The Negative Implications of Los Angeles’ Increasing Inequality

south-los-angeles-110-and-105-freeways-aerial-view-from-north-august-2014On a broad level, America is seeing rapid, widespread demographic shifts. But some areas are experiencing greater shifts than others. People of color will soon become the national majority, and at the same time, wealth inequality is growing. Wages have been stagnant for all but the richest earners, middle class job opportunities are becoming more scarce, and large racial economic inequities still persist. If inequality trends and demographic shifts continue on their current trajectory, the disparity will soon have an even greater impact on the nation as a whole. What these national statistics fail to convey are the extensive effects these trends also have at the local level.

In Los Angeles County specifically, there already exists greater inequality than the national average. A recent paper by the USC Program for Environmental and Regional Equity (PERE) reveals some causes and effects of this phenomenon. One factor influencing inequality in Los Angeles is a changing economic structure. Los Angeles is losing middle-wage jobs while gaining more low- and high-wage jobs. Between 1990 and 2012, Los Angeles experienced a 27 percent decline in middle-wage jobs in industries such as trade, construction, and manufacturing. During the same time, however, it gained low-wage jobs (a 15 percent increase) and high-wage jobs (a 6 percent increase). Prevalent not just in LA but the whole country, a related trend is uneven wage growth. Between 1990 and 2012, the highest earners saw marked growth in their earnings–a 38 percent increase, adjusted for inflation–while simultaneously, wages for low-income earners dropped one percent.

FredGraph

The ratio of mean income for highest 20% of earners, divided by the mean income for the lowest 20% of workers in Los Angeles, 2010-2017.

As shown above, income inequality in LA has risen noticeably: the inequality ratio has increased by two points in eight years, no small amount. But more alarming is how the trend is increasing consistently, with no telling how or when it will level off or reverse.

Demographic changes further account for growing disparities in wealth, because people of color are more likely to be either impoverished or working poor than whites. Los Angeles was one of the first cities to cross the “majority minority” threshold, and the relative proportion of people of color is only getting higher. Because of Los Angeles’ high diversity, the discrepancy in earnings between whites and people of color makes its income inequality even greater than the national average. Today, nearly one quarter of African Americans and Latinos in LA live below the poverty level, compared to only 10.6 percent for Whites, and the working poverty rate for Latinos is almost three times as high as for African Americans (12.5 versus 4.3 percent).

Education is another key factor of inequality. Unemployment generally decreases and wages increase with higher educational attainment, but racial and gender gaps persist in the labor market. Among college graduates with a bachelor’s degree or higher, blacks and Asian Americans and Pacific Islanders on average earn $6/hour less than their white counterparts while Latinos earn $9/hour less. At all education levels, women of color have the lowest median hourly wages. And only 10 percent of Latino immigrants, 28 percent of U.S.-born Latinos, and 34 percent of blacks and Native Americans have earned an associate’s degree or higher, which will be required for 44 percent of California’s jobs by 2020. This will likely lead to a skill gap, decreasing the county’s competitiveness in the economy.

If minorities benefit less in terms of lower earnings from college education, they have less of an incentive to earn a degree. Nevertheless, returns to education are still significant for minority workers, so they still stand to benefit greatly from any increase in availability of college education. This also increases the probability that their children will earn college degrees, which helps minorities to break out of the cycle of poverty.

Los Angeles residents rely heavily on driving as a mode of transportation, which influences commuting patterns: getting to one’s workplace is difficult if owning a car is financially unfeasible. Eighteen percent of Black households and 11 percent of Latino households do not have access to a car. In the overall region, very low-income African Americans and Latino immigrants are most likely to use public transit. The implementation of voter-approved tax measures to expand the region’s transportation infrastructure is an important opportunity to connect those neighborhoods and communities that have been left behind. This would make it more convenient for minorities to work at faraway jobs, improving the range of work opportunities available to them.

The Los Angeles region’s rising inequality and racial discrepancies in income, education, and poverty are bad not only for communities of color, but also for the region’s economic growth and prosperity. According to the PERE’s analysis, if there were no racial disparities in income, the region’s GDP would have been $380 billion higher in 2014–a 58 percent increase. This increased GDP would be accompanied by greater consumer buyer power and increased tax revenue, enabling future growth due to the increased output and growing population. While eliminating all racial disparities would be difficult, minimizing these divides as much as possible would be advantageous for the County.

One method to combat current and future inequality is to focus future resources and investments on communities that have been left behind in the County’s development. Impact investing is one recent phenomenon seen in LA, where companies create opportunities specifically for impoverished areas. In the words of LA’s Mayor Garcetti:

Major local companies are providing funding, internship opportunities, workforce development, and mentorship programs to young people from underserved communities. In turn, our rising industries are leading the charge on developing an inclusive workforce that reflects the diversity of Los Angeles.

Fostering and encouraging such civic engagement will provide great returns to the overall county. Secondly, leaders must be willing to stick with comprehensive strategies over the long-term. The problem of inequality has many facets and no simple solution, especially in the short-term. Politicians and agents of change in Los Angeles should be mindful of this, because bureaucracy could cause aid from philanthropists to be spent inefficiently.

Furthermore, subsidizing education for minority workers within Los Angeles and making a concerted effort to reduce racial discrimination in the workforce would create great returns and provide more social justice to the relatively poorer, powerless communities. Along with measures to expand the region’s transportation infrastructure, these would be progressive, worthwhile steps towards greater levels of equality and productivity which has not been seen in recent years. Every single resident of LA stands to benefit from reducing racial discrimination and lack of opportunity, and as such it should be a much higher priority on the city’s to-do list.

