Urban Inequality Could Get Worse

President Obama's stated objective to reduce inequality, as laid out in public addresses and budget plans, is a noble one. The growing income gap – not only between rich and poor, but also between the ultra-affluent and the middle class – poses a threat both to the economy and the long-term viability of our republic.

But ironically, what seems to be the administration's core proposal, ratcheting up the burden on "rich" taxpayers earning over $250,000, could have unintended consequences. For one thing, it would place undue stress on the very places that have been Obama's strongest supports, while providing an unintended boost to those regions that most oppose him.

At the heart of the matter is the age-old debate about who is "rich." If you define wealthy as $250,000 a year for a family of four, that means different things in different places. America is a vast country, and the cost of living varies widely. What seems a princely sum in, say, red state Oklahoma City is barely enough to eke out a basic middle-class life in blue bastions like New York, Los Angeles or San Francisco.

In the recent study on the New York middle class that I conducted with Jonathan Bowles at the Center for an Urban Future, we compared the cost of a "middle class" standard of living in New York and other cities. The report found that Manhattan is by far the most expensive urban area in the country, with a cost of living that's more than twice the national average. (This is according to a cost of living index developed by the ACCRA, a research group formerly known as the American Chamber of Commerce Researchers Association.)

But even Queens, the city's middle-class haven and the only other borough included in the ACCRA analysis, suffers the eighth highest cost of living in the country.

What does that mean? An individual from Houston who earns $50,000 would have to make $115,769 in Manhattan and $81,695 in Queens to live at the same level of comfort. Similarly, earning $50,000 in Atlanta is the equivalent of earning $106,198 in Manhattan and $74,941 in Queens. (See "New York Should End Its Obsession With Manhattan.")

The cost of housing constitutes one critical part of the difference. Average monthly rent in New York was $2,720 in the fourth quarter of 2007, by far the top in the nation. That total was both 55% higher than the second place city, San Francisco, where average effective rents are $1,760, and nearly triple the national average of $975.

Even in relative boom times, such high costs have been driving many out of New York, and now it could get worse. During tough times, people's incomes drop, so they are less able to absorb high costs and taxes, which are rising in many blue cities and states. Imposing more taxes on some label-rich New Yorkers or Angelenos, who earn $250,000 a year, won't make them more likely to stay.

Perhaps even worse, higher taxes probably won't help the inequality issue. True, historically and to this day, the greatest levels of inequality occur in low-tax areas like the Mississippi Delta, the Rio Grande Valley and Appalachia. But, increasingly, this unsavory distinction is shared by big cities like New York, Los Angeles and Chicago. In contrast, the most egalitarian states are generally deep red places – such as the Dakotas, Alaska, Nebraska and Wyoming.

Higher costs – manifested in everyday expenses like sales taxes and energy bills – now contribute in a large way to growing inequality even in the richest, most elite cities. When housing and other costs are factored in, notes researcher Deborah Reed of the left-leaning Public Policy Institute of California, deep-blue mainstays Los Angeles and San Francisco rank among the top 10 counties in America with respect to the percentage of people in poverty. Only New York and Washington, D.C., do worse.

Worst of all, the rise of inequality in these high-cost blue cities seems to be connected to policy decisions. High taxes and strict regulations have expelled relatively well-paying blue collar jobs in manufacturing and warehousing from expensive urban areas. Without them, an extremely bifurcated economy and society forms because no traditional ladders for upward mobility remain; they are critical to a successful urbanity.

Back in the 1960s, Jane Jacobs predicted that Latino immigrants to New York, mainly from Puerto Rico, would inevitably make "a fine middle class." Yet four decades later, in the Bronx, the city's most heavily Latino county, roughly one in three households lives in poverty – the highest rate of any urban county in the nation.

At the other extreme, in Manhattan, where the rich are concentrated, the disparities between socioeconomic classes have been rising steadily. In 1980, the borough ranked 17th among the nation's counties for social inequality; today it ranks first, with the top fifth of wage earners earning 52 times that of the lowest fifth, a disparity roughly comparable to that of Namibia.

To an old-fashioned Truman Democrat like me, this is bad news. But some modern-day "progressives," like Richard Florida, celebrate the concentration of rich people. They see them as guarantors that places like New York will be the winners of the post-crash economy. The losers? Goods-producing regions of the Great Plains, the industrial Midwest and, of course, those unenlightened, suburban middle-class people.

Yet it seems more and more likely that raising taxes for urban middle-income workers will, over the long term, add to the flood of people fleeing to less costly locales with lower taxes. This will be particularly true for the growing ranks of information economy "artisans" who might find critical write-offs for home offices and other business expenses cut from their next tax return.

None of this is necessary. The "creative destruction" resulting from the downturn might actually prove a boon to these big cities – by making them more affordable for the urban middle class. This help would be accelerated if city governments – as in Los Angeles, New York, Houston and even San Francisco during the early 1990s – nurture local businesses.

But "growth" – a word not widely embraced in this greenest of administrations – does not seem to be a priority in either Washington or in most city halls. There are murmurs that investment in high-cost, subsidized alternative energy will create vast numbers of new jobs, but this is likely just wishful thinking for everyone but Al Gore's business partners.

This is not to say cities' policies need to return to Bush-style Republicanism. Tax breaks for big-time investors and real estate speculators do not make a sustainable urban policy either. What's needed is something closer to lunch-bucket liberalism, which focuses on productivity-enhancing initiatives and sparking entrepreneurial growth. America – its cities in particular – could do with more private-sector stimulation and a lot less high-minded social engineering.

With policies geared toward the latter at the expense of the former, one of the great ironies of the Obama era will continue to unfold.

By targeting the urban middle class to pay for its deficit and new social programs, the president's plan could end up draining wealth – and boosting inequality – from our nation's great cities, where he currently draws overwhelming support, to its hinterlands. Not exactly what the White House had in mind, no doubt, but, sadly, it's a distinct possibility.

This article originally appeared at Forbes.

Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.