California Income Gap Grows Amid Prosperity

At the doorstep of a new century, California finds itself standing in a new Gilded Age, the income gap between rich and poor wider than at almost any time in history and magnified by the sudden wealth and lavish living of a growing elite.

California’s super rich haven’t been this flush or freewheeling--and the poor and middle classes haven’t languished this far behind--since the last days of the Roaring ‘20s, economists say.

The state’s ongoing economic boom, led by high-tech industries but also fueled by light manufacturing and agriculture, has concentrated even more wealth at the very top of the income ladder, according to a study of earnings by the California Policy Institute and other scholars. The state’s poorest working families, meanwhile, now bring home 22% less in real dollars than they did in 1969, the study shows.

“Over the last three decades, we’ve seen a very rapid rise in the income gap in California,” said Deborah Reed, an economist with the nonpartisan institute, based in San Francisco. “We’re back at the kind of income disparities we had in the 1920s and ‘30s.”

The reason the boom hasn’t translated into higher incomes across the board is twofold, economists say. High-tech doesn’t create a vast array of well-paying factory jobs, and it puts a premium on an educated work force. And California, more than other states, has a high concentration of uneducated immigrant workers.

The growing income divide reveals itself in every corner of the state even though different engines are driving California’s three regional economies--Southern California, the Central Valley and the Bay Area. In Los Angeles County, it is mostly whites and, to lesser degree, Asians who create and fill jobs in the computer and entertainment industries. Meanwhile, the burgeoning service economy--maids, nannies, cooks, gardeners, retail clerks--employs more and more immigrants from Mexico and Central America, economists say.

In the great Central Valley, in the shadow of some of the nation’s wealthiest farming operations, villages of tar paper shacks rise out of the flat earth like relics from the sharecropper South. In one forgotten corner of Tulare County, black and Filipino men and women live year-round in plywood shanties and old wooden Southern Pacific boxcars with no running water.

Here, James Dixon sleeps on a 50-year-old mattress with a sack of rice for a pillow. He draws heat from a turn-of-the-century stove and goes to the bathroom in a 1940s outhouse. Weather and wood rats have chewed a gaping hole in his roof. To keep the ceiling from falling, he wedges empty Vienna sausage cans into the crevices as makeshift studs.

“It’s not right, what happened to my life,” said Dixon, 96, his threadbare clothes held together with safety pins. “I worked all my days in the cotton fields and then cooking on the Union Pacific. I’m not happy living in this situation. It rains in my house.”

A few hours up the road, spilling out of Silicon Valley’s dot-com economy, billionaire Larry Ellison has built a 22-acre medieval Japanese-style retreat at a cost of $40 million. His Woodside estate, designed by a Zen priest, includes a pond filled with purified drinking water. Ellison, who founded Oracle, the world’s second-largest software company, has surrounded himself with an 80-foot world-class racing yacht, a stable of rare cars and a clutch of airplanes, including an Italian turbojet fighter.

Millionaires Clad in T-Shirts, Running Shoes

At Ferrari and Porsche dealerships, a whole new clientele glides through the door. It used to be that Ferrari of San Francisco salesman Brad Goldstone could spot his prime customer at a glance: a man in his 50s sporting Guccis and gold chains who was ready to crown decades of hard work with a $200,000 luxury sports car that screamed, “I’ve made it!”

Today, Goldstone’s keen eye fixes on a different moneybags: the twentysomething guy wearing a baseball cap, T-shirt, running shoes and an ear-to-ear grin.

“They always have the same look on their faces,” he said. “They are giddy, excited. I say: ‘Let me guess. You just went public.’ They giggle. And they don’t care what they have to pay.”

That Third World poverty and immense wealth exist side by side in a state so big and manifold is hardly surprising. Income gaps have defined California and America since the early days of the railroad and oil magnates. Back then, unlike today, welfare and other government programs didn’t exist as minimal safety nets.

