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News and Features: Features

A have and have-not world

Is it fair that 1 percent of the state's population pockets 22 percent of its income?

BY: Bruce Mohl
Issue: Fall 2011/The American Dream Special Issue






carol meyrowitz started her climb up the corporate ladder at Fram­ing­ham-based TJX Corp. in 1983. Today, nearly 30 years later, she runs a $22 billion retailing giant whose off-price strategy seems to work well in good—and bad —economic times. Over the last three years, despite the Great Reces­sion, the company’s sales have risen 10 percent, its earnings have jumped nearly 50 percent, and its stock price has nearly tripled.

Meyrowitz’s pay has kept pace. Her total compensation package of salary, cash incentives, stock awards, and retirement benefits was $8.5 million in fiscal 2009. It doubled to $17 million in 2010 and rose another 35 percent to $23 million in fiscal 2011, making her the highest-paid CEO at a publicly traded corporation in Massa­chusetts.

Altagracia Ortiz started at TJX eight years ago. The 47-year-old Provi­dence resident, who is originally from the Dominican Republic, commuted to Fall River to work at a warehouse distribution center owned by a TJX chain called A.J. Wright. Ortiz says her initial salary was $6 an hour and by her eighth year she was making $10.55 an hour. That’s about $22,000 on an annual basis, or a third of what Mey­rowitz’s compensation package nets her in a single day.

The enormous income gap between Meyro­witz and Ortiz grew even larger just before Christ­mas last year. Meyrowitz decided to close the A.J. Wright chain to better focus the company’s resources on its faster-growing retail out­lets—TJ Maxx, Marshalls, and Home Goods. The TJX board would later cite this “important decision” as one reason for giving Meyrowitz a $6 million raise.

The shutdown forced the layoff of 4,400 A.J. Wright employees, including Ortiz and 800 other workers at the warehouse in Fall River. Ortiz’s situation went from bad to worse when she wasn’t able to find a new job, her husband lost his job, and, without any income, the couple lost their home. Ortiz says her plight isn’t unique. “They destroyed everybody’s life at A.J. Wright,” she says.

Meyrowitz and Ortiz bookend the income inequality story, real-life examples of the gap bet­ween rich and poor that keeps widening in the United States—and particularly in Massa­chusetts. Researchers are struggling to pinpoint the precise causes of income inequality and determine what, if anything, should be done about it. To some extent, inequality seems like it would be a natural byproduct of a capitalist society, with the pursuit of higher pay a tenet of the American Dream. But a growing body of research is raising alarms about long-term in­equality. A recent study done by the Inter­national Monetary Fund suggests inequality may actually retard a country’s long-term economic growth by precipitating economic and political instability. “A rising tide lifts all boats, and our analysis indicates that helping raise the smallest boats may help keep the tide rising for all craft, big and small,” the report says.

While economists debate the harm of in­come inequality, there’s no dispute about its existence. It has become so accepted that Procter & Gamble, the world’s largest maker of consumer products, incorporates income inequality into its marketing plans. P&G used to target its soaps and deter­gents at a vast middle class, but now the company believes the middle class is shrinking so it is starting to market separate products to the high and low ends of the income spectrum.

This have and have-not economy is beginning to influence the nation’s political debate. Democrats in Washing­ton are tentatively starting to frame issues in terms of rich and poor, a tactic Republicans deride as class warfare. And protests unfolded this fall in New York, Boston, San Fran­cisco, and other cities by activists who feel it’s unfair that 1 percent of the nation’s population controls so much of its income.
“We are the 99 percent,” says one website developed by the protesters. “We are getting kicked out of our homes. We are forced to choose between groceries and rent. We are denied quality medical care. We are suffering from environmental pollution. We are working long hours for little pay and no rights, if we’re working at all. We are getting nothing while the other 1 percent is getting everything. We are the 99 percent.”

 

 Protesters at Occupy Boston. Photo by J. Cappuccio

What the numbers say

The richest 1 percent of the nation’s population takes an 18 percent slice of its income pie, a figure that rises to more than 20 percent when capital gains are included. Those figures are nearing levels not seen since the late 1920s, just prior to the Great Depression. Between the Depression and now, the top 1 percent’s share drifted downward in the 1930s and 1940s and then plummeted during the broad-based economic prosperity following World War II. It hit a low point in 1973 when it fell to 8 percent, before starting to rise in the 1980s. Over the last 30 years, the rich steadily became richer, while the rest of the population failed to keep pace.

