Curious Capitalist

What President Obama Should Really Do About Inequality

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JEWEL SAMAD / AFP / Getty Images

Inequality is the big economic topic of the moment—everyone from the Pope to New York mayor Bill DeBlasio to global leaders at the recent World Economic Forum in Davos are talking about it. Tonight, it’s very likely to be the centerpiece of President Obama’s SOTU speech—which I’ll be discussing from 8:30pm onwards with my colleagues Michael Scherer, Mark Halperin, Bobby Ghosh and Callie Schweitzer in a live stream commentary on time.com. Here are six things you need to know about why it matters and what the president should do to address it:

• The American economy is 70 percent consumer spending, and you can’t have a robust recovery in an economy in which the majority of people haven’t gotten a raise in years. Inequality has risen dramatically since the financial crisis; 95 percent of the wealth created since then has gone to the richest 1 percent of Americans. In large part, that’s because the Federal Reserve’s efforts to bolster the economy with lower interest rates and asset buying—in lieu of a better bipartisan stimulus plan from Congress—bolstered the equity markets rather than salaries.

But job and wage growth has been broken since the 1990s. Median family incomes grew very slowly from 1979 to 1999, peaked that year, and have fallen 13 percent since . Bottom line: even though the economy is in “recovery,” it’s still the weakest and slowest recovery of the post World War II era. And if growth isn’t shared more broadly, it’s not likely to get any stronger. After all, there are only so many pairs of jeans and cars and homes that the 1 percent can buy.

• As a consequence of this lack of broad-based demand and other economic issues—public budgets that are unsustainable over the long haul, poor infrastructure and a workforce that doesn’t have the skills required to do the jobs of the future—businesses aren’t investing in America. The latest surveys of big American companies show they plan to grow their investment by only a little over one percent this year. No investment means job creation remains slack, and wages can’t grow.

• The jobs that are being created are exacerbating the inequality effect, since they tend to be at the very top and bottom of the food chain. Six out of ten of the fastest growing job categories in the US are $15 an hour service gigs, like retail clerks and home health care aids. There are plenty of jobs for software engineers and burger flippers in our economy but not much else.

• Technology will only increase the short-term pain. A recent McKinsey Global Institute survey found that 230 million service jobs representing some $9 trillion in salary globally could be transformed by computers—and even lost to humans—by 2025. Bolstering education is the key to keeping up. Harvard academic work has shown that when the quality and availability of education outpaces technology, jobs are created. Unfortunately, that link has been broken since the 1970s.

• That’s why wholesale educational reform has to be a big part of the President’s solution—and not just at the primary and secondary level, but at the college level, too. Each time there’s been a major tech-related period of job destruction (during the Industrial Revolution, for example, or after WW II) we’ve also had major changes in education to accommodate a new workforce. Given that the majority of the 14 million new jobs that will be created over the next decade will require at least an associates’ degree, it may be time to turn four-year high school into a 6-year degree with a stronger focus on science and technology (something the President has already supported).

• But education isn’t a quick fix. It takes years, even decades to pay off. In the short-term, there are other policy fixes that can help reduce inequality, including reforming the tax code to favor savings and investment over debt. These might include bolstering capital gains tax, closing loopholes while lowering the overall corporate tax rate, and offering tax incentives to firms that invest in infrastructure bonds. There’s also much-need reform of corporate compensation so that pay is linked to long-term performance, which would encourage better corporate governance and job creation as well as increasing the minimum wage.

Whatever the economic costs of inequality, the social costs are even greater. Research shows that unequal economies are more fragile and prone to financial crisis and that they have higher levels of social unrest, poor health, anxiety and a host of other problems. Inequality also reduces social mobility—the very foundations of the American Dream—and it’s a voting issue. A new Gallup Poll shows that two-thirds of adults are dissatisfied with wealth distribution in the US. They’ll be listening tonight to hear what the President plans to do about it.

4 comments
KishorShah
KishorShah

Time to levy 5% of MINIMUM ALTERNATE TAX on all assets ( net of specified Super Annuation needs) held by a person or entity with set off the this tax against Income tax.
This will make holding of idle assets expensive and wealth distribution will improve.

JohnDavidDeatherage
JohnDavidDeatherage

Here's a simple first step to ending financial inequality.  Tax all income as ordinary income.  End preferential treatment for dividends, interest, capital gains, etc.  All income (earned and unearned) should be taxed at the same rate.

bryanfred1
bryanfred1

@JohnDavidDeatherage Why?  Corporate profits are already taxed at 35%; the highest corporate rate in the developed world.  Taxing dividends in the top bracket at 20% means that for every dollar of corporate earnings, the Federal government collects $0.55.  The shareholders who are the owners of these businesses see 45% of the profits those companies generate.  That is hardly a modest burden.  Of course if you're in the bottom two brackets, dividends are taxed at 0%.  So is the argument that lower-income earners should be paying higher dividend tax rates?