Inequality vs. Growth is the New Economic Debate

Labor Day has come and gone, taking along with it some of the last vestiges of summer. Gone are wearing white clothes, weekends spent at the pool and prime vacation season. But what should never stray to far from our minds, despite the passing of the holiday in their honor, is the plight of the American worker.

The recession has certainly taken its toll on the average worker. Real hourly wages are down, the number of part-time workers has gone up, the percentage of people in the workforce is low, and unemployment remains high. But statistics, trends and talks of a “new normal” provide cold comfort to a workforce in dire need of a seemingly simple thing: well-paying jobs.

Unfortunately, it’s really not that simple. In fact, politicians really can’t even agree that the lack of jobs is a problem. Rather than address the dearth of jobs, Democrats have adopted a different goal: the elimination of income inequality.

They do have some statistics on their side. In 2012, the top 10 percent of earners took home more than half of the country’s income. Ninety-five percent of the economic gains from the recovery have pooled in the top 1 percent of earners. And between 1979 and 2007, more than 90 percent of households saw their incomes grow more slowly than average income growth.

But simple glances at top-line statistics like these mask the real world picture. For instance, life has certainly gotten much better for those at the top of the income ladder, but that’s different than saying that other Americans are worse off as a result. Indeed, the data paints a different picture. According to a new report from the left-leaning Economic Policy Institute (EPI), incomes from the lowest-earning quintile of workers grew by 29.2 percent after accounting for inflation. Those in the middle firth rose by 19.7 percent.

Moreover, income inequality is much different than personal well being, and that metric is decidedly improved over the past several decades for all income classes.

“Bill Gates is much, much richer than I am,” explains economist Tyler Cowen, “yet it is not obvious that he is much happier if, indeed, he is happier at all. I have access to penicillin, air travel, good cheap food, the Internet and virtually all of the technical innovations that Gates does.”

“By broad historical standards, what I share with Bill Gates is far more significant than what I don’t share with him,” Cowen concludes.

Even if conservative and liberal thinkers could agree on the data, it’s still not clear that they would interpret it the same way. The National Review’s Kevin Williamson writes about a new study on inequality from the aforementioned EPI:

If you would like a condensation of everything that is odd and wrong about the Left’s view of how the economy works, consider this argument from EPI’s report: “If inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.” That is, it should be obviously, exactly backward: If middle-class incomes had been nearly $18,000 higher in 2007, then inequality would not have risen.

The Left sees inequality as a cause of economic facts, not an effect of them. As EPI sees things, inequality is an independent actor, a motive force in world affairs: It is not only a “determinant” of economic conditions but “by far the most important determinant”; it has, under its own steam, “blocked living standards growth for the vast majority”; and it is “the key driver behind stagnant wages for workers at the bottom.”

This leads Democrats to espouse policy ideas like income redistribution and higher minimum wages – “solutions” that will address income inequality, but could hurt economic growth and job creation. Conservatives, on the other hand, see rising income inequality as two separate issues – rising incomes for the wealthy, which is the result of positive things like globalization and technology, and slower gains for lower-income earners, which is the result of negative things like rent-seeking, government cronyism, poor education, and a tax and regulatory structure that inhibits upward mobility.

Fix those and perhaps America’s workforce will have something to cheer about by next Labor Day.