The trend toward inequality is even more pronounced in Massachusetts. Tax return data compiled by the state Department of Revenue indicate the wealthiest 1 percent of filers nearly doubled their share of the income pie in just 17 years. In 1991, the wealthiest 1 percent accounted for 12 percent of the state’s income. By 2008, their share had risen to 22 percent when just 35,000 tax filers reported a combined income of $53.7 billion. The wealthiest 10 percent of filers (349,000 in all) reported a combined income of $119 billion, which is just a shade less than the $122 billion reported by the other 90 percent.

Michael Goodman, an associate professor of public policy at the University of Massachusetts Dartmouth, and Robert Nakosteen, an economics professor at UMass Am­herst, have plotted the changing pattern of income distribution in Massachusetts. In a recent report in Mass­Bench­marks, an economics journal published by the Donahue Institute at UMass, they divide the state’s families into five equal groups based on income. From 1979 to 1999, each group experienced real growth in median income, although the top income group experienced much stronger growth. From 1999 to 2008, income growth slowed for the top group, but it ground to a halt or even declined for those in the lower groups. The result is a widening gap between the top and bottom quintiles.

In Greater Boston, the inflation-adjusted median in­come of the wealthiest 20 percent of families grew 55 percent between 1979 and 2008, rising from $150,000 to $233,000. But over that same time period the corresponding figure for the 20 percent of families at the bottom of the income spectrum fell slightly, dropping from $23,026 to $22,988. The decline at the lower end of the income spectrum was even more pronounced in the Berkshires (a 29 percent drop) and the Pioneer Valley (a 24 percent drop).

Theories abound about why incomes are diverging so dramatically. They include immigration, the decline of unions, laissez-faire politics in Washington, and, perhaps most popular, the combination of globalization and technological change. In a world where technology is changing rapidly and capital can move virtually anywhere, those with sought-after skills are in high demand and receive high compensation. By contrast, those with less valuable skills are vulnerable to losing their jobs to places where labor costs are low. Even traditionally middle-class jobs are not exempt from this dynamic. It’s what Don Peck, in his new book Pinched: How the Great Recession Has Narrowed Our Futures And What We Can Do About It, calls the slow hollowing out of the middle class.

Harvard economics professors Claudia Goldin and Lawrence Katz explain income inequality by linking technological change and education. They say technological advancements throughout much of the 20th century steadily boosted demand for skilled workers, but the nation’s educational system churned out skilled workers fast enough to keep up with the demand. As a result, workers across the income spectrum gained economically but no one group gained disproportionately.

Over the last three decades, however, educational attainment stalled, sharply increasing demand for the skilled workers the educational system does produce. The result has been a supply-demand imbalance and a workforce in­creasingly divided into the well-compensated haves (those with sought-after education skills) and poorly-compensated have-nots (those with limited education).

Altagracia Ortiz, the woman laid off by TJX, falls in the have-not category. Her warehouse skills are not easily transferable to other jobs and her heavily accented English makes it difficult to move up the income ladder. She’s returning to school to learn customer service skills that she hopes will enable her to find a new job.

Carol Meyrowitz, the TJX CEO, is one of the haves. She has a college degree and decades of corporate retail experience that have helped prepare her to run a mammoth company employing 150,000 workers. Still, her outsized compensation package seems to go beyond simply supply-and-demand economics. As Katz tells Common­Wealth’s Michael Jonas in this issue’s Conversation, the huge compensation packages awarded to a select few have “much more to do with the massive growth of finance, with the politics of corporate governance, and changes in the norms up there.” In essence, the salaries of the superrich are outliers, not fully explained by any one theory.

 
Source: Massachusetts Department of Revenue. Data is based on tax filings,
which are filed by about 90 percent of the population. Those left out are
primarily low income people. Income is net adjusted gross income, including
wages and salaries, capital gains, and interest and dividend income. Capital
gains losses are not included, but losses from business, farm rental, and royalty
activity are included.

None of these theories would matter much if everyone, regardless of their background or race, had an equal shot at moving up the income ladder, what economists call economic mobility. Yet research conducted for the Organ­ization for Economic Cooperation and Development in­dicates economic mobility is far from equal, that the in­come and education levels of parents heavily influence how far their offspring go in school and where they end up on the income ladder. The influence tends to be far more pronounced in the United States, the United Kingdom, Italy, and France, and less pronounced in the Nordic countries, Australia, and Canada, according to the OECD research.