But the income gap persists even as the unemployment rate has dropped below 6% and California has continued to create more wealth in a shorter period of time than at any point in the past century.

Although the economic expansion since 1995 has begun to slow the rate of growth in the income gap, the disparity between rich and poor continues to widen faster here than in any other state, experts say.

For the moment, economists say, the boom masks the growing income gap because it has driven down unemployment and given many entree to the good life. But rich and poor are moving in such starkly opposite directions that signs of discontent have begun to surface, such as in the recent mayoral election in San Francisco, where debate centered on skyrocketing rents and an unequal distribution of wealth, polarizing the city.

“A lot of my concerns have to do with what will happen in the next downturn,” said Lynn Karoly, senior economist with the Rand Corp. think tank.

It is then, economists worry, that the inequalities will grow even deeper. The wealthy tend to be more cushioned against a downturn but the working poor risk losing jobs and falling back on a welfare system that no longer provides the same safety net.

“It is a truism going all the way back to the French Revolution, that when there are tremendous disparities in income and wealth, it creates social instability,” said Stanford Jacoby, a UCLA labor economist.

From 1993 to 1997, the incomes of California’s richest grew at a phenomenal pace while the incomes of the state’s working poor and middle class stagnated or increased just slightly, according to census and income tax data. The average income of the top 1%--$845,000--shot up 57% in that period, said Jean Ross, executive director of the California Budget Project, a research group. By contrast, the average income of the middle fifth of California taxpayers--$24,177--grew by only 1.8%. For the state’s poorest working families, the average income in 1997--$13,000--reflects a 13% drop since 1989 and a 10% gain since 1993.

In Los Angeles County, a recent United Way study discovered a shrinking middle class: nearly half the households in 1998 had an estimated net worth of less than $25,000, while 34% of households boasted a net worth of $100,000 and above. The study found that even though the poor were technically making it, they had lost considerable ground because of the high cost of living and rent.

Children Growing Up in Poverty

Maria Rios, a nurse’s aide at a Pasadena retirement home, and her husband, Gerardo, a house painter, raise four young children on an income of $24,000 a year, hovering near the poverty line. It leaves no room for health insurance, clothes or savings, much less a trip to Disneyland. Rios, who left Mexico with a ninth-grade education, yearns to get her GED and start her own travel agency, but she’s too busy treading water.

“It’s getting harder,” she said.

From Kern to Merced counties, a 180-mile stretch, more than one-third of the children live in poverty. The Fresno Unified School District serves a student body of 79,000 that ranks as the sixth-poorest in the nation, behind only cities such as East St. Louis, Ill., and Detroit.

Californians hitched to high-tech and other growing industries say the possibilities of the new millennium appear limitless. Those mired in low-paying service jobs say their lives seem tolerable only when compared to that of neighbors or relatives on the other side of the border or across the sea.

“We live on a little more than $1,000 a month,” said Leon Richardson, an assistant pastor and unemployed auto body man with four children on welfare.

Living in Tulare County, where the jobless rate never drops below 12%, it’s not easy finding a decent job, he said. “In the winter months, the bills burden us down. In the summer, I hustle. I haul trash out of someone’s yard or recycle metal. Somehow, we get by.”

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Like a river of American venture financing, Sand Hill Road runs two miles between Menlo Park and the brown hills overlooking Stanford University. The road, known as the “capital of capital” and lined with the nondescript office buildings of the new moguls, is the moneymaking heart of Silicon Valley. More than $22 billion of investment capital, the densest concentration in the world, sits right here.

At 28, Joe Kraus is emblematic of all that is right with an economy that rewards innovation, guts and nerve. A onetime pizza delivery man who graduated with a political science degree from Stanford, Kraus founded his company, Excite, an Internet portal, in a garage with five college buddies in 1993.

“Getting a job seemed boring. My friends and I all thought we were probably smarter than the people we would be working for,” he said.

