American Income Inequality: A Debate-Interview with Jason Russell from the Manhattan Institute

This article was originally published in The Daily Pulp on September 22, 2014.

One need only watch a bit of cable news to appreciate that the American political left and right have starkly different views regarding economics, particularly in regard to inequality, taxation, and the attitude of government toward business. Outside of the vacuous punditry of the airwaves, though, conservative and liberal activists conduct tremendous amounts of research to defend and articulate their divergent economic views. Toward that end, the Manhattan Institute for Policy Research, a prominent conservative think-tank, released a major report in May called Income Inequality: Fact and Fiction.

Jason Russell has been a Research Associate at the Manhattan Institute for Policy Research since December 2013. He helped to edit Income Inequality for publication. In this article, Jason, a young conservative and fellow traveler of the Tea Party, and our own Dan Gorman, a young liberal, half-interview, half-debate each other about their differing economic views.

Income inequality and the report of the same name provide a starting point, but the participants are allowed to branch out and consider related issues of economics & politics.

JASON’S OPENING STATEMENT

Jason Russell, Manhattan Institute
Jason Russell, Manhattan Institute

Above photo archived from: http://the-daily-pulp.com/wp-content/uploads/2014/09/Jason-Russell.jpg

In May, Economics21, a center of the Manhattan Institute for Policy Research, published an issue brief on inequality. Income Inequality in America: Fact and Fiction shows that much of American public opinion on income inequality is incorrect. Manhattan Institute Senior Fellows Scott Winship and Diana Furchtgott-Roth, along with other leading economists, debunk common misconceptions about the wealth gap and provide a fact-based analysis of America’s income inequality debate.

Despite widespread claims that inequality is the issue of our time, evidence shows there is little cause for alarm. Although income concentration has risen in the past, it was not at the expense of the lower and middle classes. Incomes among the bottom quintile rose one-third from 1979 to 2007 when income concentration was also rising. Rising inequality also does not harm economic growth, as shown by at least three studies published by the liberal Center for American Progress. Other studies show greater inequality actually correlates with increased economic growth, although it is more likely that greater inequality is the effect, not the cause.

It is important to remember that incomes change over the course of a lifetime. As Gerald Auten of the U.S. Treasury writes in the issue brief, “Incomes are typically lowest for people in their first jobs, rise with seniority and promotions, and then decline after retirement.” Too often, income is thought of as static. Auten looked at mobility between income quintiles, and found that more than 46 percent of those who were in the lowest income quintile in 1996 rose to a higher quintile within 10 years.

Should Americans be more concerned about inequality or mobility? An income gap will always persist, but we should ensure that anyone born in the lower or middle class can have the opportunity to rise to the upper class. Scott Winship examines absolute mobility, which compares an adult’s income to how their parents did at the same age, after accounting for inflation. Eighty-four percent of people aged 40-49 today have a higher family income than their parents did at the same age. For the bottom fifth of income earners, this figure is even higher, at 93 percent.

Inequality is still a legitimate concern for some, but these facts should give the concerned something to celebrate.

DAN’S REBUTTAL

Dan Gorman, Daily Pulp.
Dan Gorman, Daily Pulp.

Above photo archived from: http://the-daily-pulp.com/wp-content/uploads/2014/09/DG.jpg

As a historian with a minimal math background, I can’t fully critique the statistical economic data presented in the Manhattan Institute report, Income Inequality: Fact and Fiction. Still, with pre-tax income inequality at its highest since 1928, I think the Manhattan report has a number of flaws, so it is wrong to dismiss income inequality as a minor problem. Besides, regardless from what I have to say, there are quite a few economists who disagree the Manhattan claim that income inequality doesn’t hurt growth. Notably, the International Monetary Fund – itself not exactly a bastion of liberal economics – released a report this past February concluding that high income inequality indeed hurts national economic growth.

The Manhattan report says that relative mobility between economic groups has decreased – in other words, the poor tend to stay poor, and the rich tend to stay rich (Income Inequality, pgs. 20-21). However, the report (like Jason in the last section) also describes absolute mobility – that is, current economic status compared to that of past generations. In this light, the lowest income brackets are actually doing much better than their equivalents in the past. To this, I say: It’s nice that income brackets have more cash than their equivalents did a couple decades ago, but we have to consider the state of the economy today. (Yes, I appreciate the irony of a historian saying to ignore history.) Even if each bracket today has more absolute mobility, people in lower income brackets are still struggling to make ends meet, and poverty is rising – points that economists atStanford University recently summarized in their own inequality report. Given the problems of this post-recession economy, better absolute mobility isn’t really something to celebrate.

The Stanford report also concludes that the government’s social services prevented poverty from swelling to even higher levels after the recession. It is clear from the Stanford report that social services like Medicare, Medicaid, and food stamps are essential initiatives. Without these services, low-income Americans would truly struggle to survive, and relative economic mobility in America would be even worse than it currently is – facts that Income Inequality neglects to mention.

Meanwhile, the introduction to the Manhattan report says that social services give low-income Americans extra buying power, whereas high taxes cause the upper brackets to lose income and buying power. Essentially, the Manhattan report implies that the rich aren’t really so rich, the poor aren’t so poor, and taxes are too high on the rich, giving the poor an unfair advantage in the economy. However, the Manhattan report is based on the flawed assumption that rich people in America are overly taxed – persecuted by taxes, even. In truth, the richer Americans, even with just the money left after taxes, can still buy more than people in the bottom strata. It’s very misleading to criticize social services for giving the poor extra buying power, thereby implying that poverty isn’t a serious problem. It’s also misleading to argue that slightly less buying power for the rich means that the rich will struggle to survive.

