Big government is the biggest threat

Obama’s simplistic view of income inequality

By Charles Lane,

Statistics show rising income inequality in the United States. But, contrary to the impression created by the Occupy protests, and media coverage thereof, statistics also show that Americans worry less about inequality than they used to.

In a Dec. 16 Gallup poll, 52 percent of Americans called the rich-poor gap “an acceptable part of our economic system.” Only 45 percent said it “needs to be fixed.” This is the precise opposite of what Gallup found in 1998, the last time it asked the question, when 52 percent wanted to “fix” inequality.

Maybe Americans are Okunites — as in Arthur Okun, the late Yale economist and author of the 1975 book, “Equality and Efficiency: The Big Tradeoff.”

Okun saw free markets as a source of unparalleled human progress — and of big gaps between rich and poor. Indeed, he argued, markets are efficient partly because they distribute economic rewards unevenly. Government should try to smooth out income stratification, but such efforts risk undermining incentives to work and invest.

Hence the “big trade-off”: channeling income from rich to poor, Okun wrote, was like trying to carry water in a leaky bucket. He wanted to move money from rich to poor without “leaking” so much economic growth that the whole process became self-defeating.

The American public intuitively shares Okun’s concerns. Consider the responses to another question in the Gallup poll. Asked to rate the importance of alternative federal policies, the public saw both economic growth and redistribution as worthy objectives — but put the former well ahead of the latter. Some 82 percent said growth was either “extremely” or “very” important; only 46 percent said “reduc[ing] the income and wealth gap between rich and poor” was “extremely” or “very” important.

In short, the public wants fairness but retains a healthy skepticism about the federal government’s ability to achieve it.

As such, Gallup’s numbers do not bode well for President Obama’s effort, launched in a Dec. 6 speech at Osawatomie, Kan., to win reelection as a soak-the-rich populist.

The president, like Okun, acknowledged that the free market created “prosperity and a standard of living unmatched by the rest of the world.” But he explained the recent rise in inequality too simplistically, as the result of financial deregulation and the “breathtaking greed” it enabled.

And rather than tackle the big trade-off directly, Obama tried to sidestep it. Rising inequality “hurts us all,” he argued, implying that more widely distributed income would essentially pay for itself through higher growth. He alluded to a recent study showing “that countries with less inequality tend to have stronger and steadier economic growth over the long run.”

It’s true that International Monetary Fund researchers Andrew Berg and Jonathan D. Ostry reported in September that egalitarian developing countries grow faster than less egalitarian ones. But the lesson for mature industrial economies is unclear. Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece.

The president argued, as he has before, that more government spending on education and training is key to greater equality. No doubt education has been a source of social mobility in the past. Obama has taken some steps in the right direction, notably his “Race to the Top” program that conditions some federal educational aid on reform.

But lack of reform — not resources — remains the problem with U.S. education and with many other public-sector institutions, from housing to agriculture. The president has taken only modest steps to deal with this problem, which is not surprising given his party’s dependence on public-sector labor unions.

Public-sector unions and other interest groups wrap their causes in the rhetoric of equality. Often, what they’re really protecting are privileges that raise the cost of public services to everyone else — including citizens who earn a lot less than civil servants. Yes, Wall Street’s bonuses are stratospheric. But the New York Times recently reported that Medicaid was paying nine executives $500,000 or more per year to operate nonprofit homes for the mentally disabled.

Okun’s message is that equality is a public good, whose benefits — social cohesion, political stability and the like — are worth paying for. The trick is not to overpay.