Gridlock in Washington

Washington is in stalemate over what to do about the nation’s deficit. Republicans want to curb spending by reducing the size of government, while Democrats favor a combination of spending cuts and tax increases. Repub­licans won the first round this summer, when Congress passed a budget agreement to head off a default on government debt. But since then the Democrats have tweaked their strategy, trying to make the debate more about in­come inequality than budget balancing. They’ve proposed a millionaire’s tax. They’ve created the Buffet Rule, named for billionaire investor Warren Buffett, which stipulates that people making more than $1 million a year should pay at least the same percentage of their earnings in taxes as middle-class Americans. The Democrats in one sense are going where the money is—wealthy taxpayers—but they are also appealing to those voters who feel the rich have been getting favored treatment in the nation’s capital.

Republicans, led by Rep. Paul Ryan of Wisconsin, the chairman of the House Ways and Means Committee, are pushing back. They say tax increases or the elimination of tax cuts will only hurt the fragile economy. “If you tax job creators more, you get less job creation,” Ryan told Fox News in September. “Class warfare may make for really good politics, but it makes for rotten economics.”

US Rep. James McGovern, one of the most liberal voices in Washington, foreshadowed the emerging income in­equality/class war debate when he voted against the budget agreement this summer. In a speech on the House floor, the Worcester Democrat said he did not come to Wash­ing­ton to dismantle the New Deal and the Great Society. He said he did not want his children growing up in a country where the middle class is disappearing and the gap bet­ween rich and poor grows wider each year.

“One of the things that gets me so angry about this so-called deal that was struck before we recessed for the summer is it is just so unfair,” he says in an interview. “There’s no balance to it. Yes, we’re in a mess. Yes, we have a debt. But the people who are paying for it are not responsible for that debt.”

McGovern blames the federal debt on the Bush tax cuts and the wars in Iraq and Afghanistan. Yet he says Wash­ington seems determined to deal with the debt by hacking away at programs that help working people. “Not­with­standing all the corporate greed and all the Wall Street misbehavior, Washington seems to have forgotten all of that and we’re focused on inflicting more pain on the people who can least afford it,” he says. “I don’t think it takes a lot of courage for some of these politicians, who are multimillionaires themselves, to cut Social Security or to cut Medicare because they don’t need it anyway. I think a lot of these people vote to cut programs that benefit poor people because they believe there’s no political consequence at all. Poor people don’t vote. They don’t have a PAC. They can’t write out a $2,500 check for a fundraiser.”

Like most people in Washington, McGovern doesn’t have a quick solution for curbing income inequality and restoring the American Dream. He talks about government working with the private sector to develop new industries. He supports giving companies financial incentives to create jobs in the United States. And he firmly believes government must invest in education.

McGovern says he was pleasantly surprised at the reaction of his constituents to his “no” vote on the debt bill, and chalks it up to a growing desperation he senses among the electorate. “They feel hopeless. They feel nobody is on their side, nobody is fighting for them,” he says. “And it’s not just those who don’t have jobs. It’s working people.”

Is a flat tax fair?

State Rep. Jay Kaufman of Lexington, who co-chairs the Leg­is­lature’s Revenue Committee, is one of the few politicians in Massachusetts talking about income inequality. He says the notion of the American Dream, that anyone can move up the economic ladder, is rooted in the belief that “we’re all in this together.” Yet income inequality subverts that sense of togetherness, he says, and threatens our economic vitality and our social order. “I see the alienation and the anger,” Kaufman says.

Kaufman believes the Massachusetts tax system contributes to income inequality, more so than the federal system. At the federal level, the income tax system is progressive, meaning an individual’s tax rate increases as his or her wealth increases. Federal tax data indicate the wealthiest 1 percent of tax filers collect 20 percent of the nation’s income yet pay 38 percent of all federal income taxes. In Massachusetts, with its flat 5.3 percent income tax, the wealthiest 1 percent of tax filers pocket 22 percent of the state’s income and pay roughly the same percentage—25 percent—of the state’s taxes.

To make the state’s tax system more progressive, Kauf­man is traveling around the state trying to build consensus for a number of initiatives. One is the implementation of a progressive income tax, which would require an amendment to the state constitution. Several efforts to implement a progressive income tax have failed in the past. Kaufman has filed legislation to expand the property tax circuit breaker, which currently allows low-income seniors to write off their property taxes as a deduction on their state taxes. Kaufman wants to expand the circuit breaker to include all low-income people. Kaufman says the state could also increase progressivity by raising taxes on dividends, interest, and capital gains.

