On the short end of the growing income gap


Detroit Free Press (Michigan)
By: Susan Tompor
January 26, 2014

Maurita Mussawwir, 36, wasn't laid off during the recession. She's an auto-industry survivor who has been able to hold on to an engineering job for 15 years. But when you ask her about the economy, all she talks about is the need to cut back.

"I'm holding on, but just barely," said Mussawwir, who lives in Detroit. Since the recession, the mother of four children says she's turning to penny-watching ways of family members who lived through the Great Depression. She has changed how she shops for groceries, focusing more on coupons; she has cut back on going out; she now even carefully considers the costs of prescriptions, too.

From her point of view, the purse strings are tighter for everyone in the middle class, as well as the poor. If you're fortunate enough to get a bonus or raise, she said, it's often not nearly as generous as in the past. People with good jobs have lost jobs.

"I've met people who stayed out of work for three years until they found something comparable," she said.

Even some who have jobs, she said, wonder how long the paychecks will last. Her husband, who served in Iraq, is now in a temporary job as a contract employee on a blight-related project in Oakland County. His job could last six months to a year. After that, it's unknown.

"I feel like everyone is frustrated," she said.

Income inequality is as much about income instability for many families. The war on poverty in 1964 involved engineering ways to rescue families out of very dire situations. Now, the battle lines have moved, and even the middle class feels more under siege. The challenge today is what can be done to enable families to gain ground and move ahead economically.

President Barack Obama plans to make economic opportunity a front-burner issue in Tuesday's State of the Union address. Many economists and experts agree that the solutions are far more complex than simply raising the minimum wage. The conversation will no doubt be politically charged. But many agree that stagnating income growth is something that can keep some consumers from being able to save for college or retirement, as well as being able to buy a new car or home.

A long struggle

It's a topic brought into high relief last week with release of a report that shows the 85 richest people in the world have as much wealth as the poorest 3.5 billion. It's of concern across the nation and in Michigan, in particular, home to a domestic auto industry that took severe financial hits five years ago and with an 8.4% state unemployment rate consistently higher than the nation's, now hovering just above 7%.

"There is an income gap, and in the past couple of years it's gotten even further apart," said Robert Lytkowski, 53, of Wixom, who works as an engineer at B&P Process Equipment in Saginaw. "The banks CEOs are getting back to their big bonuses."

For those who lost ground in the Great Recession, it continues to be a long struggle, he said. "There are people we know who lost their homes and basically had to start their life all over again."

On the Forbes list of richest people in the world, the top five from Michigan have combined wealth of more than $25 billion, according to the magazine, an amount roughly equivalent to 50,000 Michiganders earning the state's 2012 average household salary for 10 years, before taxes.

"We know widening income and wealth inequalities damage our growth potential, especially when one considers loss of education and skills by large swath of population," said Diane Swonk, chief economist for Mesirow Financial. "The problem and its cures, however, are much more complex than the sound-bite solutions that we seem to demand of our politicians."

The Pew Charitable Trusts, for example, has discussed solutions that include universal preschool education where toddlers can build up their verbal scores and other skills, more emphasis on post-secondary education initiatives that enable low-income students to attend and complete college, and addressing the challenges of economic segregation within metro areas, such as Detroit.

Some experts discuss a widening racial wealth gap, too.

"Americans are feeling how financially fragile they are, even though they had this compact where playing by the rules was supposed to help them get ahead," said Erin Currier, director of economic mobility research at the Pew Charitable Trusts.

Education is key

Some economists note that the share of income and the share of personal outlays by income group since 1990 show that the distribution of income and spending is very skewed and has become more skewed over the past quarter century.

Mark Zandi, chief economist for Moody's Analytics, said research shows that the top 5% of income earners garnered 21.3% of all income in 2012.

By contrast, the top 5% earned 17.4% of all income in 1990.

What can be more startling is that those at the bottom 20% saw a significant drop in their already small slice of the income pie during that same time.

The bottom 20% of income earners held 3.8% of all income in 2012, compared with 4.6% in 1990.

Zandi said some of the most significant policy steps to address the skewing of income and reduced income mobility include the expansion of the earned income tax credit, increased funding for education and retraining, and immigration reform.

Charles Ballard, a professor of economics at Michigan State University, said an increase in the minimum wage, as supported by President Obama, is likely to reduce income inequality somewhat.

Finding more ways to use public policy to boost high-school graduation rates would be help reduce income inequality, too, he said.

When it comes to college, he said, finishing college and obtaining the degree provides an entry into the upper echelon.

"In the last 35 years, the earnings of college grads have increased a lot relative to the earnings of high-school grads," Ballard said.

Slow growth

Paul Traub, a business economist with the Federal Reserve Bank of Chicago's Detroit branch, has been tracking the slow growth in disposable income. Prior to the recession, he said, disposable income had been growing twice as fast as it is now.

While some of the setbacks may seem insignificant, he said, over long periods of time slower growth in disposable income can have a serious impact on a family's station in life.

If disposable income is growing at a rate of 3.5%, a family's real disposable income could double in 20 years. That might take a family from being apartment renters to homeowners or from being a used car buyer to a new car buyer, he said.

But if that growth continues to stagnate around 1.4%, it would take the same family about 50 years to see their real disposable income double.

One of the real setbacks?

The jobs that are being created, such as those in hotels or leisure, do not have the same high income levels as the ones we've lost, such as manufacturing and construction, Traub said.

"Where we've grown the labor force in this recovery has been in sectors that have historically paid less," Traub said.

Even in the auto industry, Traub said, the unions had to give concessions that created two-tiered wages, where newly hired workers are paid less per hour than workers with more seniority doing the same work.

UAW President Bob King's remarks to the Automotive News World Congress in Detroit on Jan. 15 talked of the "fight to restore the American Dream."

"We find ourselves returning to a Gilded Age of class division in which a small percentage of the population reaps extraordinary gains while the majority of Americans struggle and lose ground."

How long will it take?

Tariq Chams, 21, of Lincoln Park said he's optimistic that once he obtains his degree in pharmacy from Wayne State University, he should have a strong chance at finding a high-paying job. He has grand expectations and plans to start at $100,000 a year and move well up from there.

He's not all that sure that any initiatives out of Washington could help build jobs immediately.

"They're trying now, but nothing really happens," said Chams, who originally grew up in Los Angeles.

Jessica Daly, 31, of Zeeland is skeptical about how much the federal government can do about the economy. Her view is that the economic challenges can sort of work themselves out if the recovery is able to keep building.

Daly owns a small business called MiPhotoBooth, which rents photo booths for weddings and other parties. Her husband, Adam Daly, 41, does architectural blueprints and saw his work take a big hit in the recession. But she said now retailers are updating their stores and remodeling once again, and her husband is busy again.

Jessica Daly calls some economic initiatives by government "too forced of an algorithm."

The big question that many have is: How long will this recovery last? And how long will it take for their bank accounts and finances to recover, too?


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This page contains a single entry by CFED published on January 27, 2014 4:29 PM.

Progress on Predatory Lending was the previous entry in this blog.

A State of the Union about the state of poverty is the next entry in this blog.

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