In his State of the Union address, President Barack Obama had much to say about the economy and the nation’s recovery from the financial crisis. But some of his sharpest words concerned income inequality.
While generating applause, the president’s rhetoric misses the core economic challenges facing low-income Americans and reduces the likelihood of constructive policy action.
While the president now wisely acknowledges the importance if mobility, the underlying difficulty concerns the way the problem is framed. Inequality is not in itself necessarily undesirable. People earn more or less depending on how old they are, how hard they work, and how useful are the business or creative aptitudes they possess. This is a normal feature of a competitive, dynamic economy.
There are two real problems. The first and central one is poverty – a cause not only of deprivation but of wasted potential and social dislocation. The second is economic immobility. Who is rich and who is poor matters little if the least well-off can readily climb the ladder with hard work, superior skill and by taking well-judged risks. Unlike inequality, which need not be harmful, lack of opportunity is a genuine concern.
With this distinction in mind, it is important to see that any policy designed to tackle inequality should emphasise opportunities for work. Poverty rates are three times higher for non-working than working individuals. A work-centred agenda for economic opportunity would focus on creating work (by increasing the rate of economic growth), preparing for work (by improving skills and training), and rewarding work (by supplementing incomes of low-income working individuals in lieu of non-work-related transfers).
By focusing on unequal incomes rather than unequal opportunities, Mr Obama muddies the policy debate. At worst, this could make it less likely that a mobility-enhancing agenda can be enacted. You can reduce income inequality by paying unemployment benefits for longer, or increasing taxes on the highest paid. But this does not help people looking to start work or to find a better-paying job.
Worse still are the ways in which the president’s agenda actually frustrates chances for a mobility agenda. Consider, for example, corporate tax reform, an idea floated previously by the president and raised again in his State of the Union address. In principle, this is a promising suggestion. The US tax system stymies investment in the US by domestic and foreign corporations. And the burden of the tax is borne in part by American workers in the form of lower wages. Business tax reform that reduced rates significantly while broadening the tax base would raise investment, economic growth, and wages. But the president’s emphasis on raising taxes on some businesses makes such reform less likely.
Another example lies in policies to support skills. While the president spoke about extending unemployment insurance benefits, he offered no suggestions about how to reform training programs beyond asking – years into this discussion – that the vice-president review them. Education tax incentives could also be simplified and expanded.
And to support work, the present earned income tax credit could be reformed to offer more support for workers without children. A higher standard deduction could offer further support, as the president now sees. But agreement on such measures is unlikely without a broader discussion of individual tax reform. Here again, the president’s focus on increasing marginal tax rates on upper-income Americans in the name of combating inequality makes individual tax reform – with a goal of lowering marginal tax rates – less likely.
The stakes are high. Recent research by economists Raj Chetty, Nathaniel Hendren, Emmanuel Saez, and Nicholas Turner finds that while mobility is not getting worse, it is lower than in some other industrial economies such as Canada or Denmark.
This result should not be acceptable. The president has missed an opportunity to highlight economic mobility and its links to supporting work.
Republicans should act where the president has not. Senator Marco Rubio and Representative Paul Ryan have recently put forward their own anti-poverty proposals. The objective of improving economic mobility and tactics to support work should win support even in a bitterly divided Washington.
This op-ed appeared in FinancialTimes.com "A-List" on January 29, 2014.
Glenn Hubbard is dean of Columbia Business School and former chairman of the Council of Economic Advisers under President George W. Bush.