The topic of income inequality has received a lot of media attention, primarily because it has been a feature of president Obama’s recent speeches, including this week’s State of the Union. It’s a shame, because as a metric it’s pretty lousy for both determining sound policy prescriptions and measuring their success.
It’s easy to illustrate both of these points. First, a very effective policy to reduce income (and wealth) inequality in California would be for it to pay Google to move its headquarters to Texas. Inequality would be reduced instantly in California and increase in Texas as all the Google millionaires moved in, but which state would be better off as a result?
Second, imagine for a moment that every American’s income doubled overnight. Most rational people would herald this as a stunning achievement. However, using the framework of folks like Paul Krugman, who consider the current level of inequality in America to be completely unacceptable, America would be no better off. Everyone’s relative inequality would be unchanged.
Now don’t get me wrong, my position on inequality is best summed up by something my father once wrote:
Other things being equal, I prefer less inequality in incomes and wealth rather than more. But I worry much more about poverty and hardship…
I’d be happy for there to be so much talk about inequality if the policy solutions that were being discussed to reduce it were also the ones that have the highest likelihood of lifting the most people out of poverty, but that’s not the case. Take for instance the minimum wage. As I wrote earlier this month, only a small percentage of workers earning the minimum wage come from households in poverty. A majority of the beneficiaries of an increase will be people from middle class or wealthy families, if they and their less well off colleagues don’t lose their jobs. Meanwhile, employers, consumers and taxpayers will all end up worse off as the increase is passed on to them.
Other policies being discussed to tackle inequality have similarly awful track records at addressing poverty, such as increased government spending on job training programs that have seldom been successful, increasing taxes on businesses (something the president called for in his State of the Union) and wealth redistribution.
What America needs is policies that increase economic growth, whereby businesses and entrepreneurs create jobs to employ the poor and unemployed, and give them skills to get them on a path to higher paying jobs. None of the ones being discussed by the president has ever been proven to grow an economy.
[I]ncome inequality has actually gotten much worse under Obama’s watch.
It’s easy to see why he’s so concerned about leaving a legacy like this. But it’s a shame he hasn’t recognized why the policies of the past five years haven’t worked and that more of the same won’t help matters.
What he needs to recognize – to end on another quote from my dad – is that:
…growing the economic pie, rather than redistributing the pieces, is by far the most effective way to alleviate poverty and hardship.