Special Report: The Unequal State of America: How Uncle Sam widens the income divide
(This is the first in a three-part series, "The Unequal State of America")
By Deborah Nelson and Himanshu Ojha
WASHINGTON, D.C. (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.
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 January 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.
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.
THE FEDERAL FUNNEL
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.
Massachusetts 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.
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.
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.
But government makes a difference.
Two miles south of the Capitol Building, the confluence of the Potomac and Anacostia rivers marks an economic divide between the region's rich and the District's poor. Carved out of their eastern banks is the city's poorest ward, the 8th. As of late last decade, just over a third of all residents and nearly half of children there lived in poverty.
Several miles west, Lani Hay owns a $2 million house with towering windows that overlook the bluffs of the Potomac River in the District's wealthiest neighborhood. A striking figure with dark hair and a designer wardrobe, she gets mentions in local society columns for hosting charity galas and private parties with celebrity guests.
Hay, who attended the U.S. Naval Academy, said she left the military at age 27 after five years in active duty to try her luck in the defense industry. It was 2002, the year after the terrorist attacks on Washington and New York. The United States was at war in Afghanistan and preparing to invade Iraq.
Hay launched Lanmark Technology Inc., a national-security consulting company, joining hundreds of other federal contractors who opened or expanded businesses in the region after 9/11 - including many run by people fresh out of government.
She received a no-bid federal contract for $99,912 from the Department of Defense in 2003. Since then Lanmark has won more than $120 million in federal contracts, according to government records. Hers is a modest success story by Washington standards. "I have peers that are doing over a hundred million in revenue annually," she said.
They are the beneficiaries of a shift in U.S. policy over the past 20 years that has directed trillions of tax dollars to private-sector contractors by outsourcing government operations and through record spending on war, national security, science and technology.
President Bill Clinton launched his "reinventing government" initiative in the 1990s. The federal money flowing to business rose 7 percent during his second term and 72 percent under Bush, who outsourced a record amount of national-security and defense work after the 2001 attacks by al Qaeda and through two wars. The upward trend continued under President Barack Obama until leveling off in 2010.
The outsourcing boom has been particularly dramatic in the Washington region. Direct spending by the federal government accounts for 40 percent of the area's $425 billion-a-year economy. The government spends more on private-sector procurement here than in any other metropolitan area or state - up 300 percent since 1990.
Roughly 15 cents of every dollar from the entire federal procurement budget stays in or around the government's hometown, said Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University. Last year, that was about $80 billion out of $536 billion in procurement spending, he said. The 15 percent share is far greater than the region's 2 percent portion of the U.S. population.
"We're seeing an enormous transfer of wealth from taxpayers to the Washington economy," said Fuller.
The federal largess kicked off a gold rush to the capital region.
Since 1990, five of the top 10 major defense contractors have moved their headquarters to the Washington area - joining Lockheed Martin, the No. 1 defense contractor and a longtime resident of suburban Maryland.
The Washington area has produced 385 of the nation's fastest-growing small- and medium-sized companies since 2000, more than any other metropolitan area, according to a study this year by the Ewing Marion Kauffman Foundation. Nearly half were government-service companies.
"It's the rich getting richer phenomenon," said Dane Stangler, Kauffman's director of research. "Because Washington has a concentration of high-growth companies, that attracts higher-skilled people to work there, which will attract more companies."
The influx has widened a split in the working population between haves and have-nots.
The ranks of Washington-area workers with incomes above $100,000 rose to 22 percent of the workforce, up from 14 percent in 1990, adjusted for inflation, a Reuters analysis of Census data found. The share making less than $40,000 stayed flat, while the middle hollowed out to 41 percent from 49 percent.
Executives, lawyers and high-tech workers are among the occupations that increased most in both numbers and average income. At the bottom, one of the fastest-growing areas is personal services, such as hairdressers and childcare workers.
"There are federal procurement CEOs making millions, and young professionals who are making in six figures, then there's a wage gulf," said economist Fuller.
Northrop Grumman CEO Wesley G. Bush received $18.4 million in direct compensation last year, in line with peers at major defense contractors. He said his company is concerned about income disparity and is funding programs to improve opportunities for students in disadvantaged schools.
Bush declined to discuss the impact of executive pay on the income-distribution equation. "I found out long ago that talking about CEO compensation is not an appropriate thing for CEOs to do," he said. "I'd say that for CEOs that are performing well, they ought to be compensated well."
The federal government historically lifted the fortunes of poor Washingtonians, too. It provided one of the sturdiest rungs on the economic ladder for low-income high-school graduates, who had a shot at thousands of entry-level federal jobs.
Orlando D. Epps, 38, started working at the Census Bureau through a work-study program while a senior in high school. Upon his graduation in 1992, the bureau hired him full-time in an administrative job at the lowest pay grade on the federal scale, GS-1. "I kept time cards, and I typed memos," he said.
Today, he is at the National Weather Service. He worked his way up to program analyst at the GS-13 level, which pays $89,000 to $115,000. He has three children, ages 16, 11 and 9, and bought a $130,000 townhouse in Waldorf, a suburb in Maryland.
