2014 February 25 Tuesday
Is High Inequality In Richest Cities A Transitional Phase?
inequality is sharply higher in economically vibrant cities like New York and San Francisco than in less dynamic ones like Columbus, Ohio, and Wichita, Kan.
The full Brookings report is here.
San Francisco achieves a high level of inequality by having really high top earners. That requires lots of hard work and considerable talent. By contrast, Miami has found a way to achieve almost as high a level of inequality without such high-producing elites. Miami's top 5% earn less than half as much as SF's top 5%. So how do they do it? They've got much larger low performing lower classes imported from Latin America. That's great if you attach a higher value to your relative standing than your absolute standing
The "less dynamic" cities are falling behind the cities where people make the big bucks. But you can buy a much nicer house on a median income on also-ran cities than in top tier cities:
To frame this another way, the median income in metro San Francisco is about 60 percent higher than it is in Akron. But the median for-sale housing price per square foot today is about 700 percent higher.
What I'd like to know: Will SF and NYC drive out their lower classes? Are they in a transition period of high inequality until most of the lower classes leave? Erik Brynjolfsson and Andrew McAfee think robots are starting to get good enough to automate a large fraction of lower class jobs out of existence. This will bring an end to Moravec's Paradox, the idea that it is easier for computers to automate middle class information-handling jobs than to automate lower class jobs that require handling complex objects in the physical world.
The trend is for middle class areas to shrink while upper and lower class areas grow. While some cities are on the rise other cities such as Philadelphia are losing the competition for the best and the brightest and losing their middle classes. Do not buy housing in a city whose lower classes are rising as fractions of the total city. Such cities are at risk of a death spiral of shrinking tax bases, more welfare recipients, and higher crime and social pathology.
I see SF especially as a city with the potential to lose most of its lower classes. The weather is much more appealing than NYC weather and the geography isolates it better from lower class regions. Throw in extensive automation of work now done by the lower classes and in 20 years it seems possible for SF to be an extremely elite city.
Liberal policies such as obstacles to construction and also higher minimum wages will help the cities where elites cluster to cater more exclusively to the top 10%.
By Randall Parker at 2014 February 25 08:25 PM
Increasing the minimum wage to $15/hr or even $20/hr will also help to spur the development of automation and robotics that will obsolete lower income jobs as well. Increasing the minimum wage appears to be quite popular in "blue" cities such as SF and Seattle.
I think all progressives in cities with big upper classes should embrace $15 per hour minimum wage as a great strike against soaring inequality. Some city should bravely embrace $20 per hour to show what can be done for the working poor. It is time we stood in solidarity with those differently incomed and help them earn more per hour for those hours where they manage to work.
I recently encountered an argument that the apparent rise in inequality is being exaggerated by statistical artifacts resulting from changes to household size and tax laws. I haven't had time to determine whether there is any substance to this but here is a sample graph. Thoughts?
Here is where I encountered this argument, in abbreviated form: http://www.theatlantic.com/business/archive/2014/02/the-rise-and-rise-and-rise-of-the-001-percent-in-america/283793/#comment-1243146739
The minimum wage is irrelevant compared to other economic factors like housing costs or high salary jobs or racial conflict. In the case of Philadelphia, the white middle class is being driven out by the black underclass, and the end result will be another Detroit regardless of minimum wage levels. The same process is underway in several other cities like Baltimore, Cleveland and Indianapolis. A few cities with extremely desirable economies or locations (e.g. San Francisco, Manhattan, Cambridge MA) are able to sustain themselves or even undergo gentrification, but they are the minority.
And when our elites have had their fun, they'll sell us genetics so that *everyone* can have powers. *Everyone* can be super! And when everyone's super... no one will be.
Damn, so many things to worry about and there isn't even a war.
The reverse of San Francisco with high prices and top earners is Detroit. That's where we're headed - separate enclaves for rich and poor. A lot of Latin America is already that way. That minor earthquake in Virginia was Thomas Jefferson rolling over in his grave.
