Many Californians Struggle to Make Ends Meet Despite a Growing Economy

The economic recovery has continued to largely bypass low- and middle-income Californians, according to new Census data released last month. These latest Census figures show that California households in the bottom three-fifths of the income distribution saw their incomes essentially stagnate last year, even though the economy had been expanding for four straight years in California and nationally. The absence of any significant income gains is especially bad news given that these households suffered steep declines in their incomes in each of the prior five years.

California households in the bottom fifth, whose incomes fall below about $23,600, fared the worst in recent years. Their average inflation-adjusted income dropped by about 19 percent between 2007 and 2012, then flat-lined in 2013. This means that the lowest-income state residents have yet to gain back any of the nearly $3,000 they lost, on average, due to the weak job market during and in the aftermath of the Great Recession. While sobering, this trend is not entirely surprising given that hourly wages stagnated or declined for low-earning workers throughout the recovery.

High-income Californians also saw their incomes fall in recent years, but unlike state residents at the low end of the distribution, they regained in the last year much of what they had lost in prior years. The average inflation-adjusted income for households in the top fifth dropped by about 8 percent ($18,200) between 2007 and 2012, but then rose by about 4 percent ($9,500) in 2013. This means that in a single year the highest-income households — whose incomes averaged $224,000 — regained more than half of the income they lost, on average. The top 5 percent of California households — whose incomes averaged $399,000 — fared even better: Last year alone, they regained nearly two-thirds of the income they lost during the prior five years.

 

The Uneven Economic Recovery Is Exacerbating Inequality in California

As the benefits of recent years’ economic growth largely accrue to Californians at the top of the distribution, income gaps are widening, exacerbating already high levels of inequality in the state. Last year, the average household in the top 5 percent had an income of $399,000 — 31 times the income of the average household in the bottom fifth ($12,700). Just six years earlier, at the height of the housing boom, the average household in the top 5 percent earned 26 times as much as the average household in the bottom fifth. This widening divide means that nearly one-quarter of total household income now goes to the wealthiest 5 percent of Californians, while less than 3 percent goes to the bottom fifth. And as striking as these figures are, they actually understate the extent of inequality in California. This is because they exclude one of the most significant sources of income for the wealthy — capital gains — and also because the Census does not report income changes for most millionaires.

Rising Inequality Isn’t Just Bad for Low- and Middle-Income Families, It’s Bad for the Economy

Should we be concerned that our nation’s economic rebound isn’t translating into income gains for a broad swath of the population? Certainly if you’re among the majority of families who have yet to see their incomes rise after years of decline, you have good reason to be concerned. As one recent New York Times analysis put it: “You can’t eat G.D.P. You can’t live in a rising stock market. You can’t give your kids a better life because your company’s C.E.O. was able to give himself a big raise.” In other words, without broadly shared income growth, an expanding economy can do little to help most families be economically secure or move up the economic ladder.

But there’s another reason we should be worried about uneven income gains. Recent reports, including one by Standard and Poor’s (S&P) Financial Services, have suggested that income inequality could be holding back our nation’s economic growth. One explanation could be that when many people’s incomes don’t keep up with their expenses, they often spend less. And when large numbers of people spend less, businesses produce less. The end result: an economy that grows more slowly than it otherwise would if fewer families were struggling to pay their bills.

Policymakers Can Reduce Inequality in California

But now for some good news: Inequality is not inevitable. As Nobel Prize-winning economist Joseph Stiglitz recently wrote, “widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.” That means policymakers have the tools to reduce our growing income divide and mitigate the hardship it inflicts on low- and middle-income families. One way state policymakers could do this is by making investments to ensure that all children have sufficient opportunities to move up the economic ladder. Increasing access to high-quality education, from preschool through college, for example, would set low-income children on a path toward greater economic security in the future. State policymakers could also take steps to make California’s income tax system more progressive. Creating a state Earned Income Tax Credit (EITC), for instance, would not only help workers with low to moderate earnings better support their families, but it also would reduce after-tax income gaps. To learn more about how California could reduce inequality by establishing a state EITC, watch for our forthcoming publication on the topic.

