The secret to diminishing economic inequality: Government aid matters

By Mark Kreidler, Capital & Main

This story is produced by the award-winning journalism nonprofit Capital & Main and co-published here with permission.

By any measure, the initial outbreak of the COVID-19 pandemic ravaged individual Californians and the state as a whole. In addition to illness and death, the state lost 2.6 million jobs between February and April of 2020, plunging businesses into crisis and putting families at risk.

One series of interventions, though, did mostly what it was designed to do despite its obvious flaws. Direct government assistance, at both the federal and state levels, helped prevent millions of Californians from experiencing further economic inequality — and it rescued an estimated 2.7 million residents from falling into poverty altogether.

The rollout was at times badly botched. The state’s systems for doling out this financial assistance left it open to fraud, delay and mistakenly denied claims. But on balance, rushing aid to Californians in the midst of the crisis worked.

“I think it’s most remarkable to see how government support from unemployment insurance and stimulus payments reduced income inequality in 2020,” says Sarah Bohn, a senior fellow at the nonpartisan Public Policy Institute of California.

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The PPIC’s research bears that out. Using data gathered by the U.S. Census Bureau’s Current Population Survey, the institute estimates that lower income workers in California would have seen their incomes decline by 15% in the first year of the pandemic without government assistance. Instead, they fell by only 5% from 2019 figures.

If you want to know what that looks like in real life, consider the finances of Amparo Ramirez, an airline food services worker at Los Angeles International Airport. Ramirez, 50, is paid $17 per hour, or about $2,720 every four weeks before taxes. Her monthly rent for a one-bedroom apartment in Culver City is $1,700 with a rent hike on the way, and she has to buy food and health insurance and pay for her transportation out of what’s left.

“I am incredibly worried,” Ramirez told Capital & Main earlier this year. “I am living at the margins.”

A 15% decrease in income might mean the difference between maintaining rent payments and becoming unhoused. It’s a concern common to Californians — in a recent survey, nearly 55% of respondents said they were worried about being able to pay their rent or mortgage — but the toll on lower income workers could be disastrous.

Government aid mattered up and down the income spectrum in California in 2020. At the median earning level in the state, the drop was 2%; it would have been 5% without unemployment insurance (UI) and stimulus payments. Both California’s lower middle (20th percentile) and upper middle (80th percentile) wage earners showed no change in total income from 2019 to 2020. Absent government help, both categories would have taken hits, PPIC research showed.

And Bohn said the Census Bureau survey almost certainly underreports UI benefit receipts. “So our data reflects a conservative estimate of these supports. Even so, we find that these supports took us back to a late-1980s level of income inequality in California.”

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That is a significant point. Since the 1980s, income inequality in the state has steadily widened, severely separating higher and lower earners. One half of 1% of all tax filers account for about 40% of all personal income tax collected in the state.

In 2020, families at the high end of income distribution in California earned 11 times more than those at the low end — $270,000 vs. $25,000. In the 1980s, those at the top earned seven times more than those at the bottom. It was direct government support, Bohn says, that narrowed the inequality gap in 2020.

Among research experts and sociologists in the field, it was a given that the pandemic would wreak havoc on lower income workers in California. They tend to live in crowded, often multigenerational housing, have the poorest access to health care, and suffer in greater numbers from the kinds of comorbidities, like diabetes and heart issues, that could make their COVID cases worse.

They were also the least able to afford job loss or even a temporary layoff, so they kept showing up at service-sector workplaces — in food service, meatpacking, transportation, agriculture, hotel and maintenance work — in which COVID precautions might be lax or nonexistent. Millions of lower income Californians had no choice but to be physically present at work, assuming they still had jobs.

Direct stimulus payments and enhanced UI helped fend off the worst of the pandemic’s financial ravages, at least temporarily. According to the PPIC, federal stimulus payments kept 1.7 million Californians out of poverty, and enhanced UI prevented another 1 million from falling into poverty. Overall, the state’s poverty rate fell from 16.2% in 2019 to 12.3% in 2020, still well higher than the national average of 9.1% in 2020.

What this means for public policy going forward is unclear, in part because government programs are so constantly subject to political expediencies and external pressures. Too, there’s no question that California’s unemployment system experienced tremendous failures in delivering some of the pandemic aid that was most urgently needed, particularly during the critical early months of 2020.

But the fact that government intervention not only helped keep millions out of poverty but also narrowed the income gap in California “may prompt state and federal policymakers to reassess the role of longstanding safety net programs in boosting family incomes and supporting well-being and economic success,” wrote PPIC Policy Director Caroline Danielson.

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State lawmakers seem attuned to such reconsideration. By extending free school meals to every student, expanding Medi-Cal to all low income workers regardless of immigration status and broadening the earned income tax credit to include more families, among other things, California legislators and Gov. Gavin Newsom have signaled a clear understanding of the role government can play in closing the gap between rich and poor.

“These aren’t merely policy problems. They are moral imperatives,” Newsom said in his 2019 inaugural address, speaking to the need to reduce the income gap and curb housing, utility and health costs that work against that imperative.

It isn’t merely an income inequality; it’s an inequality in the entire standard of living in the Golden State. Stimulus and enhanced UI have concluded, and “We’re returning to longstanding economic challenges,” Bohn says. With the state looking at record budget surpluses, the opportunity still exists for California to deal directly with those challenges.

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