The problem is slow growth, not rich CEOs.
Occupy Wall Street won. In fact, the movement won even before taking to the parks in 2011. By the time the demonstrations started, America had already elected a president whose top priority was to reduce high-end income inequality — i.e., the inequality between the wealthy and everyone else. If Obamacare — at its heart a “spread the wealth” redistribution scheme — and a call for ever-more tax hikes on the rich and on businesses aren’t proof enough, there’s also Barack Obama’s recent speech at Knox College. The enormous disparity between the 1 percent and the 99 percent, the president argued last month, “is not just morally wrong, it’s bad economics.”
But that financial divide is hardly America’s biggest challenge, economic or moral. Obama’s Knox College claim that the income of the top 1 percent surged over the past 30 years, while the income of the typical family “barely budged,” has been thoroughly debunked. While the rich did get a lot richer, real median household income grew by roughly 20 percent before taxes and government transfers, and by about 40 percent after. And, says a Washington Post fact check, “it’s inaccurate of Obama to suggest otherwise.”
Then there’s a blockbuster new study from economists Steven Kaplan of the University of Chicago and Joshua Rauh of Stanford University on why high-end inequality has increased so much the past three decades. Is it compliant corporate boards’ giving huge payouts to CEOs, or perhaps crony capitalism between Washington and Wall Street? Was it the Reagan and Bush tax cuts? Not so much, according to Kaplan and Rauh: “We believe that the US evidence on income and wealth shares for the top 1 percent is most consistent with a ‘superstar’-style explanation rooted in the importance of scale and skill-biased technological change.” Market forces — technology and globalization — allow a broad swath of folks — CEOs, bankers, lawyers, athletes — whose skills are in high demand “to expand the scale of their performance.” The NBA has a global TV audience today, so its superstars can earn more in salaries and endorsements. Growing international markets have greatly increased the size and value of U.S. companies and, not surprisingly, executive pay has risen, too. Technology allows top executives and financiers to manage larger organizations and asset pools.
Instead of fretting so much about income inequality at the high end, Obama should focus on expanding economic mobility. Primarily, this means policies to boost GDP growth, polices including education, tax, and regulation reform. The economy has grown at just 1.8 percent annually, adjusted for inflation, for the past decade, versus 3.3 percent a year since 1929. And a new JPMorgan research report, “U.S. Future Isn’t What It Used to Be,” says we had all better get used to the New Normal: “The long-run growth potential of the U.S. economy continues to slide lower, by our estimate, to around 1.75%; if realized this would be the lowest of the post-WWII era.” That’s a huge drop; it means the economy will double in 42 years instead of 22.
The megabank has two big concerns. First, declining birth rates and immigration mean slower labor-force growth. The Obama White House, in its recent budget proposal, cited this very problem as a reason that, in “the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras.” Second, productivity growth has declined by half since the information-technology-driven boom between 1995 and 2005. JPMorgan economists Michael Feroli and Robert Mellman note that quality-adjusted IT-equipment prices are falling more slowly than they were a decade ago. That’s a flashing warning sign that tech innovation is decelerating, which also helps explain current levels of business investment in equipment and software, which are at just half the rate of the past 25 years.
This growth prediction is more dire than some others. The Federal Reserve pegs the economy’s long-term growth rate at 2.5 percent, the Congressional Budget Office at 2.2 percent. And maybe the productivity slowdown is just a pause, or perhaps the available data don’t tell the whole story. Feroli and Mellman concede these possibilities. But U.S. policymakers should assume the worst and try and figure out how to fill a growth shortfall of at least a full percentage point.
But increasing absolute mobility — making sure kids end up more prosperous than their parents — is not enough. Solid research from the Equality of Opportunity Project shows big variation among U.S. cities in residents’ ability to rise above their birth stations thanks to factors — including family structure and geographic segregation — not directly linked to the macro economy. This suggests it’s wise to implement micropolicy ideas such as relocation vouchers for the long-term unemployed in high-unemployment areas and rolling back regulations that limit urban density. Ryan Avent, a reporter with The Economist, calculates that various urban land-use regulations cost the U.S. as much as half a percentage point per year in GDP growth. Business tax cuts and entitlement reform alone make for an incomplete conservative policy agenda.
America does have a 1 percent problem, just not the one Obama thinks it has.
— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.