Income Inequality Is Not America’s Primary Problem

Occupy Wall Street has focused the nation’s attention on income inequality. Here’s their critique of “the system:” The rich are getting richer off the labor of the poor and middle class. The middle class, once the engine of America’s economy, is dying. Poverty is rising. Something must be done to change an unjust economic system.

Similar complaints are coming from the Right as well. Pundit Pat Buchanan frequently notes middle class wage stagnation that has taken place over the last forty years and claims free-trade policies (e.g. NAFTA) have destroyed America’s manufacturing base and eliminated millions of well paying, blue collar jobs. Presidential candidate Rick Santorum wants a 0% tax on manufacturers, hoping to lure back companies that have outsourced jobs in recent decades.

All this talk is centered on American decline. Has the American Century ended? When will China and India surpass it economically? What’s next?

There is wide discontent with President Obama’s performance on the economy. Mr. Obama seems content to manage America’s decline. His Keynesian stimulus got the country out of recession, but unemployment has only grown on his watch. Americans fear going into a double-dip recession, a concern exacerbated now that forecasters predict the European debt crisis will put the Continent into recession (and America shortly thereafter).

Government statistics only add fuel to the fire. 1 in 6 now live in poverty. Workers, desperate for employment, have accepted diminished wages and benefits to get back into the labor force. The misery index has soared.

But how bad is it, really? This is not a facetious question. Sure people are hurting out there. The economy is sputtering along. High growth seems unlikely. Political gridlock in Washington has faith in government at an all time low. People are angry. Kids are protesting in the streets.

But I would argue things are much better than they seem. Stay with me here. Look at the developments and life enhancers Americans have enjoyed over the last forty years.

Most people, undeniably, are better off in 2011 than they were in 1971. True income inequality does exist and should be addressed, but this does not negate the tremendous quality of life advances that have taken place during that period. These things immediately jump to mind.

            Cell phones and Ipods are now ubiquitous

            Ditto Satellite and cable television

            Ditto the internet

            Ditto the availability/accessibility of air travel

Americans are still an affluent people and are, ironically, the 1% that OWS complain about. We are a blessed people. But that’s not the impression one gets from reading the headlines or watching the nightly news. Doing so would give the impression that Americans are poorer than ever and starving in the streets.

In fact, America is concerned with an obesity epidemic. This is such a pressing “crisis” that First Lady Michelle Obama has made fitness and obesity prevention the cornerstone of her agenda. Only a prosperous society could have such a problem.

We are so fat and happy because the American economy boomed over the last several decades. GDP per capita doubled from 1970-2009 according to recent research conducted by University of Notre Dame and the University of Chicago. Conservative fiscal policies put into place under President Reagan and accepted by President Clinton and the New Democrats led to a quarter-century of economic prosperity. Median income and consumption both rose by 50% during this period.

But poverty rose 2% during those years as well. How is that possible? Washington spends about $500 billion annually in transfer payments for the poor. Programs like food stamps, heating and home assistance and Medicaid all address the less fortunate. Washington is still fighting President Johnson’s quixotic “War on Poverty”.

Conservatives have long argued these transfer payments won’t fix anything. When Republicans took over the House in January 1995, incoming House Ways and Means Chairman Bill Archer (TX) argued the war on poverty (a 30 year effort at that point) was a colossal failure and had cost taxpayers $5.3 trillion. Chairman Archer echoed President Reagan, who famously said: “we fought a war on poverty and poverty won.”

Clearly transfer payments aren’t the solution to ending poverty, as the research points out (page 5 of 77 page PDF file). This academic study is a critique of big government and federal efforts to combat poverty.

The lesson of the 1960s—it seems to me—is that the Kennedy tax cuts were good (fueling a decade of economic expansion) and the Johnson social democratic agenda was idealistic (liberalism at its best), but catastrophic in terms of public policy (leading to anarchy and political unrest).

Shifting back to the present day, I would argue that income inequality is a problem, but it shouldn’t be the country’s top concern. The anemic economy should be issue number one.

Only economic expansion will get the United States out of the doldrums. Private consumption and spending will pick up and demand will be pumped back into the economy when things turn around. Government coffers at the local, state and federal level will all fill up. The housing crisis will get resolved. Happy days will return.

We know what leads to economic expansion. Unfortunately, we’re not pursuing those policies- e.g. tax reform, entitlement reform, letting the housing market clear, rolling back regulations on business, etc. Until we change course, income inequality will persist and America’s malaise will continue.

 

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One comment

  1. Wonderful articles, I have learned lots.

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