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Why the American Dream Is Dying in California

Image: Creative Commons.

A recent study from the Urban Reform Institute is sounding an alarm about rising inequality and decreasing upward mobility in California. In fact, the report found four of the nation’s top ten worst metro areas to live in for upward mobility for African‐​Americans and Latinos are in California. Those regions include Los Angeles, Stockton, San Francisco and Bakersfield for African‐​Americans and Santa Rosa, Los Angeles, Stockton, and Modesto for Latinos.

The study goes on to point out that minority populations are disproportionately likely to live in poverty and are far less likely to move up the economic ladder. African‐​American and Latino families make up 43 percent of all families in California, but they compose around 60 percent of Californian families living in poverty and represent just 12 percent of people of those in the top 10 percent of Californian incomes. Other studies have shown California had the 4th highest level of inequality of any state pre‐​pandemic. African‐​American families are twice as likely to be at the bottom of the income distribution than at the top. White families, meanwhile, are the exact opposite; they are twice as likely to be high‐​income earners rather than low‐​income earners.

And, we know that minorities have been hit especially hard during the pandemic, exacerbating existing inequality further.

This, despite the fact that California has one of the most generous social safety nets in the nation. Indeed, California provides an object lesson about the limits of redistribution as a weapon against poverty and inequality. Despite a progressive tax system and extensive social welfare programs, California has the highest poverty rate in the nation.

Of course, inequality is not, in and of itself, a bad thing. The economic dynamism that drives growth and produces wealth will inevitably lead to a certain level of inequality. However, too much of California’s inequality results from government policies that make it harder for low‐​income Californians to take advantage of a growing economy.

The Cato Project on Poverty and Inequality in California has spent the last two years studying the ways in which the state’s policies exacerbate poverty and inequality. We have found a variety of policies in areas as far reaching as housing, criminal justice, education, social welfare, and economic regulation contribute to the problem.

Consider, just one example: housing. A number of state and local policies, including zoning, the California Environmental Quality Act, and building fees have limited the supply of housing and driven up costs. A report from the California Association of Realtors found that the average family would need to make at least $127,200 a year to buy a home in Los Angeles. Only 25 percent of the LA population could afford a home when the study was conducted in 2019. This means that some Californians reap a windfall from rising property values, while others are artificially locked out of the housing market. Making housing more affordable will allow minorities, with a long history of discrimination in the housing market, to accumulate intergenerational wealth. Owning more assets means that people can leverage the equity in their homes to pay for other needs.

It is unavoidable; inequality will most likely increase due to this most recent economic downturn. This trend will be no different than the one seen for the past 40 years. Inequality would be more permissible if economic mobility increased in places like California. But this is not just an issue of class, but of race. Increased economic mobility is particularly important for historically disadvantaged minority groups. Even before COVID-19 and the widespread adoption of telework, people were moving out of California at an alarming rate. If Californians want to preserve the dynamism that made their state so wealthy, policies have to reflect these values. Low taxes, low barriers to entry, and affordable housing will contribute to an inclusive economy for all.

Michael Tanner is a Cato Institute senior fellow and heads research into a variety of domestic policies, with an emphasis on poverty and social welfare policy, health care, and Social Security and entitlement reform.

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Michael Tanner is a Cato Institute senior fellow and heads research into a variety of domestic policies, with an emphasis on poverty and social welfare policy, health care, and Social Security and entitlement reform.