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Obama’s Inequality Illusion

Posted By Jacob Laksin On April 5, 2012 @ 12:30 am In Daily Mailer,FrontPage | 19 Comments

Lashing out at the Congressional Republican budget earlier this week, President Obama chastised the GOP for ignoring what he called one of the “big, fundamental issues” of our time: inequality.

“What drags down our entire economy is when there’s an ever-widening chasm between the ultra-rich and everybody else,” Obama claimed. He went on to insist that addressing inequality was not only an important moral cause in its own right but also an economic priority, since “research has shown that countries with less inequality tend to have stronger and steadier economic growth over the long run.” It was a theme Obama has sounded repeatedly in his first term, most famously last December in his speech in Osawatomie, Kansas, in which he claimed that “breathtaking greed” in America was the cause of America’s economic woes and belied America’s national promise that “this is a place where you can make it if you try.”

Obama is not completely wrong. America’s rich have indeed gotten richer. A 2011 report by the Congressional Budget Office pointed out that between 1979 and 2007 after-tax income for the highest-income households grew more than for any other group. Altogether, between 1980 and 2005, 80 percent of the total increase in incomes went to the top 1 percent of American households. But before enlisting in the nearest “Occupy” protest, it’s worth considering some of the complications with the inequality picture presented by Obama.

Authors Peter Wehner and Robert Beschel have done just that in a new essay in the public policy journal National Affairs. One problem with focusing on the increase of wealth at the very top, the authors note, is that it is misleading. The reality is that the income of individual households is not static. People have always moved up and down on the scale of income distribution, and that remains true today. Thus the CBO points out that the population with income in the lowest 20 percent in 1979 was not necessarily the population in that quintile in 2007. Similarly, the authors report, about half of those in the bottom income quintile in 1996 had moved up to a higher income category by 2005, even as 30 percent of those in the top income group in 1996 had fallen down to a lower quintile by 2005. Contrary to what Obama suggests, income distribution is not etched in stone.

Further, an exclusive focus on the rise of incomes among the highest earners ignores the disparate effect of taxes on the rich. Even as the top 1 percent has seen a significant rise in their wealth, they have also paid a disproportionate share of the country’s taxes. The top 1 percent of income earners now pay 40 percent of all federal income taxes, according to the CBO, more than double the less than 20 percent that they paid in the 1970s. While the point is often lost in Obama’s appeals for “fairness” and higher taxes on the rich, the fact is that among the world’s richest nations, America already imposes the largest share of income taxes on its rich, exceeding even socialist countries like Sweden.

Yet another flaw in the inequality narrative is that it ignores the tremendous leveling of inequality as it concerns quality of life. The authors’ cite George Mason University economist Tyler Cowen’s observation that, even as income inequality has risen, inequality as measured by living standards has been falling. As Cowen notes:

Bill Gates is much, much richer than I am, yet it is not obvious that he is much happier if, indeed, he is happier at all. I have access to penicillin, air travel, good cheap food, the Internet and virtually all of the technical innovations that Gates does. Like the vast majority of Americans, I have access to some important new pharmaceuticals, such as statins to protect against heart disease. To be sure, Gates receives the very best care from the world’s top doctors, but our health outcomes are in the same ballpark. I don’t have a private jet or take luxury vacations, and — I think it is fair to say — my house is much smaller than his. I can’t meet with the world’s elite on demand. Still, by broad historical standards, what I share with Bill Gates is far more significant than what I don’t share with him.

The same applies to America’s poor, who are not poor as the term has been understood throughout history. A 2011 study by the Heritage Foundation found that, in 2005, the typical household defined as poor by the government not only had access to food, clothing and shelter, but also owned a car, air conditioning, and a wide array of modern amenities – from a satellite TV to a PlayStation – that once might have been affordable solely for the affluent. As the late James Q. Wilson observed, “The poorest Americans today live a better life than all but the richest persons a hundred years ago.” In light of such tremendous progress, it’s perhaps not surprising that the Obama administration has moved to introduce a new definition of poverty that has virtually nothing to do with actual poverty. Only through linguistic legerdemain can Obama maintain that inequality is the dire threat to the American way of life that he has claimed it to be.

Finally, it is far from clear that inequality impedes economic growth. While the issue is still debated among economic researchers, Harvard economist Robert Barro has written that there is “little overall relation between income inequality and rates of growth and investment.” What does slow economic growth in richer countries like America is not income inequality but income redistribution. Barro notes that “active income redistribution appears to involve a tradeoff between the benefits of greater equality and a reduction in overall economic growth.” In other words, Obama can justify his soak-the-rich strategy as a matter of economic “fairness,” but it is hardly a formula for economic growth.

This is not to say that inequality is a non-issue, or that nothing can be done about it. However, one of the more pertinent ways to address the problem is to focus on a driver of inequality that Obama never mentions: bad government policy. Entitlement programs like Social Security and Medicare are a case in point. As structured, these programs are not means tested, and thus financial status is not a factor for eligibility. The result is that many of the workers paying for these programs are younger and less wealthy than many of the recipients. For instance, in 1979, households with incomes in the lowest 20 percent received 54 percent of transfer payments for these programs. By 2007, their share had fallen to just 36 percent. And because these programs are funded by payroll rather than income taxes, the burden of payment falls on low-income workers who pay the former but not the latter. It would be hard to imagine a more clear-cut instance of inequality. Yet Obama, like much of the political class, has been hostile to any proposed reform of entitlement programs.

A truly meaningful focus on reducing inequality would entail finding ways for low-skilled workers to compete in a modern economy that rewards skills and education. It would mean curbing illegal immigration, which places downward pressure on the wages of low-income workers. It would mean reforming government programs that burden the poor to benefit the rich. When Obama harps on inequality, however, what he really means is taxing the rich. That may please his political base, but it shouldn’t be confused with a serious solution.

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