Inequality for Dummies

By BILL KELLER

December 22, 2013

Inequality is in. The president, you have probably heard, has declared income inequality to be “the defining challenge of our time.” (Except he didn’t quite, but we’ll get to that.) Politicians, pundits and activists on the left have seized on the president’s words, along with the rising fortunes of progressive idols Elizabeth Warren and Bill de Blasio, to refute the apostles of austerity (mostly Republicans these days) and lay down early populist markers for the 2016 elections. Liberals of a more centrist bent — notably the former Clintonites at the Third Way think tank — have refused to join the chorus and been lashed by fellow Democrats for their blasphemy. Senator Warren has suggested that liberals who disagree with her are in the pocket of Wall Street. Third Way executives took to the op-ed page of The Wall Street Journal to accuse the populists of indulging a “ ‘we can have it all’ fantasy.”

If you traffic in opinions, as a pro or an amateur, you’d better have opinions about inequality. And so I set off into the intramural battlefield to see what’s up.

For starters, economic inequality is manifestly real, growing and dangerous. The gulf between the penthouse and the projects is obscenely wide. Obama cited some of the startling numbers: The top 10 percent of Americans used to take in a third of the national income. Now they gobble up half. The typical corporate C.E.O. used to make 30 times as much as the average worker. Now the boss makes 270 times as much as the minion. Many factors have led to this trend, including the offshoring of work to low-paid foreign labor, the automation of everything from manufacturing to meter-reading, a tax code that allows the accumulation of riches at the top, the slow growth of educational attainment, the demise of strong unions, a collapse of the social contract.

The alarming thing is not inequality per se, but immobility. It’s not just that we have too many poor people, but that they are stranded in poverty with long odds against getting out. The rich (and their children) stay rich, the poor (and their children) stay poor. President Obama’s speech on Dec. 4, widely characterized as his inequality speech, was actually billed by the White House as a speech on economic mobility. The equality he urged us to strive for was not equality of wealth but equality of opportunity.

A stratified society in which the bottom and top are mostly locked in place is not just morally offensive; it is unstable. Recessions are more frequent in such countries. A widely praised 2012 book, “Why Nations Fail,” argues that historically when the ruling elites have pulled up the ladder and kept newcomers from getting a foothold, their economies have suffocated and died. “The most pernicious fact of inequality is when it translates into political inequality,” said Daron Acemoglu, a co-author of the book and a Massachusetts Institute of Technology economist. “That means our democracy ceases to function because some people have so much money they command greater power.” The rich spend heavily on lobbyists and campaign donations to secure tax breaks and tariff advantages and bailouts that perpetuate their status. Not only does a dynamic economy stagnate, but the left-out citizenry becomes disillusioned and cynical. Sound familiar?

The left-left sees economic inequality as mainly a problem of distribution — the accumulation of vast wealth that never really trickles down from on high. Their prescription is to tax the 1 percent and close corporate loopholes, using the new revenues to subsidize the needs of the poor and middle class. They would string the safety net higher: expand Social Security, hold Medicare inviolate, extend unemployment insurance, protect food stamps, create more low-income housing. They would raise the minimum wage.

The center-left — and that includes President Obama, most of the time — sees the problem and the solutions as more complicated. Yes, you want to provide greater security for those without independent means (see Obamacare), but you also need to create opportunity, which means, first and foremost, jobs. Yes, you can raise taxes on the rich, but you don’t want to punish success. “You want to increase social mobility by providing an opportunity for the bottom to become rich, not forcing the rich to become poor,” said Acemoglu, who aligns more with the center than with the populists.