The people at the top don’t need an extra helping hand, whereas the people at the bottom do. Overall, I think welfare reduces income inequality by supplementing low-income Americans’ salaries and shrinking the gap between the lower and upper brackets. In contrast, the conservative line of thinking seen in the Manhattan report contends that (A) upper-income Americans are taxed way too much, and (B) welfare increases income inequality by giving the poor too much buying power in comparison to the rich. If we follow the Manhattan report to its logical implications, then the report is saying the current state of extreme inequality is acceptable. I refuse to believe that it is acceptable.

Finally, there is a historical problem linked to income inequality. Even if the folks at the Manhattan Institute are correct that income inequality doesn’t hurt economic growth, disparities in wealth historically have inspired tremendous envy and resentment, paving the way for armed conflicts. For this reason, income inequality in America needs to be addressed.

THE BATTLE OF ECONOMIC PHILOSOPHY

DG: Well, Jason, we certainly seem to have a difference of opinion!

JR: Indeed we do, but that’s what makes discussion fun. There are a few things we actually agree on, namely that the post-recession economy is weak. However, I’m sure we would still disagree on the causes and most effective prescriptions.

In any case, I want to focus on your claim that income inequality hurts economic growth. For liberals, this argument is incredibly important to their cause. We know that higher taxes alone hurt the economy and job creation. If your claim is true, then high taxes can reduce inequality and the resulting economic growth could offset the negative economic effects of punitive tax rates.

Alas, it is not true that higher inequality hurts economic growth. One mistake that both the IMF and Standard & Poor’s have made in the past is concluding that inequality harms economic growth in developing countries, and then extending that conclusion to the wealthy, modern, and completely incomparable democracies of Europe and the United States. Especially when discussing economic policy in the United States, it makes more sense to compare only developed economies. Christopher Jencks, a professor at Harvard’s Kennedy School of Government, conducted a study in this manner and found no relationship between inequality and economic growth in the long-term.

I’m not arguing that higher inequality helps the economy and economic policy should seek to widen the gap, just that higher inequality is not holding the economy back.

DG: And I can come back at you with an S&P report that, yes, inequality hurts growth. Jason, what’s striking about this exchange is that we have not only our own assumptions and basic premises about economics, but also completely different sets of data and analysis. Senator Daniel Moynihan once quipped that you can’t have your own facts; now, it seems, you can.

I’m curious if you see any room for bridging these divergent economic worldviews in the policy arena. Because how are we going to run this country if we can’t assemble a shared understanding of the economy?

JR: JR: I believe that was the very same report I was critiquing . In any case, it’s a positive sign that we’re seeing such a wide variety of data and analysis. It shows a broad diversity of opinion, which is healthy in such a populous democracy. It also shows that inequality is a relevant issue and that our research methods have advanced significantly over time. None of these data used to be so widely available, and now research has progressed to the point where we can debate which data are most accurate. As research advances over time, we will have better conclusions over to what extent inequality is an issue and which solutions will be most effective. Politically, as with every issue, this will come down to which side can make the most persuasive argument to voters. Our federalist system of government will be helpful here: even if the federal government remains gridlocked in future Congresses, inequality is an issue that we will see play out at the state and local level. When it comes to various policies that affect inequality and well-being – minimum wages, tax rates, welfare, etc. – state and local governments are more effective than the federal government at serving constituents. That’s the beauty of federalism.

DG: Well, this speaks again to fundamental differences in our political thought. You have faith that local governments can solve things, and certainly I don’t deny that can be the case. Until the conservative austerity turn in recent years, Wisconsin was called a laboratory for democracy. But I do think there needs to be national action on inequality; I’m convinced it’s too big a problem for small polities to solve on their own. The small polities will have to do a lot of the hard work, but there needs to be national action.

Then again, you may be right – localities may be forced to make their own solutions if DC stays gridlock[ed]. Still, I’m glad we’re having this conversation. Look how anger over income inequality exacerbated the Ferguson riots. This issue of inequality and people’s perceptions of it are not going away soon.

JR: I’m wondering whether or not you approve of Paul Ryan’s Opportunity Grants proposal. [Just Chapter 1: http://budget.house.gov/uploadedfiles/expanding_opportunity_in_america.pdf%5D It seems to be a compromise between both of our positions on poverty. The federal government still maintains control over how much each state spends on food stamps, Temporary Assistance for Needy Families, and nine other programs. However, states would have flexibility over different methods of distribution, accountability, and eligibility for the programs. It empowers leaders to implement the solutions that would work best for their state or locality. The proposal also takes advantage of the laboratories of democracy and would show which methods are effective and should be replicated in other states. Regardless of its legislative potential, Opportunity Grants would create innovative anti-poverty solutions without cutting welfare.

DG: Again, mixed feelings here. On the one hand, when I hear “states would have flexibility,” I think of Democrats using the funds (probably in mixed-up ways, but still putting the money to work) and Republicans opting not to use the funds. So generally I’d want a national plan on how inequality is going to be addressed. But on the other hand, D.C. is paralyzed, and it looks like it’ll stay that way for the near future, so I can see why smaller communities need to be empowered. It’s a real conundrum.

I also think reports of Paul Ryan’s economic genius are grossly exaggerated to the point of parody. Still, there are a few good ideas in the Opportunity Grants idea, mostly that the national government will require documentation from the states that the money is “used to move people out of poverty” (pg. 15 of the Ryan report).

So maybe we do have a little agreement here. But in terms of reframing the tax system and other really big, institutional changes, I don’t see us hashing out policy easily.

JR: While it’s difficult for you and I to agree on policy specifics, we can at least agree on policy goals. Economic reform should focus on making every American better off, particularly on bringing the impoverished up. There is no justification for bringing the wealthy down for no good reason. We both think everyone should have the opportunity to achieve the American Dream – to start at the bottom, work hard throughout your career, and make it to the top.

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