Unequal to the Challenge

Published February 10, 2014

National Review

America these days faces a daunting array of economic challenges. Still in the midst of a weak recovery from a recession that technically ended more than four years ago, the economy continues to suffer from high unemployment and weak income growth. Americans are anxious about their own and their children’s economic prospects, and they are unsatisfied with what their political leaders have offered them.

The Democrats think they know how to address these problems and anxieties. To hear them tell it, income inequality is at the core of what ails us. “Income inequality is a threat to the strength of our middle class, the health of our businesses, the security of our workers, and the growth of our economy,” Nancy Pelosi argued last spring. President Obama has repeatedly called rising inequality “the defining challenge of our time.” Liberal commentators insist on a tight link between increasing inequality, declining growth, and weak social mobility. And for the Left, the centrality of inequality among our economic woes demands an agenda of redistribution: higher taxes, higher spending on our existing assortment of social-welfare programs, new programs (such as universal preschool), and, most prominently just now, a higher minimum wage.

That agenda has repeatedly put Republicans on the defensive on economic issues, as the Democrats have frequently succeeded in portraying themselves as standing with the poor and middle class while Republicans are associated in the public mind with the rich and are assumed not to care about most people’s economic troubles and worries. But this success has had more to do with Republicans’ lack of understanding of (and at times discomfort with) the public’s economic concerns than with the strengths of the Democrats’ arguments.

The truth is that neither party’s existing agenda is well suited to addressing today’s economic challenges or voters’ concerns. The Democrats don’t have much of an alternative to attempting to harness public anxiety for their own longstanding priorities, since their electoral coalition does not leave them much room to maneuver. As the president recently demonstrated in his State of the Union address, the Left seems exhausted. But Republicans could do better: If they took better account of what worries Americans today and why, they would see that the Democrats’ obsession with inequality could leave the GOP with a great opportunity to offer the public an appealing, constructive, conservative economic agenda.

The Left’s argument about inequality begins with a largely accurate observation about economic trends but proceeds to economic assertions and political judgments that are much less well founded. Inequality, liberals correctly note, has been rising in recent decades. That trend can be seen throughout the developed world, not just in the United States, and its causes are not clear. Over the past three decades, a growing portion of Americans’ total income has gone to the wealthy. The top fifth of earners saw their share of pre-tax income rise from 45 percent in 1979 to 52 percent in 2010. Much of that gain went to the much discussed top 1 percent, whose share increased from 9 percent to 15 percent over that period, according to the Congressional Budget Office’s latest figures, released in December 2013. The poorest fifth, meanwhile, received just 5.1 percent of all pre-tax income in 2010, down from 6.2 percent in 1979, while the income share of the second-poorest fifth dropped from 11.2 percent to 9.6 percent over that time.

Accounting for the effects of taxes and government benefits tempers those figures some but does not change the basic pattern. Between 1979 and 2007, the CBO found, after-tax income grew by 314 percent for the top 1 percent of households, by 73 percent for the remainder of the top fifth, by 42 percent for the next three-fifths of households, and by 45 percent for the bottom fifth. Everyone’s incomes grew, but those of the wealthy grew more, leaving America’s wealth more concentrated at the top.

The causes of this concentration are varied and much in dispute. The combination of advancing technology and freer global trade has meant that jobs in America have become more skill-intensive while much lower-skill work has been exported, leaving Americans who are at the bottom of the income distribution (and generally also with lower levels of education) at a growing disadvantage. Changing marriage patterns have also increased inequality among households, as high earners marry each other. Pay at the very top of some professions (such as finance, sports, and entertainment) has risen dramatically more quickly than pay in the rest of the economy. And the lowering of top marginal income-tax rates starting in the 1980s has given those at the top of the income distribution much stronger incentives to work and invest than they previously had.

The Left is of course ideologically committed to the view that rising inequality of income and wealth is in itself a terrible wrong. Conservatives incline instead to the view that poverty and social immobility are distinct from economic inequality (even if all three can sometimes result from the same causes) and are much more important problems to address. The Left has attempted to overcome this disagreement by arguing that inequality is a cause of economic problems that even non-leftists agree demand public action. It is a cause, that is, of poor growth, diminished standards of living, and poor economic mobility and opportunity. That leap is not well supported by the economic data.

It is not hard to imagine possible mechanisms by which inequality might hinder growth, but it is quite hard to find compelling evidence that it has done so. While rising inequality sometimes correlates with slower growth, it also sometimes correlates with faster growth, both here and abroad. In one 2011 study, Harvard’s Christopher Jencks and his team found that there was no relationship between changes in inequality and changes in economic growth in the United States or abroad over the past century.

Similarly, rising inequality does not appear to have caused the stagnation of wages or purchasing power among the poor and middle class, even if at some times (but not others) it has coincided with it. And what may be the most prominent plank of the Left’s inequality argument — the notion that inequality has been the cause of inadequate upward mobility — also lacks clear evidence.

