole lot of money left over
to do other things.
Q: First, a brief comment about graphs. The numbers for
minorities obviously are absolutely appalling. But I think it is
easy to lose track when you see a graph and you look at the white
population that close to one out of five white families is one step
away from poverty. As a political matter, I think that is a very
My question is this, to the panel: I don't know if you have any
answers to this or not but we just heard that this very large
percentage of the population is making less than $17 an hour,
without health care, without a pension. If we look just to the
unionized workforce, what would the numbers be?
*469 John Schmitt: It is totally knowable. It is going to
be substantially higher. We know, for example, there is about a 25
percentage point higher probability of having health insurance if
you are in union. It is about a similar rate with pensions.
Q: Is that true of the service workers' union or are we
talking about the UAW?
Lisa Keister: It is knowable but I don't think anyone
knows offhand. Let me go to the back of the room.
Q: I think this might be for Professor Handler. You
mentioned that at one point there was an assumption that welfare
offices would serve as active centers for employment, education and
training, and of course that assumption was misplaced because of
caseload and wages, lack of training. I think those centers have
some potential for being important. The Trade Adjustment Assistance
Programs are supposed to be housed in the same county offices, they
are supposed to function as one-stop centers. I'm wondering if you
have a vision or any sort of proposal of how those centers might be
brought back on? What could we do for people who come to those
offices to avail themselves of what the safety net offers? If there
is a way to do that, do you see that as a part of the larger
structural reform of welfare?
Joel Handler: What I would do, which has been proposed by
several others, including Irv Garfinkel and Sara McLanahan as well
as some other people, is abolish the welfare system. At least for
single mothers with children, I would have a basic income grant.
This would give clients an exit option. Then I would have several,
separate one-stop social service agencies. They would have to have
something to offer the clients to get clients. The present method is
the clients are dependent on these agencies, there is a vertical
relationship and the workers are monitored by statistical
controls--how many cases they have, how many people they shove out
the door. I think the welfare system is fundamentally flawed in
terms of implementing these kinds of programs.
Q: Hi, I think this question is probably for Professor
Rank and for Mr. Schmitt. The moderator called you back to some
extent, but perhaps not specifically, to Mr. Reynolds' statistic,
which I'm very interested in--the statistics about the relative
disparities of wealth and income, particularly with respect to the
top 1 percent. His graphs are not what I would like to believe from
a lot of the reading that I have seen.
I wanted to focus you both on them and ask, first of all: do you
agree with these statistics? And if you don't agree with the
statistics, specifically what do you disagree with? If you don't
think they tell the whole picture, what else should we be looking
Mark Rank: I read Alan's paper last night and so I have
not had time to really think about it, but no, I don't agree at all.
Perhaps this is like global warming, where there are always a few
people out there that are saying, "No, no! It's not getting warmer!"
Nearly all of the research has shown that income inequality *470 has
gotten wider over the last forty years. For example, the Gini
coefficient, which is an overall measure of income inequality, has
been increasing significantly over the last four decades. If you
look at the population as quintiles, the only piece of the pie that
has gotten bigger from the early 1970s onward is the top 20 percent.
In terms of wealth, it has been extremely skewed for at least the
last twenty-five years. Whether it has gotten even more skewed is
not the story. The bottom line is that it is already extremely
skewed. A very small percentage of the population own a great deal
of the wealth in this country. So, no, I do not agree with the story
that Alan was telling.
John Schmitt: Quickly, I think there is overwhelming
evidence from a variety of data sources that income inequality has
increased an awful lot since the end of the 1970s. Obviously Alan
should jump in at this point, but let me give some specific issues
that I am concerned about. One is, when most economists talk about
rising inequality, they do not focus on what has happened to the top
1 percent of the income distribution because it is difficult to
measure: those people do not participate in the surveys, they have
all sorts of erratic perceptions of their income because it is from
different sources. But if you look at what the 95th
percentile family earns and compare it to the 10th
percentile or 20th percentile family and you look at the
change over time, the gap has been yawning and it has been
increasing a lot over time.
The other thing, it is very important to start from 1979. I know
Alan was clear that he was saying he was only looking at from about
1985 on. But there was a lot of income inequality increase between
1979 and 1985. That does not mean that those increases somehow
didn't count. Those were some pretty tough economic times and the
economic policy then was designed to undermine workers' wages by
having a recession with unemployment touching 10 percent
unemployment--there was a reason for running the economy that way at
Alan Reynolds: I very specifically never said that there
was not an increase in measured inequality in the period from 1979
to 1986 or 1988. Of course there was! Most of that occurred in the
debacle in 1980, 1982, the stagflationary mess that brought top
incomes down, but also brought lower incomes down through
unemployment. That was what I was saying about be careful about
watching for these cyclical things, and look at every year, not just
To say there has been an increase in inequality over thirty
years, does not tell *471 you what has happened for twenty years,
and I would think that would be an interesting question. That is the
question I am addressing-- not much has happened in twenty years.
John Schmitt: Again, the statistic I gave on median wages
and the average worker, I mean, they have been flat; in fact, they
have actually gone down a bit.
Alan Reynolds: Male wages, median male wages!
John Schmitt: That's right. That's right and that is what
I said, median male wages have been flat over this period of time.
So the economic gains that we have seen have not gone there. They
have really gone to another place.
Alan Reynolds: To women. I mean, we let women into
economics and law and medicine! My gosh, what a horrible idea that
John Schmitt: But the 90th percentile woman
still makes substantially less than the 90th percentile
The other issue that is really important is that we are about 70
percent richer, per person, than we were in 1979. I think it is
pathetic to say the median male is still making the same amount
of money as thirty years ago. That is not what I consider to be a
well-functioning economy! And the median male is now actually less
likely to have health insurance and less likely to have a pension.
