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Ask the Experts: Why Should Americans Care About Income Inequality?

April 1, 2014
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Ask the Experts: Why Should Americans Care About Income Inequality?
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How bad is the problem of income inequality in the U.S., really, and what does it mean for your family? Our panel of experts weighs in.

It was a focus of President Barack Obama’s State of the Union address in January. It’s consistently been a hot topic on political talk shows, in news magazines and at your dinner table. It’s a politically polarizing and passion-invoking topic of discussion. And it’s almost impossible to nail down.

It’s income inequality.

A commonly accepted view is that the United States has one of the highest levels of income inequality among the world’s industrialized nations. But is this true? Well, it depends on whom you ask or, more specifically, how you measure it. Judging from the Gini coefficient — a statistical measure of a country’s distribution of income — you might agree that, yes, the U.S. has seen a rise in income inequality over the past few decades.

However, economists like Richard Burkhauser of Cornell University have written extensively that the way we measure inequality is flat-out wrong. In a 2011 paper for the National Bureau of Economic Research, Burkhauser and co-authors Jeff Larrimore and Kosali Simon argued that income should be measured post-tax, size-adjusted for households, and after accounting for benefits such as health care. When those items are factored in, Burkhauser and his co-authors claimed, income inequality isn’t as big an issue in the U.S. after all.

MORE: Could a National Sales Tax Ease American Inequality?

In this first installment of a new series for NationSwell in which we ask experts to weigh in on the major issues facing America, we asked our panel to contemplate this highly controversial topic. The main question we asked is: Why should (or shouldn’t) Americans care about income inequality? And, of course, what are the solutions to the problem?

The answers we got were surprisingly wide-ranging. Read on for the panel’s thought-provoking perspectives, and then join the conversation by leaving your own ideas in the comments box.

Dan Crawford

Spokesman for the Economic Policy Institute

NationSwell: Why should Americans care about income inequality?

Dan Crawford: Income inequality is far from an abstract issue. Since the 1970s, the productivity of the American economy has soared, but workers’ wages have stagnated. Inequality doesn’t just mean the rich are getting richer — it means the middle class isn’t sharing in the country’s overall prosperity. Americans should care about inequality because, since so much economic power is concentrated in the hands of the top 1 percent, the middle class keeps falling further behind. We’re not seeing the increases in living standards that should be emblematic of a healthy economy. For most Americans, inequality means they won’t see their incomes or living standards grow in any meaningful way.

NS: How do we fix it?

DC: There’s no easy fix to slowing or reversing the growth of inequality, but there are a number of steps that policymakers can take, such as making full employment a priority, raising the minimum wage, strengthening labor standards and protecting workers’ rights to bargain collectively.

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William McBride

Chief Economist at the Tax Foundation

NS: Why should Americans care about income inequality?

William McBride: First of all, I’m not sure they should. Income inequality is, in a general sense, a negative thing. You look around the world, there are certain places and times where it manifests itself as very problematic. For example, Brazil has such economic extremes, where the wealth and income is highly concentrated, and you have a real problem in terms of opportunity. You have a permanent “underclass” type of situation. Does that state of affairs exist in the U.S.? Well, it’s hard to get a handle on it.

I think a lot of researchers have tried to draw connections from income inequality to taxes. If we take from the rich and give to the poor through taxation, we can make our cultural problems better. That’s a very tenuous argument, and I think those who put it forth have yet to provide any evidence of it. [In fact,] the standard approach to economics tells a different story. It says that the economy works by different income groups cooperating, and employers hiring employees to produce wealth and income. Disrupting that process by redistribution from owners of assets to workers — or to retirees and nonworkers — that is a severe disruption to a basic economic process. We have very strong evidence that that destroys wealth — not just for the rich, but for the workers and future workers, as well.

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Additionally, the measurement of income inequality has been very flawed and politicized. To what degree do we have inequality? There are different ways to measure it. There’s IRS tax return-based measures and census survey data, and they come to totally different conclusions. The census-based data — which the CBO [Congressional Budget Office] uses that — that measure is more comprehensive, but it’s not the full story, either. When you add in what’s missing from that, you get a more complete picture of compensation, including fringe benefits. Then, you’ll find there’s been no change in inequality in 30 years, since the 1980s.

NS: Does it need to be fixed?

WM: There are policies that can and need to change to improve opportunity, not necessarily to improve inequality. Inequality is an outcome. But what we need to do is to change the inputs. In regards to education, it’s widely known we have a very poor K-12 system relative to other countries, and it’s only gotten worse over time. We have public schools in rich neighborhoods that are excellent, while low-income neighborhoods get very bad public schools. It’s very much tied to income. We know this is a very big driver of the low mobility problems we’re talking about here. So we need to fundamentally revolutionize K-12 public schooling, and to do so we can look around the world to see what’s worked and try some bold experiments.

MORE: Why the U.S. Should Adopt the “Finnish Way” of Education

Branko Milanovic

Senior Scholar at the Luxembourg Income Study Center at the City University of New York

NS: Why should Americans care about income inequality?

Branko Milanovic: There are several reasons people should care. Studies show if we have high-income inequality — called inequality of outcome — then over time that can be transformed into inequality of opportunity. What happens is that if you have a very high income, you pass your money, privileges, connections and so on to your sons and daughters, and they start their lives with much greater advantages than others. Gradually, these advantages become cemented from generation to generation, which means that at the very beginning of one’s life, there’s already a disparity in opportunity. In other words, one can say that such a society would undermine the long-held American dream of equality of opportunity and upward mobility.

Secondly, there are arguments that inequality might actually slow the rate of economic growth.  We can argue that very rich people are saving and investing and so on, but if middle-class income doesn’t grow fast enough, then there’s no healthy demand provided by the bulk of the population. Again, we have seen this in the hollowing out of the middle class over the last 30 years, and possibly even in the run-up to the crisis, where the middle class basically compensated for the lack of growth by borrowing to unsustainable levels.

Lastly, in the long run, inequality has the tendency to undermine democracy. We have seen this, as well. Rich people try to buy legislation that is good for them. The political system gives them an unfair advantage over the others, which in turn makes them even richer. That’s how crony capitalism is born.

NS: How do we fix this problem?

BM: First, we can increase spending for education. Educated people are more productive. They participate in globalization, which is good for growth. And having more educated people in the country reduces the premium on university educations and reduces wage disparities, simply because the supply of highly educated people increases. Education is one of few instruments that we have which is a win-win strategy: It increases growth and reduces inequality. On top of that, basically everybody agrees that education is good in itself and for the entire nation.

Secondly, we can increase minimum wage to be in line with inflation. This would increase income for people at the bottom. But then of course, economists raise the issue of whether this could reduce demand for labor. So, one has to factor in this possibility too. Lastly, we can expand social spending and make it more generous — food stamps, Temporary Assistance for Needy Families (TANF), Medicaid, earned income tax credit. They will decrease inequality, even if it means increased taxation. But all these ideas have as their objective not only to reduce inequality but more importantly poverty, which has been extremely stubborn in the U.S. for about 40 years.

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If our experts’ responses are any indication, the issue of income inequality has no simple explanation or answer. But notice that everyone did agree on one thing: To increase equality, we need to invest in education. Hear that, Congress?

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