Redistributing Up

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The federal government has emerged as one of the most potent factors behind the rise in income inequality in the United States -- especially in Washington, D.C.

LEFT BEHIND: The poverty rate in D.C. has risen despite the local boom. REUTERS/Larry Downing
LEFT BEHIND: The poverty rate in D.C. has risen despite the local boom. (Larry Downing/Reuters)

In the town that launched the War on Poverty 48 years ago, the poor are getting poorer despite the government's help. And the rich are getting richer because of it.

The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 - a ratio of 54 to 1.


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"THE UNEQUAL STATE OF AMERICA"
A Reuters 3-part series.

That gap is up from 39 to 1 two decades ago. It's wider than in any of the 50 states and all but two major cities. This at a time when income inequality in the United States as a whole has risen to levels last seen in the years before the Great Depression.

Americans have just emerged from a close presidential election in which the government's role as a leveling force was fiercely debated. The right argued the state does too much; the left, too little. The issue is now at the center of tense negotiations over whose taxes to raise and what social programs to cut before a Jan. 1 deadline. And the government's role will be paramount again next year if Congress takes up tax reform.

The federal government does redistribute wealth down to struggling Americans. But in the years since President Lyndon Johnson took aim at poverty in his first State of the Union address, there has been an increasingly strong crosscurrent: The government is redistributing wealth up, too - especially in the nation's capital.

The beneficiaries are not the billionaire financiers and celebrities who have come to personify income inequality in the 21st century. Yet the Washington elite are just as much part of the trend, having influenced laws and decisions that alter the entire country's distribution of income.

THE FEDERAL FUNNEL

Two decades of record federal spending and expanding regulation have fostered a growing upper class of federal contractors, lobbyists and lawyers in the District of Columbia area. The federal government funneled $83.5 billion their way in defense and other work in 2010 - an increase of more than 300 percent since 1989, even after adjusting for inflation. Private industry poured more than $3 billion into lobbying to influence the government, nearly double what it spent a decade ago.

Like spokes on a wheel, the high-rise offices of this elite radiate out from Capitol Hill along major arteries deep into suburban Maryland and Virginia. The latest Census figures placed 10 of the capital's surrounding counties in the top 20 nationwide for median household income - up from six in 1990.

There probably isn't much society can do to stop some causes of the spreading class divide, such as technological change. But there's one factor that is changeable - public policy. This series of articles explores how government is exacerbating or alleviating the causes and consequences of inequality, by examining three places where the rich-poor gap has widened.

Screen Shot 2012-12-18 at 8.07.18 AM.pngMassachusetts boasts the country's finest public education system, but that has failed to slow a sharp increase in the income divide. Indiana has revamped the state's welfare system, but the number of people in poverty has soared. And in the District of Columbia, the federal government's hand in rising inequality is visible locally and nationwide.

A cadre of Washington professionals advanced their careers by pushing through personal income-tax cuts during the administration of President George W. Bush that redistributed nearly 2 trillion dollars nationally over the past decade, mostly to high earners.

OUTSOURCING BOOM

The tax cuts are listed as a career highlight in the official biography of Nicholas E. Calio, who championed them while White House liaison to Congress. "A big part of the pitch that we were able to make was that it would be benefiting middle and lower incomes," he said. Today he is chief executive of the airline-industry trade association and pressing for corporate tax reform.

The government-outsourcing boom created new opportunity for entrepreneurs. It also hollowed out a class of federal jobs that once provided entry to the middle class for people without college degrees in the region.

Michael Ponger got 10 months of temporary clerical work in the House of Representatives and at a court for a federal contractor. He's been job-hopping since, sometimes tapping family for help supporting his wife and son. "The job market out there is shaky," he said at a District unemployment office.

These changes to government policy are benefiting the affluent more than other Americans. The tax cuts were a major contributor to an increase in the nation's inequality in the 2000s, according to studies done by the research and budgeting arms of the U.S. Congress.

The income shifts in Washington are part of a broader evolution in the United States and in much of the developed world. Income inequality has grown in advanced economies around the world. But it is wider in the United States than in all but a handful of Western democracies.

Reuters examined the breadth and depth of this historic redistribution of income through an analysis of decennial Census data, which allowed a detailed look at state-by-state trends.

Reporters assessed each state on three metrics of well-being since 1989: changes in income inequality, median household income and the poverty rate. To trace how these shifts played out among families of different income levels, society was divided into five economic classes, from the 20 percent of households with the lowest incomes to the 20 percent with the highest, plus the top-earning 5 percent.

DATA FINDINGS

The analysis found that inequality has risen not just in plutocratic hubs such as Wall Street and Silicon Valley, but also in virtually every corner of the world's richest nation:

  • Inequality has increased in 49 of 50 states since 1989. (See accompanying box on how inequality was measured.)

  • The poverty rate increased in 43 states, most sharply in Nevada, ravaged by the housing bust, and in Indiana, which saw a rise in low-paying jobs.

  • Twenty-eight states saw all three metrics of socioeconomic well-being worsen. There, inequality and poverty rose and median income fell.

  • In all 50 states, the richest 20 percent of households made far greater income gains than any other quintile - up 12 percent nationally.

  • Income for the median household - in the very middle - fell in 28 states, with Michigan and Connecticut leading the way.

  • The five largest increases in inequality all were in New England: Connecticut first, followed by Massachusetts, New Hampshire, Rhode Island and Vermont. The decline in manufacturing jobs hit New England's poor and middle hard, while the highly educated benefited from expansion in the biotech and finance industries.

  • The only state that didn't see a rise in inequality: Mississippi, which had an insignificant dip. The Magnolia State was one of the few to post a drop in poverty and a rise in income, but it still ranks worst in the nation on both counts.

Public policy isn't the only driver of inequality. Technological change has driven demand for high-skill professionals and eliminated a layer of lower-skill jobs. Weakened unions have lost power to lift wages. Perhaps the biggest factor of all is that the people on the winning side of these tectonic shifts - entrepreneurs, financiers and chief executives - are earning ever-larger fortunes.

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Presented by

Deborah Nelson and Himanshu Ojha

Deborah Nelson, a Pulitzer Prize-winning journalist, is a freelance investigative reporter for Reuters and a senior lecturer at the University of Maryland's Merrill College of Journalism. Himanshu Ojha is a reporter on the Reuters global data-journalism team

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