— Alissa Anderson

Op-Ed From the CBP: Growing Economic Divide Threatens California Dream

Yesterday, the San Francisco Chronicle featured an op-ed from CBP executive director Chris Hoene and policy analyst Luke Reidenbach, which examines the fundamental economic challenges facing individuals and families across the state as we head into 2014.

The job growth of the past few years is significant and suggests that California is on the mend from the deepest economic downturn in the post-World War II era. But if we place this recovery in a broader context, one thing is clear: Serious economic issues that California faced prior to the Great Recession — most notably widening income inequality — are continuing during the recovery. Meanwhile, a new study by our organization of what it takes to “make ends meet” shows that amid high costs for housing, child care and health care, many Californians are struggling to afford even basic living expenses. California’s ongoing challenges underscore the need for a multifaceted policy response.

The full op-ed is available on the Chronicle’s website.

This piece drew largely on two recent CBP reports — Uneven Progress: What the Economic Recovery Has Meant for California’s Workers and Making Ends Meet: How Much Does It Cost to Raise a Family in California? — in highlighting why it’s critical that state and federal policymakers make budget choices and other policy decisions that pave the way for broadly shared economic growth. The fact that the current economic recovery is not reaching so many Californians should guide state lawmakers next month as they begin the work of crafting a new state budget.

— Steven Bliss

New Data Highlight the Nation’s Uneven Recovery

A new analysis from the University of California, Berkeley’s Emmanuel Saez shows that income inequality at the national level has grown during the economic recovery, with only the wealthiest seeing significant income gains. The data can be downloaded as a Microsoft Excel file here. Here are some highlights:

• Income gains were uneven. Between 2009 and 2012, the last full year for which data are available, the average inflation-adjusted family income grew by 6.0 percent. However, incomes grew by 31.4 percent for the top 1 percent of families and only 0.4 percent for the bottom 99 percent.
• These uneven gains come after severe drops during the Great Recession. According to Saez, the average inflation-adjusted income per family declined by 17.4 percent between 2007 and 2009, the largest two-year drop since the Great Depression. The top 1 percent saw even greater losses of income, with a decline of 36.3 percent.
• For high-income earners, the impact of the Great Recession was temporary. Even though the top 1 percent of families saw far more severe drops in average income during the recession than did other families, this was only temporary. As Saez writes, “Overall, these results suggest that the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, the top decile income share in 2012 is equal to 50.4%, the highest ever since 1917 when the series start.”

These new data show a trend we highlighted last week in our annual Labor Day report: Large groups of workers are not yet seeing a recovery. Here in California, wages remain depressed relative to their pre-recession levels for all but high-wage earners, and wage inequality continues to rise even as the labor market has grown for more than three years.

— Luke Reidenbach

Public Investments Should Address Widening Gaps in Income and Opportunity

California’s low- and middle-income households saw their incomes grow by much less than did their counterparts in most other states in recent decades, according to a report released today by the Center on Budget and Policy Priorities (CBPP) in Washington, DC. The report examines widening inequality in the 50 states and places California’s income gaps in a national context.

California households in the bottom fifth of the income distribution saw their average inflation-adjusted income increase by only 3 percent between the late 1970s and the mid-2000s — a weaker gain than for low-income households in three-quarters of the states, and less than half the gain among low-income households nationally (see chart). California’s middle-income households also experienced relatively modest growth. The average inflation-adjusted income of California households in the middle fifth rose by slightly less than 20 percent between the late 1970s and the mid-2000s — a gain exceeded by middle-income households in all but eight other states.

The CBPP’s study also shows that the gap between rich and poor has widened more in California than in almost every other state for which data are available. The average California household in the top 5 percent of the income distribution had 16 times the income of the average household in the bottom fifth in the mid-2000s — more than double the gap that existed in the late 1970s. Only three of the 11 states where this comparison is possible — New York, Massachusetts, and Illinois — saw the divide between rich and poor widen more than it did in California during this period. In addition, the gap between the wealthiest 5 percent of California households and those in the middle fifth has nearly doubled since the late 1970s, widening more in California than in all 10 of the other states for which data are available.