Their parents staked them $10,000. This year they yielded an amazing return: a $6.7-billion merger between Excite and @Home. Kraus is worth more than $50 million. By local standards, he still lives rather modestly. He paid more than $1 million for a four-bedroom Palo Alto house this year but has yet to furnish it. And then he bought his Ferrari, a Maranello model, for which he paid $250,000, more than sticker price to avoid a 14-month waiting list.

Some of Silicon Valley’s most successful entrepreneurs are immigrants from India, China and Israel who came here with little more than an education and an idea--people like Raj Singh.

Born to an impoverished Hindu farming family in northern India, Singh arrived in 1991 armed with a negative net worth and degrees in physics and computer science. This year, he made $350 million off the sale of two high-tech start-ups he helped found.

At 53, Singh has plunged into another start-up, working 18-hour days that begin when he signs on to his home computer at 4 a.m.

“I like the excitement of building and bringing order out of chaos,” he said. “Then I like to move on.”

The money is something he hasn’t quite gotten used to. He still drives a 1996 Suzuki Sidekick and his wife, Swadesh, still goes to work at 7 a.m. each day to design computer chips. “And she cooks our dinner every night,” he said.

For some, the embarrassment of riches sloshing around the valley brings with it obligations.

Steve Kirsch, a computer entrepreneur, has given millions to charity but finds it hard to get other dot-com moguls interested.

“There is a race in Silicon Valley,” he said. “All the top venture capitalists are in a race to see who can get to a billion dollars net worth first.” Giving money away, his friends tell him, “means it will take that much longer to get there.”

Not Driving a Mercedes Is Deemed Suspicious

For Dennis and Martha Mendoza, the Silicon Valley dream was moving their two daughters from a section of San Mateo where gunshots were fired to a pricier part of town. But no matter how straight and steady Martha Mendoza drove her beat-up Oldsmobile on the streets of her new neighborhood, she kept getting pulled over by cops. Her husband told her it was the car. Everyone else, he pointed out, was driving BMWs, Mercedes-Benzes and Audis. The Mendozas just looked suspicious.

So they bought a 20-year-old, repossessed Mercedes sedan with a busted radiator. They paid $500 and scoured junkyards for parts. “I don’t get stopped by the police anymore,” Martha Mendoza said, laughing as she took a visitor for a ride in her now-gleaming white car.

Still, the family struggles mightily to live on $27,000 a year. The Mendozas, natives of Honduras with high school-level educations, have little hope of hooking into the new economy and its high-paying jobs. She works as a part-time caregiver to an elderly, housebound man. He works 60 hours a week as a driver for a carrier company that pays no benefits. Rent on their two-bedroom apartment consumes nearly half their salaries.

Like generations of immigrants before them, the Mendozas pin their dreams on their daughters, 10-year-old Denise and 9-year-old Dina. They make a point of eating out once a month, for the treat of it and to teach the girls social graces.

“The girls need to know how to behave, what to order in a nice restaurant, because someday they are going to have that in their lives,” she said.

Twice a week after school, the girls receive private tutoring through a volunteer group. And their parents have signed up for a program that matches each dollar they save with $2 from private donors--to help their daughters pay for college one day.

“My girls will go to college,” Martha Mendoza said.

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On the vast west side of the San Joaquin Valley, in the heart of the nation’s most high-tech farm belt, rises the empire of John Harris, one of California’s wealthiest farmers. He’s known among growers as “Mr. E-Mail” and his Web site, www.harrisfarms.com, not only markets his products but tells the humble origins of Harris Farms.

Harris, 56, grows cotton, almonds and tomatoes, among a dozen other crops, breeds and owns some of California’s top racing horses, runs a hotel and restaurant and moonlights as a cattle baron. His feed lot along Interstate 5 near Coalinga, just up the road from his Mediterranean-style Harris Ranch Inn and Restaurant, is the biggest feedlot in the state, packing 100,000 beef cattle on 700 acres.

