Robert Samuelson February 2, 2014

Unless you are exceptionally coldblooded, it’s hard not to bedisturbed by today’s huge economic inequality. The gap between the richand the poor is enormous, wider than most Americans would (almostcertainly) wish. But this incontestable reality has made economicinequality a misleading intellectual fad, blamed for many of ourproblems. Actually, the reverse is true: Economic inequality is usually a consequence of our problems and not a cause.

For starters, the poor are not poor because the rich are rich. Thetwo conditions are generally unrelated. Mostly, the rich got rich byrunning profitable small businesses (car dealerships, builders),creating big enterprises (Google, Microsoft), being at the top oflucrative occupations (bankers, lawyers, doctors, actors, athletes),managing major companies or inheriting fortunes. By contrast, the verypoor often face circumstances that make their lives desperate. In an interview with the New Yorker, President Obama recently put it this way:

“[The] ‘pathologies’ that used to be attributed to the African-Americancommunity in particular — single-parent households, and drug abuse, andmen dropping out of the labor force, and an underground economy — [arenow seen] in larger numbers in white working-class communities.”

Solutions elude us. Though some low-income workers would benefitfrom a higher minimum wage, most of the very poor would not. They’re not in the labor force; they either can’t work — too young, old, disabledor unskilled — or won’t. Of the 46 million people below the government’s poverty line in 2012, only 6 percent had year-round full-time jobs. Among men 25 to 55 with a high school diploma or less, the share withjobs fell from more than 90 percent in 1970 to less than 75 percent in2010, reports Ron Haskins of the Brookings Institution. For African American men ages 20 to 24, less than half were working.

It’s also not true that, as widely asserted, the wealthiest Americans (thenotorious top 1 percent) have captured all the gains in productivity and living standards of recent decades. The Congressional Budget Officeexamined income trends for the past three decades. It found sizable gains for all income groups.

True, the top 1 percent outdid everyone. From 1980 to 2010, theirinflation-adjusted pretax incomes grew a spectacular 190 percent, almost a tripling. But for the poorest fifth of Americans, pretax incomes forthese years rose 44 percent. Gains were 31 percent for the secondpoorest, 29 percent for the middle fifth, 38 percent for the next fifthand 83 percent for the richest fifth, including the top 1 percent.Because our system redistributes income from top to bottom, after-taxgains were larger: 53 percent for the poorest fifth; 41 percent for thesecond; 41 percent for the middle-fifth; 49 percent for the fourth; and90 percent for richest.

Finally, widening economic inequality is sometimes mistakenly blamed for causing the Great Recession and the weak recovery. The argument, as outlined by two economists at Washington University in St. Louis, goes like this: In the 1980s, income growth for the bottom95 percent of Americans slowed. People compensated by borrowing more.All the extra debt led to a consumption boom that was unsustainable. The housing bubble and crash followed. Now, weak income growth of thebottom 95 percent “helps explain the slow recovery.”

This theory is half right. An unsustainable debt boom did fuel an unsustainable consumption boom. From 1980 to 2007, household debt rose from 72 percent to 137 percent of disposable income. Consumption spending jumped from 61 percent of gross
domestic product (the economy) to 67 percent for the same years, a huge shift. These increases could not continueindefinitely. But growing inequality didn’t cause these twin booms. Just because households wanted to borrow didn’t mean lenders had to lend.They lent, signifying relaxed credit standards, because they thoughtthat the risks had dropped.

Optimism seemed justified. Beginningin the 1980s, inflation fell, reducing interest rates. Lower interestrates raised stock prices and home values. People felt wealthier and, on paper, they were. Buoyant consumer spending kept the economy advancingand unemployment low. Recessions were mild and infrequent. Economistscalled this the Great Moderation. Its complacency led directly to theGreat Recession. The boom and bust had little to do with economicinequality.

Americans in the top 1 percent are convenientscapegoats. They don’t naturally command much sympathy, and theirrewards sometimes seem outsized or outlandish. When most people are getting ahead, they don’t worry much about thiseconomic inequality. When progress stalls, they do. There’s a backlashand a tendency to see less economic inequality as a solution to allmanner of problems. We create simplistic narratives and imagine thatpunishing the rich will miraculously uplift the poor. This vents popular resentments, even as it encourages self-deception.

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