"Is High Inequality In Richest Cities A Transitional Phase?"
Well, let's hope so, before we start doubting the wonders of Capitalism and start wishing for Socialism and true equality.
Some cities have to decline because the poor people need some place to live. Some cities should have specially constructed concrete housing built that is extremely difficult to destroy (the lower classes trash public housing projects). Then let the poor live in these places.
For a city on the way up a high minimum wage is a tool to drive out the lower classes. For a city well along on the downward path is probably screwed. They'd need a much more powerful set of policies to turn the city around.
Suppose some city is, for some reason, really worth saving. For example in each region of the country we need cities where there are universities and high tech corps where the brains can gather (one can argue that UPenn and some other institutions make Philly more worth saving). How to drive the lower classes out of a city that has declined far but which has value?
- $15 minimum wage
- Zoning to drive out companies that hire only low waged employees (do it in the name of opposing Wal-Mart and fast food).
- Outsource government services, preferably to out-of-town providers. That will drive out those who can't earn much in the private sector.
- More prisons and more prosecutors.
- Condemn low rent properties in the name of killing urban blight. Make the land and buildings available to homesteaders who will invest some minimum amount in upgrades.
- Lots of charter schools with themes like French immersion and Chinese immersion. Lets the upper middle class separate their kids from the lower classes.
- Slash city-funded welfare programs.
- Create a job search service for the lower class that looks for jobs over a very wide region. Gotta help the poor.
- Give poor people relocation subsidies to move to where a job can be found. Again, gotta help the poor.
- Put a big tax on fast food in order to protect the poor from the risk of eating that stuff.
Got some more? Bonus points for any idea that can appeal to liberals.
I clicked thru a couple of articles deep and found this by Tim Noah:
-- The Rich, defined as the top 10 percent, which today means everyone making $109,000 or more, increased their share of national income during the Great Divergence from about one third (34 percent) to nearly one half (48 percent).
-- The top 5 percent (Basically, Undeniably, Really, and Stinking Rich; today, everybody making at least $153,000) increased their share from 23 to 37 percent.
-- The top 1 percent (Undeniably, Really, and Stinking Rich; today, everybody making at least $368,000) more than doubled their share of the national income from 10 to 21 percent.
And he goes on with more numbers for to the 0.1% and the 0.01%.
Okay, we have enough numbers to separate out some layers. The top 10% gained 14% (48% - 34%). But the top 5% gained 14% (37% - 23%). So really, the bottom 5% of the top 10% made no gain. Good to know. But the top 1% gained 11%. So really the next 4% below them gained 3% (14% - 11%). I think the bottom .9% of the top 1% gained 4%. So it did not all flow to the top 0.01%.
I agree with his point about the financiers getting so much money. I think they are parasites because they are protected from downsides of excessive risk taking by the US government.
The argument as I understood it (I was linking to a comment on the Atlantic article, not the article itself) was that assortative mating was creating an illusory increase in inequality: skilled professionals now marry other skilled professionals, whereas previously they married housewives. The lower class is marrying less than they previously were, and marrying other unskilled workers or other unemployed when they do. When you measure household inequality it has increased, as you say--but the important fact is that inequality measured by _individual_ income hasn't changed. In other words the so-called 'increase in inequality' is a statistical illusion resulting from the way inequality is being measured--i.e. on the basis of household income. It's a consequence of feminism and class marriage patterns, not a real economic phenomenon.
See this graph: http://1.bp.blogspot.com/-g3WZGpDibPM/Up3ZAPRtScI/AAAAAAAAJqE/5hWGdOBol_E/s1600/a-gini-ratio-us-households-families-individuals-1947-2012.png
Am I missing something?
This site has a long series of posts going back to 2010 explaining the reasoning: http://politicalcalculations.blogspot.com.au/2013/12/the-major-trends-in-us-income.html If someone can see a flaw in the logic, let me know.
