California Budget Bites

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