Inequality is just a symptom; the real problem is a constricted mobility for lower and middle income households.
Throughout the Obama era, the issue of income inequality has been a central tool of political strategizing. Liberals have used the issue as a sword against conservatives, accusing the latter not only of indifference toward the plight of working Americans but of actually welcoming the widening gulf between rich and poor, as if conservatives want nothing more than to see the wealthy become wealthier, even if it is at the expense of the poor. At the same time, however, conservatives have often shied away from the issue, perhaps afraid of how the issue might feed the big-government agenda of liberalism.
The inequality problem is not the simplistic problem the Left makes it out to be. But there is a serious underlying problem reflected by the growing income gap in America – a problem that strikes at the heart of the conservative vision of America. And if they are to provide a workable governing vision, conservatives must show their concern for this problem and articulate their solutions to it.
The Widening Income Gap
Given the wage stagnation and weak employment gains of recent years, it is not surprising that many economists claim that the gap between rich and poor is at its widest since records began 45 years ago. This gap widened even throughout the recovery. From 2010 to 2013, only the households at the very top of the income ladder saw gains, while families in the bottom 40 percent saw their incomes decline over that period, according to the Federal Reserve. Meanwhile, household incomes in the middle stagnated.
The growing income gap has been driven by the anemic economic growth during the Obama era. But it has also been escalated by the Federal Reserve’s attempt to counter the drag of the anti-growth policies of the federal government and artificially stimulate the economy through its $4 trillion Quantitative Easing policy – a policy that drove short-term interest rates to nearly zero. This policy led to a surging stock market that in turn substantially increased the wealth of the richest Americans who had significant stock investments. At the same time, it vastly decreased the income received by the elderly who saw declining interest payments on their saving.
While Fed policy did boost profits in the financial markets, it did nothing to combat wage stagnation or the reduced share of wages in gross national income. A debt-based monetary system has produced a debt-driven economy, which rewards those with the financial acumen and assets to invest in the market, while eroding the earnings of working Americans. Increased financial sector profits accrue mainly to upper-income recipients, who are relatively few in number, while the decreased share of wages affects the relatively larger number of workers – thus leading to greater income inequality.
The Liberal View of Inequality
To Democrats over the past eight years, income inequality lies at the core of what is wrong with America. Consequently, the crisis of income inequality demands and justifies a more active government agenda of redistribution, including higher taxes, higher spending on government entitlements, and higher regulation of business: in other words, expanding the public sector. And the Left has used this call for bigger government to paint themselves as defenders of the working and middle classes, regardless of the fact that a bigger government has not only failed to alleviate the income gap but has widened it.
One way in which Democrats have attempted to reduce income inequality is by raising the minimum wage. But this is hardly a remedy. At least half of the minimum wage earners are not in the lowest household-income bracket, and even fewer are their household’s primary earner. So raising the minimum wage is not a great way for lifting up the incomes of the poorest households in America.
The other liberal measure for addressing inequality is to raise taxes on the higher income households. But again, this measure greatly exaggerates what can actually be done. Currently, the top 20 percent of earners pay a net average of $46,500 in taxes. The next 20 percent pay a net average of $700. And the bottom 60 percent receive more in government transfer payments than they pay in taxes. In other words, the U.S. already has a great deal of economic redistribution, and it is questionable as to how much more can be achieved through tax increases and how negative an effect those increases would have on economic growth. Indeed, it is not even certain what revenues would be produced by such taxes, since higher income individuals will increasingly shift their money into various tax shelters.
A state-by-state analysis shows that the blue states following liberal policies have bigger income gaps than do red states that follow more conservative, growth-oriented policies. So, at the minimum, redistributionist policies like raising tax rates or the minimum wage fail to achieve greater income equality. And at worst, such policies actually worsen the inequality by dampening the economic opportunity and mobility needed by lower income individuals.
The Conservative Approach to Inequality
The conservative approach takes a bottom-up focus, rather than a top-down one. It seeks to lift up the bottom, rather than to bring down the top. It seeks to maximize the opportunities for the least well-off, through maximizing the income and economic opportunities of the whole society, rather than to simply target the most well-off for what may eventually become punitive taxation, irrespective of how this taxation would affect all the lower brackets.
A policy agenda serving this focus includes increasing upward mobility through education that empowers workers and regulatory and tax reform that sparks job creation and wage growth. Conservatives must also fight crony capitalism, which benefits the politically connected, and orient tax policy to benefit families and the middle class, not just to penalize the rich. (One of the most significant proven restraints on upward mobility, family breakdown, will be discussed in a future essay.)
Welfare programs that incentivize work have been far more successful in boosting incomes and mobility than simple cash assistance programs. The U.S. Census Bureau estimates that the earned income tax credit lifted 5.4 million people out of poverty in 2010 alone. Conservatives advocate expanding this EITC to childless adults, reducing the marriage penalty by adding a second-earner deduction, and reducing the disincentives to work in other welfare programs. Conservatives also propose reforming the childcare tax credit to make it easier for single mothers to reenter the workforce, get off welfare, and take advantage of opportunities for upward mobility.
Unfortunately, the current welfare system largely serves the goal of providing a social safety net, rather than that of moving people out of poverty. Although the first goal is necessary for survival, the second goal is vital for achieving upward mobility. However, the overall design of the entitlement and social welfare system has greatly decreased the motivation of recipients to find work that would take them off those benefits.
Conservatives need to recognize that a core challenge facing America is not simply income inequality per se, but rather wage stagnation and a restriction of upward mobility. The real issue is not income inequality, but the level of economic mobility. A study published by the National Bureau of Economic Research found that the widening income gap has not translated into a lowered economic mobility – in fact, there is a .6 percent higher chance for a child born in 1986 to move from the bottom 20 percent of household income to the top 20 percent than for a child born in 1971. Nonetheless, the study did conclude that the rate of upward mobility has essentially flattened in recent years, despite periods of economic growth and an expansion of welfare programs. This stagnating rate of upward mobility is the primary conservative concern, not simply the abstract levels of income differences.
Getting Real About Inequality
Middle-class incomes have fallen during the Obama era not because the rich have gotten richer, which they have, but because of bad federal policies that have yielded the weakest recovery in the postwar history of America. Yet even as this recovery fails to lift the working and middle classes, the Left continues to take a simplistic view of inequality, arguing that it is the cause of all other economic woes, specifically a diminishing upward mobility. But in reality, it is just the other way around. The widening income disparity is a result of diminishing upward mobility, which in turn is the result of various technological, globalization and governmental policy factors.
The public is right to worry about wage stagnation and economic mobility, as well as the rising costs of education, health care and raising a family. But all these problems are not simply the result of income inequality. If anything, inequality is a reflection of these problems.
Conservatives cannot just oppose the Left’s polarizing use of the inequality issue, for to do so would reinforce the image that conservatives are not concerned about the growing income gaps, and thus not concerned about the struggles of working and middle class America. What conservatives must do is articulate a broad agenda that seeks to lift burdens from workers and middle class families, as well as to open up opportunities for economic advancement. And this broader agenda must go beyond the traditional mainstays of conservative policy – e.g., across-the-board tax cuts and regulatory reform. Such an agenda would do much in erasing the image of conservatism as caring only about the rich. It would also do much to offer voters a true understanding of today’s real economic challenge and how it might be addressed.
Patrick Garry is a professor of law at the University of South Dakota, and Director of the Hagemann Center for Legal & Public Policy Research.