But foot-in-the-door jobs are fast disappearing. Epps left the Census Bureau in 1997 because the agency laid off his entire section. Now he is working toward an associate degree in accounting after hours. "I'm preaching to my kids that they have to get college degrees," he said.
Indeed, in 1998, one in four federal civilian jobs in the District was a clerical, blue-collar or technical position. Last year: one in eight. (They remain a third of all federal civilian jobs nationwide.)
The fall-off is even greater than those numbers indicate. The federal government began downsizing the workforce in 1991. The cuts fell disproportionately on low-skill positions that could be replaced by technology or outsourced.
Today there are 320,000 federal jobs in the Washington area. Within the District of Columbia, 55 percent pay $100,000 or more. Many of the low-level jobs that remain are outsourced to temp agencies.
Michael Ponger, 30, grew up poor in the District. In 2010, he landed a clerical job in the U.S. House of Representatives. A couple decades ago, the position would have been a prize for someone with only a high-school diploma, securing a place in the middle class.
Times have changed. The government eliminated and outsourced most of its clerical jobs in Washington. Ponger had been hired by the Midtown Group, an employment agency that has won $20 million in federal contracts since 2003. He made $12 an hour taking inventory of equipment and supplies at the offices of lawmakers who lost re-election, and later did inventory for the federal court.
After 10 months, the job ended and Ponger moved on to a $9-an-hour position as a chef's assistant. The restaurant closed in August. He grabbed a "very part-time" security post; lately he has been getting more hours and hopes the position will become full-time. He's making $12 an hour.
"I can't go for no more $9 an hour jobs, because that's not going to pay the rent. And after you pay taxes, it's even shorter," he said.
A trim man with a pencil mustache, Ponger lives in a one-bedroom apartment in Washington's 8th Ward with his wife, Stephanie, 31, and their 5-month-old son, Michael Jr. They pay $750 a month in rent and sometimes need help from family to get by. She is a suite attendant at the Washington Nationals stadium during baseball season, and styles hair for extra cash.
Growing up, she lived in the suburbs. Her mother did data entry at the Federal Aviation Administration, developing skills that opened the door to a lifetime of good jobs.
"I thought I was going to follow in my mother's footsteps," she said. "Now it's harder. I find that disheartening."
Midtown Group's president, Helen Stefan Moreau, said lately she has seen a drop in temp assignments from the government for people with only high-school diplomas. Most of the temp orders require college degrees or better, with commensurate pay. She has even hired scientists for temp work on special projects.
Business is good; Moreau, 46, lives in a $1.7 million house in Chevy Chase, an affluent suburb in Maryland. But she said she is concerned about the growing disconnect between the Washington-area job market and its low-income residents.
"We have plenty of people looking for work and there are jobs. They're just not aligning," she said. "There is a group, a segment of the population, that has been left behind."
People in the influence industry are getting ahead.
In a geographic study of inequality, economist James K. Galbraith found that the Washington region led the nation in per-capita income gains during the five years leading up to the latest recession. He attributed this largely to the increase in federal spending on defense and intelligence contractors, but also to "substantial growth in spending by private sector lobbies."
Nearly 13,000 lobbyists registered with the government last year and reported $3.3 billion in fees, or about $260,000 per lobbyist. That's 22 percent more lobbyists and 37 percent more inflation-adjusted revenue per lobbyist than in 1998, according to a Reuters analysis of data from the nonpartisan Center for Responsive Politics.
Times are flush for Washington lawyers as well. The number of attorneys in the area has risen 44 percent, twice the national rate, to 41,000 since 1999. Their average income, adjusted for inflation, rose 35 percent to $156,000.
The number of organizations with a political presence in Washington - that maintain an office or are represented by lobbyists or lawyers - more than doubled between 1981 and 2006 to nearly 14,000, according to a study by political scientists Kay L. Schlozman, Sidney Verba and Henry E. Brady.
THE LOBBYING DIVIDE
These professionals work predominantly for groups representing the top of society. Schlozman and her colleagues found that more than half the groups were devoted to furthering the interests of businesses. The next closest were state and local governments, at 12 percent. The rest were fragmented into single-digit shares among divergent interests. Second to last on the list, just above unions, were groups advocating for the poor, at 0.9 percent.
Richelle Friedman works for one of them.
The 66-year-old Catholic nun is policy director for the Coalition on Human Needs, a nonprofit that represents about 100 organizations. She earns $78,000 and shares an apartment in the District with another nun. On a recent day she was at the U.S. Senate's Hart Office Building, carrying around a letter backed by 1,900 unions, social-service and faith-based organizations. The groups are prodding Congress, in balancing the budget, to raise taxes on the wealthy and reduce defense spending rather than cut low-income assistance programs.
Conservatives, she said, want to "cement tax breaks for the wealthy at the top and do so by cutting services." Friedman argues that the affluent have an inherent advantage on Capitol Hill. Many federal benefits that flow their way are built into the tax code, such as the low rates on capital gains and dividends. Advocates for the poor, she said, have to make the rounds every year at budget time to argue why things such as housing vouchers for low-income families should not be cut.
