Winston Churchill once said that "the inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries." During his State of the Union address to Congress, President Obama declared that “after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened.”
Despite the fact that Obama himself has been running the country during this time of allegedly deepening inequality, he and his fellow Democrats hope a populist message on the issue – accompanied by proposals such as hiking the minimum wage – will boost their electoral prospects in November.
Alan Reynolds of the Cato Institute has done extensive work showing that often-cited measures of inequality are misleading for a number of reasons, such as the fact that they don’t account for individuals’ effective income after taxes and government transfer payments. A new study from economists Emmanuel Saez and Patrick Kline of the University of California, Berkeley, and Raj Chetty and Nathaniel Hendren of Harvard found “that children entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s.”
One problem with placing such an emphasis on inequality is that the gap between the rich and poor is of limited value in assessing the economy. If a family can afford to eat regular home-cooked meals, it doesn’t really matter that wealthy families can dine fashionably uptown or hire personal chefs. Things are quite different, however, for the family living in poverty and forced to go hungry.
The fact that wealthier individuals have disposable income left over to invest after paying for necessities makes it easier for them to increase their wealth than lower-income individuals who must spend their entire paycheck on basic living expenses. But the goal of policymakers shouldn’t be to find ways to keep wealthy Americans down. It should be to explore ways to provide more opportunities for Americans to move up the income ladder, and for children who grow up impoverished to have a better standard of living than their parents.
One possibility would be to replace Social Security payroll taxes (12.4 percent, split between workers and their employers) with a different revenue-raising mechanism. This would not only put more money in the pockets of lower-income Americans, it also would make it cheaper for employers to hire new workers. Another idea would be to expand school choice so that parents can rescue their kids from failing schools and gain a better education for them.
But before these or other ideas are debated, it's important to move beyond the myopic focus on inequality. As Churchill’s famous quote attests, an economy could be equal but broadly poor, or unequal but broadly prosperous. The latter is the modern American norm.