How President Obama Should Fight Income Inequality

One of the bugaboos of this Business site has been the effect of rising income inequality in the United States over the last 30 years. For a quick recap of our coverage so far:

-- This is how income inequality in the U.S. got so bad
-- This is why we shouldn't necessarily blame it on technology or taxes
-- This is why we shouldn't blame inequality for economic disasters
-- And this is what's happening to middle-class wages (Spoiler alert: They're stuck.)

Here we are with the newest installation: What Obama should do to fix the problem. Jacob Weisberg says the president is failing to reduce income inequality, breaking a promise he made repeatedly on the campaign trail. Judged by this month's tax compromise, which keeps taxes historically low for the wealthiest Americans, he certainly doesn't look much like a populist crusader for income equality. Judged by his regulators' inability to reduce record bank bonuses, the administration looks like a shill for the rich.

But let's back up and think about what the president can actually do to reduce income disparity. There are basically two ways you can reduce income inequality. The first way is direct: You can raise taxes on the rich and distribute that money to the poor as cash (eg expanded EITC) or services (eg more public education money). This is basically an "accordion strategy," using government taxing policy to squeeze the bellows and bring the rich and poor closer together by redistributing their income.

The White House obviously wants to pursue this strategy, whether or not it's been successful pushing it through Congress. It wanted to raise taxes only on the $250K+ crowd, but Senate moderates weren't on board. With health care reform, the administration pursued a singular strategy to expand the welfare state and pay for it by raising Medicare taxes on the rich while trimming their benefits and taxing their expensive health care plans. That's not going to dramatically change nationwide income distribution, but it's clearly anti-inequality.

The second strategy for reducing income disparity is indirect: You can invest in technologies and industries with a shot at providing jobs that pay higher wages to the middle class. Remember, the tragedy of the last 30 years is not so much that industry superstars command more and more money (although that might create pernicious incentives). The real tragedy is that with the rich getting richer, middle class wages are frozen in carbonite. The decline of manufacturing and unions, and the rise of technology and globalization, have conspired to hollow out the middle class. This graph tells the story: Jobs at the bottom, jobs at the top, stagnation in the middle.

job growth across industries high low education.png

New industries don't grow on trees. They require years of investment and development, an educated workforce and an international market for those services. That's why the administration is pushing green energy in the stimulus, offering tax credits for renewable energy and solar power, pushing for expanded community college enrollment, and talking about an export-driven recovery. This sounds smart. But it is the sort of public policy labor whose fruits won't be apparent for years.

Upshot: Income inequality is an obvious phenomenon. But its effects are not obvious, and its cure even less so.

To Weisberg's credit, this is a keen observation about the psychology of income in America:

It is an American peculiarity that rich people want to be thought of as middle class, while those in the middle class identify with the economic interests of an upper class they have only a remote chance of joining. The United States, the land of opportunity, now boasts the world's second-lowest level of intergenerational income mobility. Meanwhile, the people most alarmed about the rise of new economic dynasties seem to be the enlightened superrich themselves, people like Bill Gates and Warren Buffett.