Business lobbyists say there's a good reason why they've grown so numerous. The rise of their industry traces the growth of government, said Kirk Blalock, a top Republican lobbyist.
"The size and scope of government is increasing," said Blalock, a 43-year-old with close-cropped brown hair. "Look at the number of laws, regulations and lawsuits companies have to contend with. It's no wonder."
His firm has flourished. Lobbying income at Fierce, Isakowitz & Blalock rose from $3.2 million when he joined in 2002 to $10.8 million last year, according to disclosures filed with Congress. The firm employs eight lobbyists and an office manager. His income exceeded $1 million, he confirmed, placing him among Washington's elite.
The son of an upper-middle-class family in Atlanta, Blalock was a public-affairs executive at Philip Morris overseeing political donations in 2000 when Bush won election. Bush adviser Karl Rove, a former Philip Morris consultant, hired the young lobbyist as a White House liaison to business.
Delivering on a campaign pledge, Bush proposed a $1.6 trillion cut in personal income taxes. Democrats opposed the proposal as tax cuts for the wealthy. Many in both parties worried about the loss of so much tax revenue.
Blalock's assignment was to persuade leading business associations to mobilize behind the cut. Business leaders were ambivalent: The bill contained no relief for taxes on corporate income, capital gains or dividends. The chairman of the powerful Business Roundtable, representing CEOs from about 200 large U.S. corporations, "looked at it and asked, what's in here for business?" Blalock recalled.
He set to work with trade-association allies to sell the cuts to the wider business community. Their pitch: Repealing estate taxes would be a boon to family-owned firms, and the income-tax cuts would lift small-business owners, whose profits are taxed via their personal returns.
They also dangled a carrot: If business helped get this bill passed, Bush could press for a second directly addressing their desires.
Within months, a thousand business associations joined a new "Tax Relief Coalition." They inundated Congress with emails and letters. Congress passed the cuts largely intact, slightly reduced to $1.35 trillion.
By 2003 Blalock had a new job: senior vice president for what was then Fierce & Isakowitz. He brought with him an important new client. The Business Roundtable had become a key supporter of the first tax cut. It now wanted Blalock's help passing a second round proposed by Bush, a cut in taxes on capital gains and dividends. Congress passed a $350 billion bill.
By the end of the year, Blalock made partner and the firm added his name to the door. He moved from a $700,000 small brick Georgian home in a middle-class neighborhood to a $1.7 million house with a pool in one of the nicest sections of Alexandria, Virginia. His rise was no exception: Other aides who worked on the tax cuts went on to similarly successful lobbying careers.
The changes took hold shortly before the United States headed into its worst recession in 70 years. By 2009 the federal deficit surpassed a trillion dollars a year. Republicans and Democrats began fighting over whether to extend the tax cuts when they expire this year - and what role, if any, they played in rising income inequality.
A $371,000 DISCOUNT
Last year, two nonpartisan government bodies, the Congressional Budget Office and the Congressional Research Service, each undertook studies of income inequality for lawmakers. Both concluded that a major driver in the years leading up to the recession was the growth in capital gains among top earners - but that the cuts also reduced the equalizing influence of the income-tax system. The 2011 CRS paper said tax cuts were the second-largest contributor to the rise in inequality in the decade through 2006. (See accompanying article, "The economics paper that rattled Washington.")
Conservative economists point out that even after the tax cuts, the rich overall wound up paying a larger dollar amount in income taxes. That's mainly because the incomes of the wealthy kept climbing. The top quintile paid 15 percent more in taxes but made 30 percent more money in 2006 than in 1996, the CRS reported.
There is no serious disagreement that the rich saved far more on taxes than any other group relative to their incomes, however.
The Tax Policy Center, a think tank staffed by a mix of economists from both parties, calculated that two-thirds of the tax savings would go to the top quintile of households and 1 percent to the lowest quintile. In dollar savings, that's $371,000 for the top 0.1 percent of households in 2012, $958 for the middle and $66 for the poor.
Nicholas Calio, the former Bush aide who heads airline lobby Airlines for America, worked on the 2001 law as White House liaison to Congress and for the 2003 cuts as in-house lobbyist for banking giant Citigroup. Calio, 59, said he won over members of Congress by focusing on the savings for average Americans. "There were concerns that there was too much for the wealthy," he said.
Calio says he isn't bothered that the wealthy benefited more. He grew up poor in Cleveland and used education as a springboard. He went to law school, came to Washington, worked hard and now is "making a lot of money." He declined to say how much, but his predecessor earned $2.6 million a year. Calio owns a $2.9 million house on the edge of a country club in the suburb of Chevy Chase, Maryland.
Income inequality is better addressed through expanding education and opportunity and economic growth, he said, not by taxing the rich.
"You don't punish people for being successful," Calio said. "You don't legislate equality."
(Reporting By Deborah Nelson and Himanshu Ojha; Edited by Michael Williams and Maurice Tamman)
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