By: Lawrence Summers
June 8, 2014
With Thomas Piketty's book "Capital in the Twenty-First Century" rising to No. 1 on the New York Times bestseller list, inequality has become central to the public debate in this country over economic policy. Piketty focuses, as does much of this discussion, on the sharp increases in the share of income and wealth going to the richest 1 percent, 0.1 percent and 0.01 percent of the population.
This is indeed a critical issue. Whatever the resolution of particular arguments about particular numbers, it is almost certain that the share of personal income going to the top 1 percent has risen by 10 percentage points over the last generation and that the share of the bottom 90 percent has fallen by a comparable amount. The only groups that have seen faster income growth than the top 1 percent are the top 0.1 percent and top 0.01 percent.
This discussion helps push policy in constructive directions. Taxes can be reformed to eliminate loopholes and become more progressive while promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. As a number of economists, notably Dean Baker and the late Mancur Olsen, have emphasized, there is a compelling case for reforms that reduce inequality arising from such successful rent-seeking activity.
Unless one regards envy as a virtue, the key reason for concern about inequality is that lower- and middle-income workers have too little -- not that the rich have too much. So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. On any reasonable reading of the evidence in the United States, more could be done to increase tax progressivity without doing any noticeable damage to the prospects for economic growth.
It is important to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life: health and the ability to provide opportunity for children.
Barry Bosworth and his colleagues at the Brookings Institution have examined changes in life expectancy starting at age 55 for the cohort of people born in 1920 and the cohort born in 1940. They found that the richest men gained roughly six years in life expectancy, those in the middle gained roughly four years, and those in the lowest part of the distribution gained two years. To put this in perspective, the elimination of cancer mortality would mean less than a four-year change in life expectancy.
Why these differences? They more likely have to do with lifestyle and variations in diet and stress than the ability to afford medical care -- especially since the figures refer to middle-aged people, all of whom, once they reach 65, will be covered by Medicare.
Over the past two generations, the gap in educational achievement between the children of the rich and the children of the poor has almost doubled. While the college enrollment rate for children from the lowest quarter of the income distribution has increased from 6 percent to 8 percent, the rate for children from the highest quarter has risen from 40 percent to 73 percent.
What has driven these trends? No doubt there are many factors. But a crucial one has to be that the average affluent child now receives an estimated 6,000 hours more enrichment activity in childhood than the average poor child -- and this gap has greatly increased since the 1970s.
A famous literary spat between novelists F. Scott Fitzgerald and Ernest Hemingway has been boiled down over time to a succinct, if apocryphal, exchange. Fitzgerald: "The rich are different from you and me." Hemingway's retort: "Yes, they have more money."
These observations on health and the ability to provide opportunity for children suggest that the differences between the rich and everyone else are about not only money but things that are even more fundamental.
If American society is to become more just and inclusive, it will be necessary to craft policies that address the rapidly increasing share of income going to the rich. But it is crucial to recognize that measures to support the rest of the population in other ways are at least equally important.