Growth, Not Redistribution the Cure for Income Inequality


Ever since the publication this spring of Thomas Piketty’s book “Capital in the 21st Century,” conservatives and much of the business press, such as the Financial Times, have been on a jihad to discredit the author and his findings about increased income inequality in Western societies. Some have even equated growing attacks on inequality with anti-Semitism, with at least one Silicon Valley venture capitalist, Tom Perkins, comparing anti-inequality campaigners to Nazis.

For their part, progressives have taken to embracing the book like acolytes who have found a new gospel for their talking points. Paul Krugman predictably describes the bookas “the most important economics book of the year – and, maybe, the decade.”

Piketty’s book is neither the Sermon on the Mount nor the “Communist Manifesto.” Its findings are, to be sure, far from conclusive, and may well have omitted some relevant points. The French economist’s solutions, as we will discuss, are also wanting. But conservatives, and business interests, should not see these shortcomings as a “get out of jail free” card on the pressing issues of class, inequality and reduced upward mobility.

Conservatives, Businesses Need to Wake Up

There are numerous measurements of reduced upward mobility from many other sources, notably the Federal Reserve, which are based on different data sets. Virtually all the conclusions are stark: The middle-class share of the economy is dropping as the vast majority of new dollars flow into the hands of a relative few.

During the recovery from the Great Recession, income among the three middle quintilesdropped by 1.2 percent, while those of the top 5 percent of incomes grew by over 5 percent. This represents the acceleration of a long-term trend. Overall, the middle 60 percent of Americans have seen their share of the national pie fall from 53 percent in 1970 to barely 45 percent in 2012.

More important, still, may be perceptions. Conservative economists can scoff at Piketty’s findings, but more and more Americans are alienated from the current economic system. For many, according to a 2013 Bloomberg poll, the American Dream seems increasingly out of reach. This opinion prevails by a 2-1 margin among Americans, rising to 3-1 among those making under $50,000 a year, but also is held by a majority earning over $100,000.

At the same time, Americans, by more than 2-1, believe they enjoy fewer economic opportunities than did their parents and feel they will experience far less job security and disposable income. They also see growing ties between powerful business interests and government, with the vast majority feeling that government contracts go to the well-connected. Less than one-third believe the country operates under a free-market system.

For business and for free-market conservatives these attitudes have consequences.Nearly 60 percent of the public, notes Gallup, favor some steps to increase the redistribution of wealth, almost twice as many who felt the current system was “fair.” Sentiments in this direction are even stronger among millennials, with some surveys suggesting that the majority are even sympathetic to socialism. Business needs to learn this lesson: Capitalism can only be sustained if it achieves a semblance of social democratic aims; without this, the system loses credibility and is seen as more oppressive than liberating.

Good news for Democrats

All this could be considered good news for Democrats, particularly the party’s left wing, which has gained growing sway over the party, particularly in urban areas. But there’s this problem with the Obama record: Rather than a shift to a more broad distribution of income, some 95 percent of the income gains during President Obama’s first term went to barely 1 percent of the population while incomes declined for the lower 93 percent of earners. As one writer at the left-leaning Huffington Post put it, “The rising tide has lifted fewer boats during the Obama years – and the ones it’s lifted have been mostly yachts.”

Leftist reaction to this failure has been building in recent years, not only during the Occupy movement, but in the increasingly open criticism of the Obama approach by populist – as opposed to gentry – liberals. Progressives, such as Massachusetts U.S. Sen. Elizabeth Warren, have made it clear that, on this issue, at least, the administration has had few, if any, answers.

Searching for Solutions

This leads us into what could be “terra incognita.” Over the past several decades, we have seen two basic approaches to economic policy. One approach can be called “trickle down,” with tax cuts designed particularly to provide incentives for investors.

Obama has tried a different approach, imposing higher taxes on upper-income professionals and small-business owners (while not touching the lower capital-gains rate for the very rich) as well as a regulatory regime particularly tough on firms without a strong lobbying presence.

The failure of the Obama approach convinces some of the Left that the solution lies with the expanded “social state” advocated by their new guru, Piketty, steps which, they hope, will forcibly redistribute wealth. Like Piketty, they seem to feel that economic growth, traditionally a prime source of social uplift, is little more than an “illusory” solution.

In reality, redistribution by the state would certainly help some, notably lower-income workers, but it’s doubtful it would improve material conditions for much of the middle class or the poor. Such a state is unlikely to increase upward mobility. The 50-year “war on poverty” in the United States, for example, initially helped reduce the percentage of the poor, but has achieved few gains since the 1960s.

Despite $750 billion spent annually on welfare programs, up 30 percent since 2008, a record 46 million Americans were in poverty in 2012. Indeed, racial and ethnic economic disparities have grown under Obama.

In much the same way, the European welfare state – held up as an exemplar by many progressives – has fallen on hard times, attracting the lowest levels of political support in several decades. Certainly, it holds little hope for young people, whose interests wane before a government increasingly focused on the growing ranks of pensioners. Overall unemployment rates in Europe are generally higher than in the U.S., and particularly for the young, where joblessness reaches 20 percent and higher in some countries. Indeed, much of the continent’s youth are widely described as “the lost generation.”

Pervasive inequality and limited social mobility have been well-documented in larger European countries, including France, which has among the world’s most-evolved welfare states. The same is true in Scandinavia, often held up as the ultimate exemplar of egalitarianism. The Nordic countries have much to recommend them, but they, too, face rapidly growing inequality. Indeed, over the past 15 years, the gap between the wealthy and other classes has increased in Sweden four times more rapidly than in the United States.

Ultimately, expanding welfare states, which can ameliorate class inequality, also depress economies and create the conditions for social stagnation. Indeed, as New Deal architect Franklin Roosevelt warned, a system of unearned payments, no matter how well-intended, can serve as “a narcotic, a subtle destroyer of the human spirit” by reducing people’s incentives to better their lives.

In contrast, significant gains in poverty reduction, among those employed, at least, have come when both the economy and the job market expand, as occurred during both the Reagan and Clinton eras. Clearly, as both of these presidents recognized, the best antidote to poverty remains a robust job market. As Mike Barone has pointed out, the best economic results for the middle class have come under either free-market leaders like Reagan or Margaret Thatcher, or moderate liberals, like Clinton or Tony Blair.

What we need, then, is a new focus on economic growth, accompanied by tax changes that both allow marginal rates to fall while equalizing capital gains with income taxes. This would lower the increasingly onerous burden on small businesses and middle-class families, and spark more grass-roots “up from the bottom” growth. It would also shift the economic paradigm away from speculative investment and toward rewarding work and enterprise. Critically, it could slow, perhaps reverse, the precipitous drop in labor force participation rates, particularly among young Americans, a harbinger of Europeanization in the worst sense.

We should neither dismiss the issue of inequality, as many conservatives might wish to, or take the wrong steps to address it. Americans need to have a serious debate on how to confront the most important issue of our times – the growing class divide – with not just ceaseless rhetoric from the political class that, for the most part, to recall Shakespeare’s “MacBeth,” “is full of sound and fury, signifying nothing.”

This article first appeared in the Orange County Register.

Joel Kotkin is executive editor of and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.