Obsessing over inequality threatens capitalism

NEW YORK. August 4. KAZINFORM Like any immigrant, I'm optimistic about the United States. The crash will recede, confidence will come back and stronger growth will resume. The zeal of ordinary Americans to work hard and prosper will prevail over the weary incompetence of the political class.

If I wanted to be pessimistic, though, I know what I'd be dwelling on right now: the new preoccupation with inequality.

Inequality is rising, and that's a bad thing. What's worse is that the issue is getting mixed up with what should be a more pressing debate over economic opportunity, which would be better kept separate. This is both a distraction and a danger.

The U.S. system, according to many critics, is fundamentally flawed, its failings all of a piece. The rich have rigged the system so that the fruits of the nation's labor accrue largely to them.

Nobody else can get ahead. The incomes of the middle class stagnate as labor productivity keeps rising. And if you're born poor, you stay poor. The plutocrats are killing the American Dream.

This encompassing theory of national decay is wrong.

As Scott Winship of the Brookings Institution has pointed out, many of the simple facts that are claimed to support it aren't so simple on closer inspection. For one thing, comparing incomes over time for this purpose isn't easy. (What's meant by "income"? Are we discussing households, individuals, tax units, full-time workers?)

You might keep this in mind: Until the recession, according to the Congressional Budget Office, U.S. median household incomes kept rising in inflation-adjusted terms, decade by decade. That's a notable achievement for a country so long at the front of the pack (and therefore without opportunities for catchup growth) during a time when the supply of foreign labor (hence, pressure on rich-country wages) was growing faster than ever.

Despite what you read, until 2007, most U.S. families were getting ahead. By global standards, their economic system, far from being fundamentally broken, has delivered mass affluence.

Successive generations are better off than their predecessors were, and once the crash is behind us, there's no reason to think this won't continue.

Already, the U.S. recovery, disappointing as it's been, is much stronger than Europe's. That's partly because U.S. macroeconomic policy was better, but it helps that the U.S. is also more flexible and resilient - by which I mean more capitalist.

Inequality has worsened in the U.S., and that's a problem. But the idea that plutocrats are enriching themselves at the expense of others needs to be unpacked.

In some cases, it's true. Some executives have found ways to pay themselves more than they're worth to their companies: They're profiting at shareholders' expense.

In other cases, though, technology and globalized markets have boosted the incomes of superstar entertainers, athletes and business leaders. That's different.

If those innovations hadn't happened, incomes would be more equal - but the middle class wouldn't be better off.

One basic point is often forgotten: The size of the pie isn't fixed. It's right to ask whether the distribution of incomes is fair and to lean against worsening inequality - say, by fixing corporate governance so the market for top-executive pay works as it should or by taxing the rich more heavily.

But it's wrong to see the gains at the top as proof of the system's ingrained wickedness, or to forget that clumsy intervention might affect everybody else's income.

The numbers on generational mobility are complicated, too, but one fact is undisputed: A child of a poor family in the U.S. is more likely to stay poor as an adult than his counterparts are in many comparable advanced economies.

It's pretty shocking to think that a Finn, or even an Englishman (for heaven's sake), born into a poor family has a better chance of making it to the middle class than a similarly unlucky American. But there it is. In this respect, just as the critics say, the American Dream is a myth.

Miles Corak of the University of Ottawa and other economists argue that high inequality causes low mobility.

The question isn't settled. I find it easy to believe that the recent surge in the incomes of the super-rich - the main driver of U.S. inequality - will make it easier for the very richest children to stay very rich, but I find it hard to believe it will help the poorest to stay poor.

They're separate issues with separate causes calling for different policy responses, not different symptoms of the same underlying disease.

This framing matters. If you merge inequality and lack of opportunity for the poor into one story about systematic injustice, each problem becomes more difficult to confront.

Greater economic opportunities for the poor should be a priority for liberals and conservatives alike. No doubt they'd differ on the means - on the weight they'd give to improving schools that serve the poor, say, or paying bigger subsidies to low-wage workers, or discouraging births out of wedlock and other poverty-replicating behavior. In a functioning polity, that could be a fruitful discussion.

Instead, the issue is subsumed into the larger perpetual conflict about liberty and social justice. And nothing happens. It's depressingly simple, really: The left would rather raise taxes on the rich, and the right would rather prattle on about freedom.

So the poor stay poor.

That's bad enough. For the longer term, there's a further risk. Let's not take America's commitment to its distinctive form of capitalism entirely for granted. Today, it seems deep in the culture, but culture can change.

Worsening inequality and the persistence of poverty from generation to generation are solvable problems, not hardwired features of the system.

Left unattended, however, they could undermine support for the market economy and lead the country in another direction - something most Americans would come to regret.

Clive Crook, born and raised in England, is a Bloomberg View columnist.

Source: JapanTimes (Bloomberg)

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