By: Fareed Zakaria
December 19, 2013
Is income inequality the "defining challenge" of our time? President Obama's Dec. 4 speech on the topic has produced a lively debate, with some supporting him and others -- including The Post's Ezra Klein -- arguing that unemployment should be the main focus.
In fact, Obama said, it is the combination of "a lack of upward mobility" and inequality that is the great challenge of the day. This strikes me as the right approach: how to get people to move up and thus create a thriving middle class. If, in the process, the Google guys stay rich, so be it.
When people talk about inequality these days, they are often talking about three different issues: the astonishing rise of the very rich, the stagnant wages and weakening prospects of the American middle class, and the large number of people at the bottom of the ladder.
These are distinct phenomena. There is a lot of debate, and some good recent research, about whether they are related -- whether the rise of the rich has caused the stagnation of the middle class and the poor. The evidence is mixed. See Jared Bernstein's "The Impact of Inequality on Growth" and a recent report from the Center on Budget and Policy Priorities titled "Pulling Apart."
The super-rich have grown worldwide, but the United States is at the head of the pack. This is because of factors structural (globalization and technology help superstars; large and liquid financial markets make the rich richer) and political (lower tax rates and the political influence of the financial sector). The United States has all of these factors -- technological innovation, global reach and huge capital markets but also tax cuts, deregulation, a powerful financial industry -- so it's not that surprising that it has experienced the biggest rise in the super-rich. The current Journal of Economic Perspectives has an excellent set of essays on this .
Reviving the middle class is clearly the most important challenge, involving the most people. It's also the hardest and, having begun 40 years ago, is proving to be one without an enduring solution. There is strong evidence that rising inequality is crowding out the middle class. But there is also a powerful story to be told about how technology, globalization and declining American education and skills have contributed to the stagnation of wages for the median worker.
Would higher taxes on the rich create a more dynamic middle class? Perhaps, but it's not clear exactly how. It's also worth noting that the U.S. tax system -- which relies mostly on income taxes -- is more progressive than European systems that raise a much greater percentage of their revenue from sales taxes. The top 10 percent of American earners pay about 70 percent of all federal income taxes. In New York City, the top 1 percent pay almost 45 percent of the city's income taxes.
Some argue that the real link between the rise of the rich and the fall of the middle class is political. The rich have captured the political system and milked it to their advantage. And it's also true that -- because of the role of money in politics -- the well-off (and well-organized) can often get tax breaks and regulatory relief.
But more broadly, look at what has happened in the past 10 years in the United States: Medicare was expanded dramatically, near-universal health care was enacted, energy policy has been changed against the wishes of big oil and coal companies, tax rates on the rich have approached 30-year highs and a stimulus program of almost $1 trillion was passed to fight unemployment. Europe, with its more egalitarian politics, slashed social spending in the face of the worst unemployment since the Great Depression. On its face, this is not strong evidence of the political power of America's rich.
Of the three problems, the easiest to fix is the one we spend the least time talking about: the fate of the poor, who number 46 million. Since the poor tend not to vote or lobby, they have not received much attention since Lyndon Johnson's efforts in the 1960s. American government does not devote much energy or money to the problems of the poor, especially those of impoverished children who suffer from malnutrition, bad health and poor education, which cripples their chances of escaping poverty. The resources needed to change this would be a fraction of what we spend on the middle class.
We don't have all the answers, but if you're looking for the policy that would likely have the biggest effect on increasing social mobility and reducing inequality, let's shift the attention from the rich and the middle class and focus on the forgotten poor.