Los Angeles can be a model for change and reform nationwide: As the USC researchers state: “just as Los Angeles has led the nation in demographic transformation and income inequality, so too can it lead the nation in its strategies and solutions for a more equitable future. Doing so will require mechanisms for documenting solutions, evaluating progress, and for broadcasting lessons learned and successes that can be scaled to change the course of the nation.” Los Angeles is a city home to millions of diverse residents, many of whom are poor and all of whom are affected by rising inequality. If LA reduces its inequality problem, it can maintain its economic strength and cultural diversity and also provide better outlooks for many residents’ futures.

China’s Remarkable Recovery From the Great Recession, and Implications For Its Future

Although China was hit hard by the Great Recession, its economy rebounded very quickly. Why?

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The Great Recession was a period marked by a sharp decline in economic activity, beginning in December 2007 and lasting officially until June 2009. It started in the United States when the housing market crashed, but contagion effects spread to the United States’ trading partners, one of the biggest of which was China. China’s economy relies hugely on exporting their goods overseas, and when American households lost about $16 trillion of net worth in the recession, they couldn’t afford to buy as many imported goods from China. Despite China’s permanent level of exports falling by 45%–a staggering amount–its economy rebounded incredibly fast, faring much better than that of any developed country. The crisis even affected countries without close financial links to the United States, such as Russia and South Africa, with these nations also decreasing their demand for Chinese products. Why did China recover so fast, given its export-driven growth model, while the rest of the world didn’t? The answer lies in the response of the Chinese government and a party system with the control necessary to push through stringent domestic policies, even if they caused short-term pain for its already struggling firms.

To start with, China introduced a RMB¥ 4 trillion (equal to $584 billion) stimulus package in 2008, to be put into infrastructure and social welfare programs by 2010. This stimulus was comparable in size to the United States’ own stimulus packages, but it came from an economy about one-third the size at the time, so the effect was more drastic and the initiative much bolder than any other country dared to enact. With its packages, China hoped to spur economic activity and increase its citizens’ total demand for goods and services, or aggregate demand, through the creation of jobs and welfare initiatives. If consumers use the money from these support policies to purchase more goods and services, their spent money circulates and get re-spent on new goods and services, bolstering the economy otherwise weakened from the recession. All of this went superbly for China: “total industrial production in China nearly doubled between 2007 and 2013 despite the crisis and an extremely weak international demand for Chinese goods, whereas the United States has experienced zero growth in industrial production and that in the European Union and Japan has declined by 9.3% and 17.1%, respectively.”

The United States enacted programs with similar goals, so why did China’s work while the United States’ didn’t? The difference was largely influenced by the Chinese government’s control of the economy. China has a market authoritarian system, where the government can keep a much closer handle on any economic activity in their country. In the United States, there is a much less restrictive free market system, and firms are under less pressure to do anything for the good of the country, instead focusing on minimizing profit loss. Once the Great Recession hit, American firms were hesitant to borrow and invest in expanding operations when aggregate demand was still low, and consumers weren’t willing to spend when firms weren’t hiring. In China, this wasn’t the case; they had things like state-owned enterprises (SOEs) run by the government, and the government took rapid steps to help the country even though they incurred debt and loss in the short run.  

China’s state-owned enterprises also acted as a sort of automatic stabilizer for their economy. Automatic stabilizers are policies and programs designed to balance fluctuations in a nation’s economic activity without needing intervention by policymakers. This stands in contrast to the pro-cyclicality of typical, privately-operated firms, which tend to restrict their operations in times of recession. While this minimizes the risks they take during a downturn, it also means firms are less eager to do business, dragging out the length of economic recovery. Normally SOEs are supposed to maximize profit just like privately owned enterprises, but beginning in 2008, they consented to increased production and investment spending, which provided major benefits to the economy and helped the economy start to grow again. Favorably for China, almost 20% of industrial employment following the 2008 crisis came from SOEs; with so many jobs remaining active during and after the recession, their economy was able to recover much more quickly and effectively in a manner not possible in countries without SOEs or similar programs.

While China’s policy actions involving SOEs worked out in the short run, risks posed by its Keynesian approach should be addressed. The timeline for the recovery of demand can vary greatly, so Chinese firms that stepped up production post-recession would be in an even worse position if their increased output went unpurchased. Past efforts by the Chinese government to influence demand have been notoriously unsuccessful, especially thanks to its people’s strong propensity to save. Data also show that from 2008 to 2015, China’s M2 measure of money (total cash and checking deposits plus savings deposits, money market securities, mutual funds, etc) increased by 16 percent annually, but during the same period, China’s economy expanded at a rate less than half that. Domestic inflation, as well as expectations of inflation, has been high since 2008. Taken as a whole, China’s success should be taken with a grain of salt and under different circumstances may have even damaged the economy more.

Beyond these unrealized risks, China also created several other hazards for itself set to materialize in the coming years, including increases in its already dangerous levels pollution and higher inequality among Chinese citizens. It has overproduced steel thanks to government subsidies and tax breaks, drawing the ire of competing steel-producing nations. Its debt has risen to approximately 50% of its GDP in part because of its post-recession policy actions, and it’s uncertain how easily they can repay it. Furthermore, with demand for Chinese exports unlikely to return to pre-recession levels, and because investment already accounts for almost half of its economic activity, China should look to do things like boost household incomes through higher wages and lower social security contributions, put in place fairer resource prices, interest rates, and distribute dividends from state-owned enterprises, or increase spending on pensions and healthcare if it wants to continue its economic growth and achieve its promise for the future.