Is income inequality the “defining challenge” of our time? President Barack Obama’s Dec. 4 speech on the topic has produced a lively debate, with some supporting him and others – chiefly the Washington Post’s Ezra Klein – arguing that unemployment should be the main focus.
In fact, Obama said in his speech, it is the combination of “a lack of upward mobility” with inequality that is the great challenge of the day. This strikes me as the right question: how to get people to move up and thus create a thriving middle class. If, in the process, the Google guys stay rich, so be it.
When people talk about inequality these days, they are often talking about three different issues. First, the astonishing rise of the very rich. Second, the stagnant wages and weakening prospects of the American middle class. And third, the large number of people at the bottom of the ladder.
These are distinct phenomena. There is lots of debate, and some good new research, about whether they are related – whether the rise of the rich has caused the stagnation of the middle class and the poor. The evidence is mixed. See Jared Bernstein’s “The Impact of Inequality on Growth” ( http://bit.ly/1cbpptA), and a new report from the Center on Budget and Policy Priorities titled “Pulling Apart” ( http://bit.ly/18BkKWe).
The superrich have grown worldwide, but America is at the head of the pack. And it appears to be caused by some structural factors: globalization and technology help superstars; large and liquid financial markets make the rich richer. Others are political: lower tax rates and the political influence of the financial sector. America has all of these factors – technological innovation, global reach, huge capital markets, but also tax cuts, deregulation, a powerful financial industry – so it’s not that surprising that it has the biggest rise in its superrich. The current Journal of Economic Perspectives has an excellent set of essays on this, all worth reading ( http://bit.ly/1dpjxi7).
Reviving the middle class is clearly the most important challenge, involving the most people. But it’s also the hardest – it began 40 years ago – and one for which it has proved difficult to find an enduring solution. There is strong evidence that rising inequality is crowding out the middle class. But there is also a powerful story to be told about how technology, globalization, and declining American education and skills have contributed to the stagnation of wages for the median worker.
Would higher taxes on the rich create a more dynamic middle class? Perhaps, but it’s not clear exactly how. It’s also worth noting that America’s tax regime – relying mostly on income taxes – is already more progressive than European systems that raise a much greater percentage of their revenues from sales taxes. The top 10 percent of American earners pay about 70 percent of all federal income taxes. In New York City, the top 1 percent pay almost 45 percent of the city’s income taxes.
Some argue that the real link between the rise of the rich and the fall of the middle class is political. The rich have captured the political system and milked it to their advantage. And it’s also true that – because of the vast role of money in politics – the well-off (and well-organized) can often get specific tax breaks and regulatory relief to help them. But more broadly, look at what’s happened in the last 10 years in America. Medicare was expanded dramatically, near-universal health care was enacted, energy policy has been changed against the wishes of big oil and coal companies, and tax rates on the rich have approached 30-year highs. And it was America that a few years ago passed a stimulus program of almost $1 trillion to fight unemployment. Europe, with its more egalitarian politics, slashed social spending in the face of the worst unemployment since the Great Depression. On its face, this is not strong evidence of the political power of America’s rich.
Of the three problems, the easiest to fix is the one we spend the least time talking about: the fate of the poor, who now number 46 million. Since the poor tend not to vote, or lobby, they have not gotten much attention since Lyndon’s Johnson’s efforts in the 1960s. American government does not devote much energy or money to their problems, especially those of impoverished children who suffer from malnutrition, bad health and poor education, which cripples their chances of escaping poverty. The resources needed to change this would be a fraction of what we spend on the middle class in this country.
We don’t have all the answers, but if you’re looking for the policy that would likely have the biggest effect on increasing social mobility and reducing inequality, let’s shift the attention from the rich and the middle class and focus on the forgotten poor.
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