Aren't they just replacing one lower class for another lower class? If housing costs are going up that much, how can people there be said to be making "big bucks"? In real terms they're making just as little or even less.
Randell, I like your entire policy list a lot. I would also add making auto ownership more expensive through car taxes, higher minimum insurance rules, and smart street parking meters that charge up to $10/hour if the market supports it. Congesting pricing too. these are all policies you already see in California and London that make entral cities safer and less polluted, as well as more convenient for people who can afford the higher costs.
LA just made a big stretch of the 110 freeway have 1 to 2 Lexus Lanes that cost up to $10 for a pretty short stretch, but is a great deal for those who value the 40 minutes they might save $50 or more.
There is an interesting twist to the 2-worker argument for higher inequality: Family structure of the lower classes has collapsed. So they are less likely to be married and with both working. So it isn't just that women are working. Upper class women are more likely to be second earners than lower class women because lower class women are much more likely to be single and single moms.
I will keep an eye out for other evidence on household income versus individual income. But I've read a great deal about the rising ratio of CEO compensation to average worker compensation in the same company. Is that rising ratio had the same impact on managers a few levels down below CEOs?
I have read about the CEO compensation issue as well. It may be an example of rising inequality, but then, I can think of several alternate explanations offhand. So I am not sure what it really means.
After a week of thinking it over, the 'household formation' argument still seems sound to me. I am particularly surprised that I encountered it so recently, when I have been reading about rising inequality in both the mainstream media and more intelligent blogs for several years running. I can't imagine how everyone could ignore this when it looks so simple and true. Especially when the argument is a perfect set up for libertarians and conservatives to talk their talk.
Here's why I think libertarians and conservatives should be jumping on this: if rising household inequality is partly a consequence of declining marriage rates amongst the poor, as you mention, this gives social conservatives a great justification for their schtick about traditional family values. And if rising household inequality is the result of marriage patterns rather than a change in the value of labor in the free market, libertarians can say that there is no real rise in inequality, and consequently no market failure that needs to be corrected through redistribution. The 'inequality' is just a statistical artifact based on the definition of household that doesn't correspond to anything real.
Even so, I think it's worth taking seriously the impression shared by most Americans that inequality is rising and that the middle class is worse off than they were fifty years ago. The numbers indicate that this is simply not the case in terms of raw income. Now, it's always possible that people are suffering from nostalgia about the past and excessive material expectations. However, there's a more compelling possibility that should also make libertarians and conservatives rub their hands with glee: perhaps the perceived rise in inequality is primarily a consequence of inflated eds and meds costs, home ownership incentives that distort the market, and the like. These kinds of costs fall disproportionately on the working class. In other words, the government interventions to reduce inequality are actually bringing about an increase in inequality, which public figures then use as a justification for further interventions and redistribution, which will likely magnify the negative effect! If true, it also follows that you automators and inventors can wash your hands of any lingering sense of guilt, because technological change is not actually creating a more polarized labor market on the whole. The free market is as equal as it's been since Eisenhower; it's corruption in the controlled markets (eds, meds, real estate) that is hurting the working class.
I'm just telling tales here. I don't have enough data to know if my story is actually true. I'm curious if others think there's any sense to it.
I think the differences in rates of marriage are causing large differences in household income. Read Charles Murray's very excellent Coming Apart: The State of White America, 1960-2010 to get a sense of just how dysfunctional the lower classes have become.
Traditional family values: What are the traditional conservatives willing to do to make the lower classes behave more responsibly? The argument that single lower class moms are poor is used on the Left to justify subsidizing them. Gotta give those kids a chance. Never mind that those kids aren't very bright. The Left isn't going to tell women to get married to avoid poverty.
But it isn't just the single moms causing this. There has been a decline in labor market participation among the lower classes. Read Murray's book.
I will look for data that presents a more coherent picture.