Academic journal article The American Journal of Economics and Sociology

Income Inequality, the Income Cost of Housing, and the Myth of Market Efficiency: "Optimal" for Whom?

Academic journal article The American Journal of Economics and Sociology

Income Inequality, the Income Cost of Housing, and the Myth of Market Efficiency: "Optimal" for Whom?

Article excerpt

ON SEPTEMBER 25, 2001, the Census Bureau released the news that in 2000 the poverty rate had fallen from a year earlier by a half percentage point to 11.3%, not statistically different from the record low of 1973. Welcome news, but celebration would be premature. The poverty rate would normally fall during a period of economic expansion, and the 1990s saw an extraordinarily long expansionary period. In fact, over the entire period between 1973 and 2000, real per capita disposable personal income rose 63%. A rising tide that spread its benefits equitably should have decreased the poverty rate substantially.

Additionally, the official poverty threshold is limited as a measure of need. (1) According to the "basic family budget" constructed by Boushey et al. (2001), 29% of families with one to three children below the age of 12 have incomes that fail to adequately meet actual living costs, and 25% of families with incomes between 100% and 200% of the threshold experience "critical hardships," where basic needs go unmet. Furthermore, it isn't clear that a half percentage point drop in the official rate represents an actual decrease in material hardship. As people left welfare for low-wage jobs in the wake of the 1996 welfare reform legislation, families could move above the threshold without an improvement in material well-being because the threshold does not allow for such work-related expenses as child care, transportation, and clothing, nor does it account for medical expenses previously" covered by welfare. Dalaker (2001) reports that if the poverty threshold were raised by $500, an amount easily consumed by work-related expenses, 386,000 additional families would have l-men classified as poor in 2000. This is enough to have increased the poverty rate by a half percentage point. (2)

These factors alone sharply limit one's optimism at the news. However, even if the drop to 11.3% measured an improvement in well-being that could be sustained in a recession, this figure is an absolute measure that indicates nothing about the relative position of those at the bottom of the income distribution. In 1995 the New York Times, noting that the idea of the United States as an egalitarian society. is "a cherished part of the country's self-image," pointed out that "the United States has become the most economically stratified of industrial nations"; inequality in income and wealth surpass even that of Great Britain, whose inequality was inherited from a feudal past. (3) Gottschalk and Smeeding's (1997) comparative data for 19 Western industrialized nations demonstrate the point. In 1991, U.S. household income at the 90th percentile was 5.78 times that at the 10th percentile. The average was 3.52; in the next closest country, Great Britain, the ratio was 4.67. The U.S. ratio reflects the relative poverty of those at the bottom of the distribution, where households fared worse relative to the median than in any other nation in the study. U.S. household income at the 10th percentile was 36% of the median; in Great Britain, the next-lowest country, it was 44%. In all but five countries, households at the 10th percentile made at least half the median income.

Data readily available from the Census Bureau verify U.S. income inequality. (4) In 2000, according to the Current Population Survey data, the top 20% of families made 47.4% of all reported money income accruing to families, with almost half of that, 20.8% of the total, going to the top 5%. This is more than accrued to the 40% of families on the lower end, who received 14.1% of income. Sixty percent of families received less than a third of all income. Because CPS data are top-coded, these figures understate the degree of inequality. Since March 1994, all incomes of $1 million or more have been reported as $999,999, an increase from the previous cap of $299,999. Furthermore, 97% of wage income but only about 330/0 of dividend income is reported. (5) Consequently, these income share data understate the share accruing to the richest families and overstate the share accruing to everyone else. …

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