The center-left (I’m somewhat oversimplifying these categories) agrees on the menace of inequality, but places equal or greater emphasis on the fact that the economy is not growing the way it did for most of the last century. The sluggish growth means that not only are the poorest stuck at the bottom, but the broad middle is in economic decline. “The central economic problem is that a middle-class wage does not make a middle-class life anymore,” said Jon Cowan, president of Third Way. This diagnosis leads to somewhat different priorities. Of the arguments that pit Democrat against Democrat, three strike me as most important:

The first is how to restart the engine of growth. The populists favor putting more money in the hands of the bottom and middle, who will then spend us back to economic vigor. This is classic Keynesian thinking, largely vindicated by history. But the center-left points out that our economy is already 70 percent dependent on domestic consumers, way more than other developed countries. Liberals of all shades favor greater government investments in education, infrastructure, clean energy and other research. But they divide over policies that might unleash the energy of the private sector. In a line from his speech that was not widely quoted, President Obama said, “The fact is if you’re a progressive and you want to help the middle class and the working poor, you’ve still got to be concerned about competitiveness and productivity and business confidence that spurs private-sector investment.” While closing loopholes, Obama would also lower corporate tax rates; he would do trade deals to expand our diminishing share of foreign markets; he would shrink long-term deficits and streamline regulations.

The second argument is over entitlements. The left-left seems to believe that government investments — roads and bridges, clean energy, education, etc. — and more-generous safety-net benefits can all be had by milking the rich and cutting military spending. Most centrists would raise taxes some and cut defense spending some, but they say that unless we also curb the growth of entitlements, the stampede of baby boomers into Social Security and Medicare will crowd out everything else. Between now and 2030, the working-age population that pays into Social Security grows by 15 percent; the over-65 population that withdraws from Social Security grows by 65 percent. No one on the left favors entrusting Social Security and Medicare to the mercies of the private marketplace, as some Republicans do. But while the left tends to treat entitlements as sacred (Senator Warren and others would increase benefits for everyone, even the rich), centrists favor measures to slow the growth of entitlements: using a cost-of-living adjustment (COLA) formula that more accurately reflects how people spend, cutting benefits for those who don’t really need them, possibly extending the retirement age a couple of years, and using the government’s leverage to drive down the costs of medical care. The tension between entitlements and investment is a Third Way obsession. In a column and two blog posts last year (here, and here, and here) I sympathized with the case for imposing some restraint on entitlements. I still do.

And a third difference between the near left and the far left is the question of making government more efficient. This is not so much a policy dispute as a mind-set. In education, health care, Social Security and other areas, the center seems more receptive to reforms intended to get decent results at lower costs. Further left, reform is seen as a euphemism for taking stuff away, and often resisted. The left responds to rising costs with rising subsidies; the center looks for ways to change incentives. Thus centrists put into the Affordable Care Act a so-called Cadillac tax, which aims to assure the government is not subsidizing plans that encourage a lot of unnecessary treatment. The idea encountered resistance from the left, led by unions that had negotiated hard to get more lavish coverage.

There is more common ground than you would know from watching the op-eds fly. Almost everyone to the left of John Boehner agrees, for example, that we are overdue for a raise in the minimum wage. The public overwhelmingly supports it. It won’t help those with no jobs at all, but the best evidence is that it won’t kill jobs either, and it does help inequality by boosting the incomes of the working poor. Even the free-market editorial writers at The Economist have begun to come around in favor of a higher minimum wage.

Neera Tanden, president of the Center for American Progress, the liberal think tank that hosted Obama’s speech, has quarreled with the centrists at Third Way, but defines the basic problem — immobility and declining middle-class wages — in the same way. Her group has advocated Social Security reforms similar to Third Way’s — including the contentious COLA fix. Significantly, many centrist Democrats who used to side with the budget hawks have mostly conceded that the federal deficit is not a near-term problem for the economy.

Liberals from Elizabeth Warren to Third Way have one other thing in common: a Republican-controlled House that hews to a discredited gospel of gutting government, cutting taxes and letting the market sort it out. Barring a purge of Congress, most of the ideas put forth by the liberals, center-left or left-left, are going nowhere in the partisan sludge pit that is Washington. If you want to see good intentions turned into actual success stories, innovation pressed into service against inequality, you should turn your attention elsewhere — to cities. In the new year, I plan to do that.