Upward mobility has indeed been too weak for many years in America — though recent evidence suggests it has not been getting worse (or better) in the past several decades as inequality has increased. The case that rising inequality is to blame for poor mobility was prominently made in a 2012 speech by Alan Krueger, the Princeton economist who was at the time the chairman of President Obama’s Council of Economic Advisers. Krueger looked at levels of inequality and the relationships between the incomes of fathers and those of their sons in the United States and several other developed countries. Plotting the two on different axes of the same chart, he found that higher levels of inequality corresponded to lower levels of intergenerational mobility, and he famously called the line showing that relationship the “Great Gatsby Curve.”

But as the Manhattan Institute’s Scott Winship, among others, has shown, there is nothing approaching a sufficient foundation for asserting that the relationship shown on Krueger’s chart is a case of causation rather than just correlation. And more recent data regarding inequality in different regions of the United States also cast doubt on that claim. Other assertions about the doleful effects of inequality — notably that it contributes to financial instability and political dysfunction — are even more speculative, piling one contestable assertion atop another.

The Left has thus not come close to proving its case. As Winship has put it in National Affairs: “The evidence behind the liberal narrative of inequality as a driver of our social and economic woes is not nearly firm enough to support the political and policy arguments now often built upon it. One can be concerned about economic growth, financial stability, and economic mobility regardless of whether income inequality harms any of them.”

The Left’s political analysis, like its economic analysis, begins on solid ground but does not remain there. There is plenty of evidence that Americans think that rising inequality is a problem. A Harris poll in October found that 80 percent of the public believed that “the rich are getting richer and the poor are getting poorer.” Last April, Gallup found that 59 percent of people thought “the money and wealth in this country should be more evenly distributed among a larger percentage of the people.” Many other polls have found similar results over the years. Specific policies often associated with egalitarianism, such as a higher minimum wage and higher taxes on the rich, also usually command majority support.

Rising inequality does not, however, seem to have led to rising public concern about it. Harris found that 82 percent of the public held the same rich-getting-richer view in 1990. The number has bounced around without much alignment with actual trends in inequality. The number of people who agreed with the statement fell during the 1990s, for example, when we had a strong economy but inequality was rising. Polling from multiple sources finds no increase over the last 15 years in rates of belief that the country is divided between “haves” and “have-nots,” with a majority rejecting that idea.

Polling also consistently finds that inequality is a low-priority issue for voters. When Gallup asked voters to volunteer “the most important problem facing this country today” in January, only 4 percent mentioned the gap between rich and poor — compared with 16 percent who mentioned health care; 8 percent, the deficit; and 5 percent, moral decline.

In May, Gallup studied voter priorities in a different way, listing several issues and asking respondents whether they considered them important. A majority thought “reducing poverty and inequality” was important (since the question lumped the two together, it does not shed light on how people thought they were related) — but significantly larger majorities felt that way about creating jobs, helping the economy grow, making the government work more efficiently, improving education, and fixing Social Security and Medicare. Pew, in 2013, asked people whether governments should “first address” jobs, public debt, inequality, or rising prices. Only 17 percent of Americans picked inequality, with larger percentages choosing both jobs and debt.

Overall, the polls find deep and in some respects growing economic anxiety, but anxiety that Americans do not appear to view mainly in terms of inequality. The polls on inequality have not changed much; the ones on whether “today’s youth will have a better life than their parents,” on the other hand, have. In 2003, Gallup found people optimistic about this question by a margin of 66 to 31 percent. Ten years later, the numbers were nearly tied.

Numbers like these may have persuaded Obama not to emphasize inequality in his State of the Union address and instead to present his agenda as a way to expand “opportunity.” The agenda itself, however, remains the same: an unimaginative list of old liberal policies that is unlikely to do much good. Even Americans who are inclined to approve of these policies, such as raising the minimum wage or expanding preschool programs, will do so mostly because they like the compassion they symbolize rather than because they think they will make a difference in their own lives.

The path would seem to be open, then, for Republicans to present a more compelling agenda. That agenda would actually expand opportunity rather than merely gesture toward it, and it would benefit the middle class as well as minimum-wage earners. It would address popular concerns about our economic future without using opposition to income inequality as an organizing principle; without, that is, treating the rising fortunes of the wealthy as a cause of those concerns. The public does not seem to share the Democrats’ intense emphasis on that issue. But to seize their opportunity, conservatives must avoid making their own version of the liberal mistake: confusing their ideological commitments for the public’s concerns.

Just as many Democrats contemplate public unease and imagine it offers an opportunity to pursue an agenda of higher taxes and more spending, so many Republicans look at the same attitudes and assume that voters just want comprehensive tax reform or regulatory rollback, or perhaps an anti-cronyism campaign or reforms to keep financial institutions from ever being bailed out again. All of that is surely worth doing, and Republicans should lay it out clearly for voters as part of their broader agenda, but (just as taxing and spending is for the Democrats) it is more a description of what Republicans could do if they won the favor and trust of the public than of how they might win that favor and trust.

The public may respond favorably, for example, to a Republican campaign against federal subsidies that flow to corporations, ranging from agribusinesses that benefit from food aid to insurance companies that profit from Obamacare. But people are probably more interested in hearing about policies that will help them improve their economic condition. These may sometimes even be the same policies, described in different ways.