Putting the gains of the past generation in dollar terms highlights the great differences in income growth across the distribution. California households in the bottom fifth have gained an average of just $22 per year since the late 1970s — a total of $623 in the past three decades — which is generally not even enough income to buy one month of groceries for a family of four. Households in the middle fifth have gained $367 per year, on average, for a total gain of $10,270 — about one-third of the average cost of a new car. These increases stand in stark contrast to those of very-high-income Californians. Households in the top 5 percent statewide have gained an average of $6,520 per year since the late 1970s, for a total income boost of $182,567 — an amount that could almost cover the down payment on a million-dollar home. What’s more, this significant gain at the top is understated because the Census income data the report is based on exclude earnings from capital gains — a key source of income for the wealthy.

While most Americans believe that hard work should pay off, scaling the income ladder takes more than just a strong work ethic – it also requires a fair shot. As income gaps widen, however, opportunities to move up are increasingly out of reach for many families. In fact, some of the nation’s leading economists, including Paul Krugman and Joseph Stiglitz, contend that the US now stands out among advanced industrial nations as the country with the least equality of opportunity.

A recent study by Stanford professors Sean Reardon and Kendra Bischoff illustrate how widening inequality and diminished opportunity are two sides of the same coin. As inequality has increased in recent decades, neighborhoods have become more segregated by income, which “may exacerbate … the economic disadvantages of low-income families,” according to Reardon and Bischoff. “Higher-income neighborhoods often have more green space, better-funded schools, better social services, and more of any number of other amenities that affect quality of life. Income segregation creates disparities in these public goods and amenities across high- and low-income communities, meaning that low-income families have decreased access to such resources. This limits opportunities of low-income children for upward social and economic mobility and reinforces the reproduction of inequality over time and across generations.”

Countering the detrimental — and often generational — effects of inequality requires investing in public systems that give low-income children the same opportunities for advancement as high-income children. Fostering equal access to high-quality public schools would go a long way toward helping more children move higher up the income ladder than their parents did. Providing a strong safety net to help families through tough times is also key, since children who don’t get enough to eat or who can’t afford a doctor’s visit when they’re sick do worse in school. And at a time when the job market remains weak, investing in high-quality, affordable child care programs and other supports that help California’s workers find and keep jobs is crucial. In developing next year’s budget priorities, policymakers should take account of the consequences of widening inequality in our state and consider policies that would enable more communities to share in the state’s prosperity.

– Alissa Anderson

Some of California’s Wealthiest CEOs Run Corporations That Paid No Federal Income Tax

The gap between the wealthiest Californians and the less well-off has widened substantially in recent decades, as illustrated in a new CBP report, A Generation of Widening Inequality. The average income of the middle fifth of California’s taxpayers was approximately $35,000 in 2009 – almost 15 percent lower than in 1987 on an inflation-adjusted basis. In contrast, the average income of the top 1 percent was $1.2 million in 2009 – approximately 50 percent higher than in 1987, after adjusting for inflation. That means the average Californian in the top 1 percent earned in less than eight workdays what the average middle-income Californian earned in a year.

Who are the wealthy? Contrary to popular perception, entertainers and professional athletes make up just a small fraction of the wealthiest 0.1 percent of US taxpayers. Instead, six out of 10 of the top 0.1 percent are executives, managers, or financial professionals. And according to Forbes, many of the nation’s highest-paid executives run California-based companies, including Walt Disney’s CEO, Robert A. Iger, whose annual compensation of $53.3 million makes him the third-most-highly compensated chief executive of a US company.

Interestingly, a report released yesterday by Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) shows that some of the most highly compensated CEOs run California-based companies that paid no federal income tax in recent years, even though these companies earned profits. For example, San Francisco-based PG&E paid no federal income tax in 2008, 2009, or 2010 even while it earned profits in each of those years totaling nearly $5 million. In addition, San Diego-based Sempra Energy paid no federal income tax in 2008, even though the company earned a profit of more than $1 million that year. According to Forbes, the annual compensation of PG&E’s CEO, Peter A. Darbee, was $7.3 million last year, while that of Sempra’s CEO, Donald E. Felsinger, was $20.6 million.

The CTJ and ITEP report examined a total of 280 companies on the Fortune 500 list that were profitable in each of the last three years and provided sufficient and reliable information in their financial reports about their profits and taxes paid. Overall, 78 of the companies (27.9 percent) paid no federal income taxes in at least one of the past three years.

— Alissa Anderson