Making Sense of the Wealth Gap

Much has been made recently about the growing wealth gap in America. Conventional wisdom states that the rich are getting richer faster than everyone else. The January study documenting the growth of this gap by the Center on Budget and Policy Priorities (CBPP) and Economic Policy Institute (EPI) attracted widespread attention.

Conventional wisdom also states that policy should be enacted to reduce the gap. The CBPP/EPI study recommends minimum wage increases, unemployment insurance expansions, state tax and earned income tax credit reforms, and income supports such as wage supplements and improved benefit scenarios.

Enter the challengers, who have responded in one of two ways. First, they dispute the data. A Federal Reserve report, also released in January, documents a mean net worth increase of one third since 1989 among families earning under $10,000. And, the President's Council of Economic Advisers have shown that incomes of the poorest Americans have been growing at a higher rate than the wealthiest since 1993.

Second, some challengers simply respond: as long as the condition of the poor is not worsening, so what? Myths of the Rich & Poor authors, Michael Cox and Richard Alm, have examined consumption patterns among the poor as evidence that they are not as poor as one thinks. Besides, only a tiny percentage fail to move out of poverty over time. The widening wealth gap, they say, is a by-product of a robust economy that has helped more than hurt the poor.

These opposing views share one thing: neither offers much hope to the poor. The hype surrounding the CBPP/EPI study has hardly made mention of its recommended policy changes, which would do little to solve the wealth gap problem.

While the study's suggestions on tax reforms and state based income credits might provide reasonable financial relief for poor working families, there is no evidence that proves they would decrease the income gap. And to suggest that income supports, unemployment insurance, and minimum wage hikes would decrease the wealth gap is wishful speculation.

Michigan State Professor David Neumark, for example, has demonstrated the irrelevance of minimum wage hikes to poverty reduction, and the past 30 years have taught us that income supports will not help: the income gap rose most sharply between 1973 and 1993 when welfare subsidies were at their height.

The challengers of the conventional wisdom, on the other hand, often sound as though they have never met a poor person. Their belief that the poor will automatically participate in our "new economy" is largely unsubstantiated, not to mention ignorant of the moral dimension of economics.

It is time to stop arguing about the gap between the rich and the poor. A new consensus needs to be built that does not treat wealth creation and poverty relief as separate issues-a mistake shared by conventional wisdom and its detractors.

All Americans, and particularly the poor, benefit when asset accumulation is at least as important as income increases. Community development corporations are now putting more emphasis on asset growth than income growth. Public policy would do well to catch up on this point.

The centerpiece of a new anti-poverty economic agenda would focus on increasing assets and home ownership while decreasing debt. Debt payments among our poorest families consume 20 percent of their income, the highest ratio in America-and devastating when there exist no assets beyond income to boost net worth.

Three main points are in order.

First, greater public emphasis on Individual Development Accounts (IDAs), which enable poor workers to save for homes, education, or business ventures, is needed in conjunction with community-based debt counseling (which does not exist in any systematic fashion). A 1997 study revealed that households earning under $20,000 saved twice as much with simple financial plans as those without them.

IDAs currently serve fewer than 5000 people across America (there is currently a bill before the Senate that would encourage their expansion). The opportunity and hope they provide are reason enough to implement them.

Second, aggressive state level home ownership efforts, whenever possible, should replace federal-to-city approaches that have failed for years. Homeownership, which would increase as IDAs spread, is a predictor of economic stability.

Michigan's urban homesteading strategy, which allows low income residents to assume ownership of tax-delinquent properties after living on them five years, represents the first state level strategy to overcome urban housing woes.

Third, any plausible income improvement policies are based on either incentives to employers or performance contracting or both. Employers would focus on retaining and advancing, not just hiring, low skilled workers, and employment service providers on advancing their clients in work, not just placing them there. Careers, not just jobs, are the goals of such policy.

It is not the gap between rich and poor that defines America's well-being but the success with which we assist poor families overcome causes, not symptoms, of poverty.