PEORIA MAGAZINE February 2023

Surprising Secrets of America’sWealthy , Thomas J. Stanley andWilliamD. Danko report that 80 percent of millionaires in the United States are hard-working small business owners who live below their means and accumulate wealth by saving. Mental, physical and psychological endowment variations have a role in income inequality. 2. Picketty’s Forces of Divergence : In his best-selling book Capital in the Twenty First Century , Thomas Piketty presents the spectacular increase in earnings of top managers across the world. In the United States, for example, the average yearly executive compensation for the top 500 companies was $12.3 million, or 354 times the average yearly compensation of rank-and-file workers of $35,000. 3. Educational Attainment : We are now living in the “New Economy” or “Knowledge Economy,” which is characterized by its speed, capital dynamics, networking and big data processing. The major form of wealth is rapidly becoming what economists call “human capital,” the developed ability of a person to produce in the economy. At the same time, the country is experiencing severe shortages of skilled workers and general labor. The market forces of today and in the future will likely further exacerbate income inequality as the talent gap for higher skilled and semi-skilled workers will remain. The Bureau of Labor statistics monthly jobs report captures some of these labor demand imbalances. They have consistently reported that unemployment rates for those with higher educational attainment and skill sets are significantly lower than for those workers with less education and skills. 4. Sprawl : It’s pretty easy to identify the negatives of suburban sprawl. They include but are not limited to long commute times, heavy energy use and the pollution it brings, time cost, reduction of productive farm acres, redundancy of infrastructure and institutions, etc. As individuals and families leave one area for another with either real or perceived differences,

they unknowingly hurt the social and income mobility of those they leave behind. The economic literature bears this out withmany studies showing that peer effects — both peer quality and peer behavior — are among the most important determinants of economic and social outcomes. A study by the Equality of Opportunity Project finds that “areas with a smaller middle class had lower rates of upward mobility,” and that there is a “significant negativecorrelationbetween residential segregation — different social classes living far apart — and the ability of the poor to rise.” The study finds that large portions of the southeastern part of the United States, led by Atlanta, have extremely low-income mobility rates due to suburban sprawl and the lack of public transportation from the low skilled areas to where the jobs are. There are other important determi nants of income inequality such as skill set agglomeration, asymmetric growth, discrimination and globalization issues, but I think we all understand that higher inequality negatively affects human welfare and GDP growth both in the short and long run. PM: The Gini Coefficient, or Gini Index, is a measure of income and wealth inequality, with 0 equaling perfect equality and 1 equaling maximum inequality. On that scale, the U.S. now sits at .485, which makes it “the most unequal high income economy in the world,” topping the other G-7 nations. Meanwhile, inequality in the U.S. is at its highest point in 50 years, according to the Census Bureau, with the top 20% of earners taking in more than half of all American income. Why is inequality so much worse in the U.S. than in most of the modern world? And, what have been the most effective remedies for income inequality and its attendant consequences? JL: That's correct. Today, economists measure income inequa l ity by comparing the proportion of total income captured by various income cohorts. The Gini Coefficient is a useful inequality measurement that can be

calculated across country and time to observe regional and country-specific trends. By dividing the population into equally sized 20% groups, we can observe what fraction of national income is going to each quintile cohort. What we are observing in the United States is a slowly rising Gini Coefficient trend that suggests the lower quintile groups are receiving less total national income while higher quintile groups are gaining an increasing share. Similar to the causes of inequality, there is no one agreed-upon reason why the U.S. seems to be underperforming other G-7 countries on the inequality front. If therewas a simple and unifying solution, it would seem reasonable that such a policy be undertaken. Many authors from the fields of sociology, political science and economics are researching this very question. For there to be any chance for inequal ity improvement, our society must improve our social and incomemobility rates back to historic levels – that is, increasing the likelihood of someone from the lower to lower-middle quin tile income class being able to jump to a higher economic standing in both relative and absolute terms. Several years ago a team of leading economists embarked upon a major study on income inequality andmobility, now entitled Opportunity Insights (opportunityinsights.org). The work goes on today, but here are several key findings: 1. Segregation and Sprawl : Opportunity Insight authors state: “Areas with larger black populations tend to be more segregated by income and race, which could affect both white and black low income individuals adversely. Indeed, we find a strong negative correlation between standard measures of racial and income segregation and upward mobility. Moreover, we also find that upward mobility is higher in cities with less sprawl, as measured by commute times to work.” Using the Opportunity Insights data, St. Louis Federal Reserve economists Rubinton and Isaacson (2022) provide

FEBRUARY 2023 PEORIA MAGAZINE 89