Why Decry the Wealth Gap? (Editorial Desk) Cox, W. Michael; Alm, Richard

The Center on Budget and Policy Priorities and the Economic Policy Institute, two liberal research groups, put out a state-by-state breakdown of Census Bureau data, which found nine states (led by New York) in which the richest 20 percent of households now earn at least 11 times the income of the poorest 20 percent. This indicated a much sharper disparity between the top and bottom than existed two decades ago.

Then the Federal Reserve Bank released its latest survey of consumer finances. It showed that the average net worth of families earning less than $10,000 a year had fallen by $6,600 over the past three years, while households earning more than $100,000 a year had seen their wealth jump by more than $300,000.

Our response is: So what?

Few of us should be surprised -- or threatened -- by statistics on inequality. Some Americans believe the more equality the better, but the fact is that the distribution of income and wealth isn't arbitrary. It emerges from broad trends in the economy and is a byproduct of a decade that created 17 million jobs and added 20 percent to median household net worth.

The unstated implication of the state-by-state report was that the states where income disparities are lower are somehow ''fairer'' than the states with high disparities. But the truth is that among communities, states and regions, income and wealth will vary for many reasons, several of them unavoidable and laudable.

Consider, for example, that income varies with education. According to census data, high school dropouts in the work force earn an average of $26,207, while workers with a professional degree average $127,499. Census figures show that many of the states with the widest income gaps have greater diversity in education levels than states with smaller income gaps. Twenty-six percent of those over the age of 24 in New York -- the state with the greatest income disparity -- have at least a bachelor's degree, whereas in Indiana, which was among the seven states with the lowest income disparity, only 16 percent do. Should we be lamenting that so many New Yorkers went to college?

Another non-nefarious cause of increasing income disparity may be our ever-higher immigration rates. Immigrants tend to cluster in low- and high-income groups. Thus it is no surprise that in the seven most unequal states -- New York, Arizona, New Mexico, Louisiana, California, Rhode Island and Texas -- about 13 percent of the population is foreign-born (in California, it's 25 percent). Among the seven states with the smallest income disparities, the immigrant population is only 3.8 percent.

The shift away from manufacturing is also a factor. Service workers span the gamut from hotel maids to brain surgeons, while the pay range is generally narrower in the manufacturing sector. States that are industrial tend to have more equal distributions of income. Data from the Bureau of Labor Statistics show that about 10 percent of workers in Arizona, Louisiana and New York have manufacturing jobs, whereas in more equal states like Indiana and Wisconsin the figure is 23 percent.

Also, in the seven states with the greatest income inequality, more than 80 percent of the population lives in or near metropolitan areas. In states with the most equality, only about half does. If we were to turn back the clock 100 years and again become a largely rural nation, we might not see such large income disparities, but that's because America's cities are our engines of wealth and offer greater prospects for those who succeed.

And what of the poorest Americans' loss of ground compared to the richest, as reported by the Fed? The apostles of equality consider the rising inequality kindling for social unrest. But while that would be true if most workers on the bottom rungs were trapped there for generations, America isn't a caste society, and studies that track individuals' incomes over time show that Americans have a remarkable ability to propel themselves upward.

A 17-year study of lifetime earnings by the Federal Reserve Bank of Dallas found that only 5 percent of people in the economy's lowest 20 percent failed to move to a higher income group. In a similar study by the Treasury Department covering 1979 to 1988, 86 percent of Americans in the bottom fifth of income earners improved their status.

Inequality is not inequity. Artificial efforts to try to curb wealth gaps invariably do more harm than good. Heavier taxation might narrow the division between rich and poor, but it would be a hollow triumph if it stifled the economy. What Americans ought to care most about is maintaining our growth, not the red herring of gaps in income and wealth.

CAPTION(S):

Drawing (Christoph Niemann)

Document Number: A121219529