Politics & Policy

Inequality Does Not Matter

Paul Krugman
The poor and the middle class are falling behind, and it has nothing to do with the 1 percent.

President Barack Obama gave a very silly speech in which he affirmed that economic inequality is to be the centerpiece of his remaining time in office. He has made similar suggestions about other issues — global warming and gun control, notably — and, President Obama being President Obama, it is very likely the case that his laser-like focus will consist of a series of speeches and very little else. The politics of the moment will determine which issue actually gets his attention, though he could go with his admirers at Washington Monthly, who contend that some of them are the same issue: Mass shootings, Daniel Luzer argues in a particularly batty piece of connect-the-imaginary-dots, has “everything to do with the distribution of wealth in America.”

It is difficult to take President Obama seriously on these issues, but it is difficult to not take seriously Josh Barro and Paul Krugman, both of whom have offered what seem to me to be inconclusive arguments, Mr. Barro under the headline “Sorry, Libertarians, Inequality Does Matter,” Professor Krugman under “Why Inequality Matters.” Strangely, neither of these erudite gentlemen quite manages to establish that inequality matters.

#ad#Mr. Barro writes: “Economic growth is not the same thing as well-being. The point of economic growth is that it leads to improvements in standards of living. If the gains from economic growth are not broadly shared, but instead accrue disproportionately to people already at the top of the income distribution, then a lot of economic growth will only generate a little improvement in living standards for most people. For this reason, rising inequality is a problem even if it does not hold back GDP.” This is true in a sense, but it reverses cause and effect: Incomes among the bottom half of earners are not stagnating because of increasing inequality; inequality is increasing because incomes among the bottom half of earners is stagnating. It could have been the case that incomes among the bottom half of earners were stagnating while incomes for the top half were absolutely crashing, in which case you would have a situation in which there was less inequality but everybody was worse off, or at least no better off. Conversely, we could have an economy in which the poor and the middle class see strong gains in their income and their wealth, but the very well off experience twice those gains, which would mean a society of increasing inequality in which everybody is better off. I have encountered progressives who state their preference for the outcome in which we are all poorer but more equal over the outcome in which we are all richer but less equal, which puzzles me.

Mr. Barro and many other commentators on economics often write as though there were buckets marked “Income” and “Wealth,” the contents of which are ladled out by some agency or agencies according to a set of rules and procedures. There is in fact no such thing as income distribution — “distribute” is a transitive verb, and here it has no real direct object. What there is is the occurrence of income. The argument that inequality causes income stagnation or decline for those who have been worse off in recent years assumes that if the rich were earning less then the middle class and the poor would be earning more, which in most situations is not the case. If Goldman Sachs earns less money this quarter, that does not mean that some quantity of money is therefore liberated from their foul clutches to float about until lower-wage workers can claim it. High incomes at the top do not cause low incomes at the bottom, or vice versa. To assign economic agency to the abstraction that is inequality assumes the opposite.

Professor Krugman does not state that he prefers the poorer-but-more-equal model (and I do not think that he really would) but it is at least partly implicit in his analysis. Professor Krugman argues that inequality is a problem not because the poorer are poorer but because the rich are richer, which he believes to present a political problem: The wealthier they get, the more power they have, and the more they will exert a baleful influence upon the economy. He writes: “In my view, however, the really crucial role of inequality in economic calamity has been political. In the years before the crisis, there was a remarkable bipartisan consensus in Washington in favor of financial deregulation. . . . When crisis struck, there was a rush to rescue the banks. But as soon as that was done, a new consensus emerged, one that involved turning away from job creation and focusing on the alleged threat from budget deficits. . . . Both consensuses, however, corresponded to the interests and prejudices of an economic elite whose political influence had surged along with its wealth.”

#page#Professor Krugman may very well be correct in his interpretation of the politics: There is little doubt that entrenched business interests, be they banks or sugar planters, have little trouble bending federal policy to their will. That is an argument for less government intervention in the economy, not more, and an argument for simpler, more transparent, and more consistent regulatory practices rather than more complex and opaque rules. Professor Krugman is blind to that conclusion.

#ad#Mr. Barro is of course correct to emphasize that there is a world of difference between GDP growth and real-world improvements in the standard of living for most Americans. Stimulus-spending programs, for example, can goose GDP by brute force: The value of government spending is calculated at cost when toting up GDP, which means that a $1 billion contract to Willy Wonka for Everlasting Gobstoppers adds $1 billion to GDP, even if we sink those confections to the bottom of the ocean. Among other things, this means that the massive fraudulent payments made under Medicaid contribute to GDP, though they contribute nothing to the national well-being.

The problem is not inequality: The problem is declining or stagnant wages for those Americans who are not thriving in the 21st-century economy. Cannier politicians will note that while they may respond to cheap rhetoric about the new robber barons, Americans are by and large much more concerned about their own paychecks and bank balances than they are those of other people. Republicans would be foolish to adopt the rhetoric of inequality and its implicit class-war thinking, but they would be much more foolish to ignore the underlying economic reality that gives teeth to that critique: Things are not good for the American middle class, and things are bad for the poor. There are signs that economic mobility is in decline, especially at the extremes, and the general environment of economic pessimism, so alien to Americans, is not entirely unjustified.

Republicans have a battery of issues with which to arm themselves here: By standing in the way of educational reform, Democrats rob poor families of educational opportunity in order to look out for the interests of relatively well-off teachers and the growing legion of six-figure school administrators. In defending to the death the entitlement status quo, Democrats ensure a net transfer of wealth from struggling young workers to relatively well-off retirees, in a system that disproportionately benefits higher earners. The nearly universal and frequently criminal misgovernance of large American cities by Democratic political machines — Detroit, Chicago, Los Angeles, Philadelphia, Cleveland, Washington, Camden — immiserates millions of Americans, robbing them of educational opportunities, work opportunities, and safe streets.

Republicans have for too long responded to these issues with a growth agenda dominated by reducing statutory federal income-tax rates on personal and corporate income. Those are worthy goals, but they are of limited interest to people who pay relatively little of the former and none of the latter (directly, that is). Republicans are in that sense a victim of the success of President Ronald Reagan, who liked to brag how many Americans he’d taken off the income-tax rolls. When next in power, Republicans should not hesitate to play hardball on these issues, for instance by making federal aid to schools contingent upon universal school choice, a simple reform that would constitute a vast improvement over the No Child Left Behind approach. President Obama has shown what the executive can do unilaterally through regulatory entrepreneurship; a future Republican president can do as much to reverse regulatory encroachment. But if the GOP makes tax cuts its hill to die on once again, or lets martial romance prevent meaningful fiscal adjustments (which must include defense-spending reforms), it will have blown yet another opportunity, the supply of which is not infinite.

Inequality per se is not a problem, but poverty is, and so is the increasingly tenuous position of the middle class. Republicans need to figure out how to get on the right side of that issue. They have the policies. They are always on the hunt for a candidate who speaks Spanish, but the experience of the last couple of go-rounds suggest that they would do well to find one who speaks English.

— Kevin D. Williamson is roving correspondent for National Review.

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