Voters are worried about stagnating wages, inadequate mobility out of poverty and through the middle class, weak growth, and the high costs of raising a family. They are right to be worried, and right also to reject the Democrats’ insistence that all of these problems are caused by inequality. But if Republicans are to speak to these worries, they must be careful not to appear to dismiss them as they dismiss the Democrats’ inequality arguments. That means that rather than minimize the nation’s economic challenges, conservatives must offer the public an agenda that addresses people’s actual concerns in a way that liberals, because of their ideology and their electoral coalition, will be hard pressed to do.

Health care, in part because of its importance in our politics over the last few years, offers a good example of the conservative opportunity. The public is, of course, highly skeptical of Obamacare, and rightly so. But it also, rightly, has concerns related to the health-care system that predated Obamacare. Above all, people worry that the cost of health insurance is too high, putting coverage out of reach for too many and depressing wages. Obamacare does not offer a plausible answer to many of these concerns. Liberals have constructed various arguments that it will reduce costs, for example, but these tend to be more striking for their ingenuity than their credibility, and very few people have been persuaded.

There are promising conservative solutions to these problems, involving the intelligent deployment of the same forces — competition, cost-conscious and empowered consumers — that spur innovation and improve value in other sectors of the economy. Liberals cannot embrace these solutions, because of both their specific commitment to Obamacare and their general skepticism about the potential for markets in health care. Republicans need to forthrightly advance these ideas and show the public how they could help reduce costs and make working families more secure.

Higher education is another source of great anxiety in American life: Will we able to afford it for our kids, and will it leave them with an unbearable debt burden? A degree from a college or university seems to be, at least under our present arrangements, a prerequisite to economic success. But only a minority of people are able to get one, and even those who do are often finding that the ratio of costs to benefits is not what they had expected. The area would seem to be ripe for reforms that create and expand alternatives to a traditional college education, open opportunities for people who follow these alternative routes, and in other ways put competitive pressure on colleges to restrain costs. Some liberals are interested in these reforms. For reasons of coalition politics and general outlook, however, they seem like a much better fit for conservatives.

The cost of raising a family — and, particularly for women, the difficulty of balancing work and family life — is another issue where conservatives can offer potentially popular reforms. Liberals are drawn to policies such as requiring companies to offer paid leave for their employees. Conservatives have in the past instead offered tax relief for families, especially by creating and then expanding the child tax credit. That policy benefits a larger group of parents and offers them greater flexibility in how to use the benefit than what the Left proposes. The conservative approach reduces inequality only incidentally, and Senator Mike Lee did not sell his recent proposal to expand the child tax credit on that basis. But it would certainly address some key public worries about our economy.

Health care, higher education, and the costs of raising children are some of the most pressing concerns of middle-class families, but the case for conservative reforms in these areas applies in others that also matter to many such families. This suggests the possibility of a broad conservative agenda that would lift burdens off the shoulders of parents and workers, strengthen the market economy while making its benefits accessible to more Americans, and better enable the poor to rise.

That agenda would include more than policies to reduce the cost of living for working families; such policies would be part of a broader growth agenda consisting of sensible tax, regulatory, monetary, and infrastructure reforms. Conservatives have increasingly proposed such a growth agenda in recent years, but if they stop with those broader and more familiar economic goals — or, worse, stop short of them — they run a dangerous risk. The reach and the character of economic growth do matter. We don’t, for example, want to repeat the performance of the Bush years, when economic growth coincided with stagnant wages for most people because the rising cost of health care ate up raises. To stand a chance of being enacted, the agenda conservatives offer must speak directly to the needs and wishes of middle-class voters.

Such an agenda, one of broad-based prosperity, might meaningfully lower inequality, or it might not. It would, however, undermine the damaging perception that the Republican party is interested in helping only the rich and big business. It would move the economic and political center of gravity of American life markedly to the right. And it would be in keeping with the actual state of public opinion. The case for economic growth, opportunity, mobility, family, and reform of our governing institutions would almost certainly be far more appealing to voters than a case for just narrowing gaps. If everyone is rising swiftly, it matters less who rises fastest of all.

In advancing their economic agenda, the Democrats have a tendency to emphasize a theme — income inequality — that unites their activists but does not speak powerfully to voters. Some of the policies they pursue under that banner, such as increasing the minimum wage, may be reasonably popular (even if they hardly seem like solutions adequate to “the defining challenge of our time”). Republicans may pay a price for opposing them. But that price will be mitigated by the fact that while voters might think a higher minimum wage is fair, they do not think that it represents a sturdy basis for economic progress or that they themselves would benefit from it. It is a price Republicans can afford to pay so long as they offer voters their own understanding of what today’s economic challenge really is and how it might be addressed.

That challenge is not that some have grown too rich too quickly in our country but that the American dream may be falling out of reach for too many Americans. The Democrats’ intellectual exhaustion offers Republicans a chance to reconceive their public arguments and their policy agenda by applying conservative principles to the problems that face working families. If they are up to that challenge, they may become America’s governing party again.

—​ Ramesh Ponnuru is a senior editor of National Review and Yuval Levin is editor of National Affairs. This article was adapted from one that appeared in the February 10, 2014, issue of NR.

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