Gov. Deval Patrick, asked at a press conference if he was in favor of President Obama’s push for higher taxes on the rich and if a similar policy should be pursued here in Massachusetts, answered somewhat cryptically. “The answer to great wealth is not guilt, it’s responsibility,” he said. “And I think that’s what the president is pushing for and I support his proposals.”

 
 David Ellwood, dean of Harvard's Kennedy School of Government
Michael Widmer, president of the Massachusetts Tax­payers Foundation, which represents business interests on Beacon Hill, doesn’t support a progressive income tax in Massachusetts, but he does agree with Kaufman that income inequality is a growing problem, not just in Massa­chusetts but across the nation. “What it really raises is whether the middle class is disappearing, and I think it is,” Widmer says.

Jobs that once provide entrée to the middle class are much harder to come by and few new ones are being created. Andrew Bagley, research director at the Taxpayers Foundation, notes some of the biggest job losses in Massachusetts over the past decade have come in sectors such as manufacturing (35 percent decline) and construction (22 percent decline), where people without college degrees could earn a high weekly wage.

Both Bagley and Widmer say they worry about the political stability of a country where income inequality is so great. Widmer goes much further, raising an issue that is troubling many economic analysts. He says the gridlock in Washington and the inability of the nation’s economy to get back on track after the Great Recession are both ominous signs that America’s economic dominance is waning. “We have begun a long slow decline as a nation,” he says. “Our ascendancy is over.”

An international perspective

David Ellwood, dean of Harvard’s Kennedy School of Government, says the American Dream is alive—in South­east Asia. On a trip last year through Indonesia, Singa­pore, Vietnam, and China, Ellwood says he was stunned at how upbeat people were. Even though many of the problems they were facing were more daunting than what Ameri­cans face, Ellwood says they felt they were doing better than their parents and they were convinced their children would do better than them.

“It was like the American Dream was all over South­east Asia. It was so striking because it doesn’t feel that way in this country,” says Ellwood, who serves on the advisory board of the Economic Mobility Project, a nonpartisan effort of the Pew Charitable Trusts to assess the prospects for climbing the economic ladder. “How many people do you know who think their kids are going to do vastly better than they did? So much of the energy and the hope and the optimism in this country is tied up in this belief that we can do anything. It’s really striking to see that kind of attitude in places like Vietnam.”

Ellwood says the American Dream is an important value. “If you have that belief, that your hard effort will pay off for you and your kids, that’s a reason to work hard, a reason to invest, a reason to believe in your country. It’s even a reason to believe in your government. But when you don’t believe that way, when you feel like somebody else is getting rich but you’re not, and your escalator is hardly going up at all and maybe even going down, that’s a very different feeling. I think we’re in danger of losing that genuine feeling that you can be anybody and anything.”

Baby boomers came of age at a time when the economy was expanding, and they were much better educated than their parents. “You put those two together and you had a recipe for growth and a recipe for optimism,” Ellwood says. “Now our population is not growing and, to the extent it is growing, it is growing in groups that traditionally are at a disadvantage, who often don’t get as much education or get a poor education. That’s the workforce of the future. The danger is that they will not feel like they have a good route to get to a better place.”

Ellwood worked in the Clinton administration on welfare reform. His goal was to move people off of welfare rolls and into the workforce, where they would start climbing the income ladder. The Clinton administration succeeded in moving many people off welfare, but they never started climbing the income ladder. “It was a new plateau,” Ell­wood says. “They were better off working, but they became the working poor. The real challenge for us is to create real genuine upward mobility.”

It’s not easy. Ellwood gives the example of a home health care aide, an entry level, dead-end job that’s important yet doesn’t pay well. Ellwood says many of the skills of a home health care aide could translate well to a better-paying job in a nursing home, but few people make that jump. Nurs­ing homes, he says, are reluctant to train home health care aides because of the fear they’ll just leave and go elsewhere. “How do you build real genuine ladders?” Ellwood asks.

Ellwood is still hopeful that the nation’s political leaders can forge a unifying message that can bring the country together and build those ladders, but he’s worried. He says the country’s frustration with immigrants and the partisanship in Washington reflect growing frustration over the lack of upward mobility.

“We are kind of on a knife edge,” he says. “There is another way this could go. That way is that firms increasingly find it difficult to find skilled workers here. They get them cheaper abroad. Workers get frustrated. They don’t have a lot of resources. The public stops investing in education because we don’t have as many kids, and we kind of unwind, and we gradually grow apart. There’s a real danger of going in that direction. We can grow faster together or grow slowly apart.”

Illustration by Shout.

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