Addressing Income Inequality the Non-PC Way

As he often does, Steven Pearlstein raises a great many issues while ducking many of the tougher ones in his article on income inequalityIs income inequality increasing? Almost certainly. Is it a concern? It should be, not because the well-to-do are doing ever better, but because low-income citizens too often seem ever stuck. Are there any good, easy solutions? No, but there are good solutions. Do liberals have a preferred solution? You betcha — higher taxes to “spread the wealth around” in Obama’s own words.

The hook for Pearlstein’s piece is yet another installment by Thomas Piketty and Emmanuel Saez on measuring income inequality. As director at the Center for Equitable Growth at Berkeley this topic is home base for Piketty. It’s worth pausing for a moment to consider the name of his outfit — the Center for Equitable Growth. Perhaps a more accurate name would be the Center for Reduced Growth and Targeted Expropriation of Property. This observation does not impugn the work or the importance of the topic, but it is important to understand the authors’ point of view, especially as it apparently reflects Pearlstein’s, as well.

Let us start with two stipulations. First, that income inequality is rising largely because upper-income people are making enormous sums and, second, that low and middle-income cash wages are not rising much. It is hard to argue with the first when football players feel insulted they’re only offered $5 million a year and when failed corporate CEO’s deploy golden parachutes in the tens and sometimes hundreds of millions. 

Another issue to keep in mind is the tremendous income mobility in the United States as individuals and families move up and down the income scales over time. A 2007 Treasury study found that about half of taxpayers in the bottom 20 percent of earners at any one time are likely to move up to the next quintile within a decade. It’s not easy to interpret income inequality when people are regularly moving up and down the income levels.

With that as preamble, we still face the most important question of why some low-income citizens are stuck with low incomes? Are the rich using their wiles and their positions to pick the pockets of the poor? No. Even Pearlstein doesn’t go there. 

A fundamental pattern in economic development is that the economy rewards skill, ability, and education. This is nothing new, but it appears to be accelerating under the pressures of globalization. The flip side of globalization is that low-skilled, poorly educated, poorly motivated Americans are increasingly competing with similarly situated workers in China, India, and the like, who work for much less. 

Parenthetically, this raises a real conundrum for liberals. They want economic development in the third world, but they don’t want workers in those countries competing with low-skilled workers at home. So they keep hoping enough development aid funneled into the right places will generate an immaculate prosperity. Keep hoping guys.

Globalization is accelerating the long-term trend, but other factors are at work, as well. For example, one that Pearlstein managed to ignore was that our nearly open borders have meant the United States has imported millions of low-skilled, low-education workers from South of the Border. As my colleague Robert Rector has observed, we are literally importing poverty. Often hard-working, illegal immigrants nonetheless anchor the income distribution while they compete away low-skilled jobs from American citizens. Income inequality must increase if we import millions of low-wage workers. That is not a political observation; it is not anti-immigrant; it is a mathematical fact.

Another major contributor preventing low-income earners from rising is single parenthood. As Rector observes in another powerful paper, “even when married couples [with children] are compared to single parents with the same level of education, the married poverty rate will still be 75 percent lower.” As a matter of culture and policy, encouraging traditional marriage is a powerful weapon against static incomes of low-wage earners. Pearlstein somehow forgot to mention this one, too.

What he does mention is his “favorite culprit” of growing income inequality — “changing social norms around the issue of how much income inequality is acceptable.” Of course, pre-tax income inequality does not increase because it is more acceptable. Fashionable opinions may sell newspapers, but they don’t create jobs and rising incomes. 

Only after-tax income inequality can increase due to changing social norms. How? Not by any economic force, but because government lets these people who make so much money keep too much of it. This leads to “trillions of dollars being spent and invested in ways that were spectacularly unproductive.” But Pearlstein is not talking about what happens when government gets its hands on more tax revenue. He’s talking about what he sees happening when private individuals spend and invest their own money. Only Pearlstein and Uncle Sam apparently really understand how best to spend.

To end on a noble note, Pearlstein then rises above the grubby business of expanded expropriation of private property by alluding to a degradation of our national “unity of purpose,” our increased political polarization, and the erosion of “the political consensus necessary for effective government.” Let’s stay at this lofty, noble plane and contrast opposing approaches. There’s the liberal approach to addressing income inequality by using the coercive power of the state to expropriate more private property to make the less well-off more completely wards of the state. Or there’s the conservative approach of jettisoning government policies that preserve the status quo of indefinite poverty while degrading human dignity in favor of policies that embrace freedom, responsibility, prosperity, secure borders, and secure families.

J. D. Foster is the Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation.

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