This is economic failure. This is not sort of "Oh, it's not as bad
as we think." That is an out and out failure.
Alan Reynolds: In the data I showed also the median
numbers were the weakest numbers. That is, the middle in fact did
not rise as much as the bottom and the top in money income. Folks,
there are a lot of things going on. One is we immigrated a lot of
poor people. They came in, legally and illegally, and that changes
the median, it changes all kinds of numbers. That is not necessarily
a bad thing--they don't think it's a bad thing, or they would not
have come here.
Lingxin Hao: I would like to add that immigration is not
necessarily importing poverty into this country. If you look at
Mexicans and give them exactly the same level as whites in education
and other demographic structures, they actually achieve the same
level of wealth as the native-born laborers.
Alan Reynolds: Takes a while.
Lingxin Hao: It takes a while. But that is another motive
to save and another motive to go upward. And do not leave the Asian
groups out--a lot of them are higher educated people bringing their
skills in this country and actually they get a lower return for
their same level of education.
Joel Handler: I should add that there is support for
people helping themselves. From 1996 to 2001, when the states had
surpluses in their budgets, they did give money, they did give child
support, several states enacted an earned income tax credit to help
the working poor, so there are these underlying positive motives,
they just have to be worked on, more and more.
Q: Hi, I'm currently a student at Tulane University in New
Orleans and the *472 question I have goes back to the American
values system. Something that has been really startling in the
recovery effort is the idea of the "deserving" and "undeserving."
You see rapid recovery of the area around my school and absolute
stagnant recovery in areas that don't have as much money. So I want
to know what you all think about how American values play into this
idea of "deserving" and "not"? Whether you are aware of where that
comes from and what we can do to change that? Values constrain
policy because values determine who you vote for and what
politicians are willing to say. I would love to hear what you think
is the cause and how to alter these values.
Alan Reynolds: I guess it is puritanical but look at the
fact that the United States gives most of its aid in kind rather
than in cash. It is one of the things that messes up international
comparisons of data because people use cash income in those
comparisons. We have Medicaid, we have food stamps, we have housing
allowances, we have energy support--but we are reluctant to give
cash. Now there are some important exceptions. The earned income tax
credit hands out fairly significant cash, but only if you have
children. You get $4,200 if you have kids, if your income is low and
you are working, but if you do not have kids, that is quite a
Obviously that relates to some values because politicians respond
to voters. I think they are reluctant to hand out money in cash
because there is a feeling that people are irresponsible with it.
And they are more supportive of families with children. There is
basically no federal program that gives cash to somebody who is just
poor, unless they are disabled, aged, blind, etc. That is why we
have to rely on the Salvation Army and outfits like that. Let's not
discount what they do. They are important.
Mark Rank: I could say a lot about this. If you want to
understand why the United States is such an outlier on many of these
issues, a lot of it comes back to the fact that we perceive these
issues from an individualistic point of view. We look at the
individual as both the source of the problem and the solution to the
problem. We do not look to the community, we do not look to
government, we look to the individual. That cuts across our
history--the rugged individual, building the frontier, self-reliance
and so on. When we address issues like poverty or inequality, we
tell people, "Pull yourself up by your bootstraps. What's wrong with
you? What's the problem here?"
That mind-set, as Alan was just saying, permeates our society and
overlaps with the distinction between the "deserving" and
"undeserving" poor. So I think it is absolutely critical.
Also critical in understanding our attitudes towards poverty in
this country are our racial attitudes and the fact that this is a
racially heterogeneous society. You find in societies that are much
more racially heterogeneous, there tends to be less giving towards
others. This is something that is actually occurring now in some
European countries, where immigrants are coming into these countries
and the generosity of the social welfare state is being questioned
as a result.
*473 Lingxin Hao: To add a point to that about
immigration: since 1965, the immigrants have become more colored,
they are non-white. So the attitude toward immigrants might be that
they are "importing poverty" or it is an "invasion by foreign
countries." The fear is that the language is becoming Spanish
instead of English. And these kinds of values do influence the
decision-making; you can see them in the past two years and you hear
them now in the back and forth over the immigration reform bill that
has not yet come up with a solution.
John Schmitt: Let me jump in on a data point because the
example that Alan just gave is actually very helpful. Alan often
presents in his critiques of the income and wealth data, legitimate
points of concern about data. But we, as consumers of that data,
might want to give things a slightly different interpretation. So
let me give the exact example that Alan just mentioned. He said that
we give a lot of aid in kind so that messes up our ability to do
international comparisons, and that is a true statement. But he
said, specifically, we give Medicaid and we give housing benefits.
Now, does this make it difficult to compare? Yes it does. But
stop for a minute: every single country you would make a reasonable
comparison with has a national health insurance. To say that we do
not consider Medicaid, but at the same time, in any comparison we
would do we are not considering their national health insurance,
Alan Reynolds: Let's do food stamps. They don't do food
John Schmitt: But you said Medicaid. You also said
housing. We have one of the worst housing policies on the planet
among rich countries. Other countries' transfers for housing are
much bigger. So all of the points Alan is making are reasonable. The
question is, are they going to change the story in any meaningful
way? I think there is a little bit of sand-throwing and
dust-throwing in a context where the overwhelming evidence shows a
huge increase in inequality and poor economic performance for about
80 percent of the population.
Joel Handler: We are fixated with the
"deserving/undeserving poor" distinction. We are fixated on the
potential disincentives for welfare. The vast majority of people who
have been on welfare would much rather be in the paid labor force!
The Statute of Labour in the fourteenth century prohibited giving of
alms to sturdy beggars. We are still living in the shadow of the
Lisa Keister: Perhaps on that note, it is time to make a
transition to the reception. Thank you.