WASHINGTON, August 5, 2014 – Rating Agency Standard & Poor’s published a study today saying empirical evidence suggests that widening income inequality is reducing economic growth. They note that since 1913, the income of the very wealthy has increased by a factor of seven while it increased by a factor of 3 for the remaining workers.They note that this growing income gap slows economic growth.
The data suggests they are right. But how should government policy react to this?
It is interesting to note that the comparison by S &P begins in 1913, the year that the progressive federal income tax was passed. The progressive tax meant that as income increases the tax rate increases, so that the wealthy pay a higher rate than those earning less income.
The thought was that this would raise revenue for the government while refraining from causing economic harm to the average worker as well as reducing income inequality. It appears that the results were the opposite.
The current administration’s solution to this is to raise the taxes on the wealthy and increase transfer payments from social programs to those at the lowest income level. This should reduce income inequality, they reason.
Again, the result is exactly the opposite, as income inequality has worsened.
S & P notes that high taxes on business tends to cause business to hire fewer workers which worsens income inequality. Because the Affordable Care Act essentially taxes small business, job creation is meager.
Although we have had many consecutive months of positive job creation, the number of jobs actually created is very low. During past recoveries the economy typically added 300,000 to 400,000 jobs per months.
After the 1981 recession there were two months where the economy created about 1 million new jobs.
The administration wants to raise the minimum wage in an effort to help raise the income of the lowest income earners. This too will make income inequality worse. While it is true that those with minimum wages jobs will see an increase in wages, there will be a large number of jobs lost as business simply will not hire a worker who produces $7 an hour worth of output when the government says this worker must be paid $10 per hour.
Even at today’s minimum wage the unemployment rate for teenagers exceeds 20% and will worsen as the minimum wage is raised.
S & P also notes that more education usually translates into higher wages.
Yet we have a primary education system that is extremely costly due to disproportionately high wages of teachers and overall poor performance.
By reducing the cost through wage moderation and improving the quality of teaching, those in the lowest income classes can “educate their way out” as many of our civil rights leaders have noted. Most wealthy people got there because they made substantial contributions to the economic system.
Therefore, the way to reduce income inequality is not by taking from those who have earned it and giving to those who have not, but rather by allowing those that earn it to keep most of what they earn and by giving the opportunity to all Americans to make significant contributions to earn income themselves.
The current administration is implementing policies that appear aimed at reducing that inequality, while actually exacerbating the problem and hobbling America’s economic growth.