“When you buy our beef, it’s got our name on it, not Safeway’s or Ralphs,” said Harris, a UC Davis graduate. “We’re proud of what we’ve built.”

In keeping with a more modest expression of wealth on this side of the mountain, Harris wears Wrangler jeans and roper boots and drives a mud-caked Ford Explorer. Most of his 1,500 full-time employees call him John.

And yet he flies to and from Santa Anita racetrack in his $2-million Pilatus Turbo and rubs elbows with Gov. Gray Davis and Sen. Dianne Feinstein at political fund-raisers at his house and hotel. The Harris home along a majestic stretch of the Kings River is known as one of the more stunning estates in California, a 6,000-acre ranch with a French chateau-style house furnished with European antiques.

Harris has heard the rap that big agriculture wastes water and exploits migrants. But he grows at least half of his crops using water-saving drip irrigation and, like a handful of farmers, maintains a neighborhood on his land where 100 farm laborers and their families live in modest houses.

Private Cessnas, Tar Paper Shacks

He proudly ticks off the name of workers whose 401(k) savings plans have amassed tens of thousands of dollars in the stock market boom.

“Agriculture gets tagged with the ‘unemployed farm worker’ but most of the unemployment in this valley isn’t a farm worker problem,” he said. “People without a lot of skills or education choose to live here because it’s cheaper than in Los Angeles or San Francisco.”

Piloting his Cessna 210 from work to home, Harris flies past the rural community of Teviston in southern Tulare County. It is not quite a town and not quite a squatter’s village of 650 residents and four churches.

The black sharecroppers are dying off after migrating here from the South in the 1940s to pick the new cotton of the West. Their ranks are being replaced by new farm worker families from Mexico, making better wages, on their way up the ladder.

The one thing the old-timers and some newcomers share is the desperation of their housing: broken down trailers, old buses and tar paper shacks that would be condemned if located in the city. Paul Boyer, who helps rural communities upgrade houses and water lines, says conditions are among the most depressing he’s seen in California. “It doesn’t get much worse than Teviston,” he said.

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The road from immigrant student to wealthy Los Angeles businessman is lined with toys, at least for 48-year-old Charles Woo, who is part of a growing economy that serves the poor.

A native of Hong Kong who graduated from UCLA with a master’s degree in physics, Woo worked in the family’s Chinese restaurant in Redondo Beach. Counting receipts at night, Woo kept thinking there had be a better way.

All those toy helicopters and plastic figurines made in China needed a conduit to the five-and-dimes in Los Angeles. Why not act as that go-between?

So the family took $20,000 in savings and opened a wholesale toy dealership downtown. From Day 1 in 1979, business boomed. A decade later, he and his brother opened Megatoys, in what was by then a full-fledged Toy District. Today, sales have jumped to more than $20 million a year.

Named the first Asian American to head the Los Angeles Chamber of Commerce beginning in 2001, Woo earns more than $500,000 a year. After selling Halloween costumes and Easter baskets, he is now exploring the business realm of biomedical research.

He says he doesn’t much care for designer suits and his 1992 BMW is running just fine. He, his wife, Ying, and two sons live in a 5,000-square-foot home in Rancho Palos Verdes with a view of Santa Catalina Island.

Woo, who walks with a crutch because of childhood polio, donates about $50,000 a year and 15 hours a week to a variety of causes, including helping disabled Asians get meaningful jobs.

Woo has a unique vantage on the growing income gap; his business serves toy stores in the poorest reaches of the city. He said he is concerned about the widening gulf and its consequences for the future, issues he hopes to address in his new chamber role. But he is optimistic that if the boom continues, the gap can be bridged.

At his company, for example, a secretary and warehouse clerk have worked their way up to top managerial and sales positions. Immigrants, he said, are especially suited to taking advantage of emerging markets, as long as they have the right education.

“We take a global view, we walk in a different community,” he said. “We don’t feel uncomfortable because we come from a different culture.”