Politics & Policy

2014’s Real Economic Challenge

Creating good jobs and training Americans to get them — not snatching income from the 1 percent.

No, the worst economic idea of the year wasn’t Obamacare. First of all, that was the worst idea of 2010 (though it’s still around, so perhaps the Worst Economic Idea of the Year Award should just be renamed the Obamacare Award and given to the second-worst idea of each year). Second, the Affordable Care Act is just one policy manifestation of what really is the worst economic idea of the year: that America’s “defining challenge” — both morally and economically — is income inequality. So President Obama has declared, and it’s an opinion that seems almost universally shared by the American Left, including New York City’s incoming mayor.

It’s interesting to note all the economic problems that Obama apparently views as less important challenges than income inequality. Take, for instance, chronically weak economic growth. On average, the U.S. economy has grown by just 1 percent a year, adjusted for inflation, since 2000. Over those 14 years, the American economy has notched just six quarters of real GDP growth of 4 percent or higher, versus 18 quarters of such rapid growth in each of the two preceding decades (the 1980s and 1990s). And the president’s own economic team has declared, “in the 21st century, real GDP growth in the United States is likely to be permanently slower” than in the past.

Or how about the long emergency that is the U.S. labor market? If the share of adults with any sort of employment were back to pre–Great Recession levels, there would be 12 million more Americans with jobs. Just as bad, that employment rate hasn’t budged much from recession lows. And the jobs that have been created aren’t as good as the ones lost during the downturn, continuing a 20-year trend of recessions’ generating weak job recoveries. More than half of the jobs that vanished during the downturn were middle-income positions, and less than a quarter of the new ones are. Analysis by Goldman Sachs found that the “hollowing out in the middle is real” and “not unique to the post-crisis period.”

Another great candidate for America’s “defining challenge” would be dealing with the continued decline, particularly in working-class America, of intact families where children live with both biological parents. Researchers on the left and right have found that kids who grew up in such old-fashioned nuclear families fare better educationally, emotionally, and financially than those who did not. It’s pretty hard to ignore the crisis of family breakdown when talking about inequality, but that’s just what Obama is doing.

Obamacrats counter that these other problems are to a great degree caused by income inequality that stems from an unfair economic system, one rigged by the top 1 percent and their minions in Washington. And there is evidence that income inequality, at least between the very rich and the rest, has increased. After-tax income for the top 1 percent of households rose 201 percent from 1979 through 2010, according to the Congressional Budget Office calculations, vs. 40 percent growth for the middle three-fifths of earners.

There is far less persuasive evidence, however, that higher top-end income inequality has slowed economic growth, pinched middle-class incomes, or reduced economic mobility from the bottom to the top. A focus on income inequality as a causal factor distracts from how technology and globalization are transforming the American economy — and boosting inequality. Those macro forces, according to economists Steven Kaplan and Joshua Rauh, have enabled highly talented and educated individuals to manage or perform on a larger scale, “applying their talent to greater pools of resources and reaching larger numbers of people, thus becoming more productive and higher paid.”

Supporting that conclusion is a study out this month from researchers Eric Hanushek, Guido Schwerdt, Simon Wiederhold, and Ludger Woessmann finding that the U.S. offers higher returns to skills than any other advanced economy. The problem, then, is that America is not producing enough workers with the skills to succeed in today’s globalized, information-driven economy. If Obama is looking for a “defining challenge” in 2014, rather than a political wedge issue, that just might be it.

James Pethokoukis, a columnist, blogs for the American Enterprise Institute.


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