A few years back in graduate school at Oxford, I learned, that we face two types of problems in life. The majority of problems are "tame" -- that is, there are specific solutions in place to address them. A few, called "wicked," are extremely difficult to handle. There are no easy solutions for them, and no one has the ability to solve them alone. These problems require the involvement and participation of many.
Growing inequality in America is indeed a wicked problem!
Growing inequality in America is indeed a wicked problem!
A couple months ago, I wrote a long blog on this subject. While traveling through Europe late in December, I ran into an article posted in the Wall Street Journal by Robert E. Grady, managing director of the private-equity firm Cheyenne Capital Fund and chief economic advisor to Governor Chris Christie.
The article was commenting on the speech by President Obama on the growing inequality in America. In the article, Mr. Grady challenges the President's assertions and assumptions. After reading the article, I concluded that I should include the highlights of his argument in my blog to round out the picture I presented in my previous blog.
Lee Ohanian and Kip Hagopian, in their seminal paper "the Measure of Inequality" (Policy Review, 2011) point out that the Census Bureau's definition of income leaves out taxes, transfer payments such as Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and even costly employee benefits such as health care insurance.
Thus, we are reminded, that "the data conventionally used to calculate the so-called Gini coefficient -- the most commonly used measure of income inequality -- ignore America's highly progressive income tax system and the panoply of benefits and transfer payments."
Thus, we are reminded, that "the data conventionally used to calculate the so-called Gini coefficient -- the most commonly used measure of income inequality -- ignore America's highly progressive income tax system and the panoply of benefits and transfer payments."
Messrs. Ohanian and Hagopian go on to tell us that "once the effect of taxes and transfer payments are taken into account, inequality has actually declined by 1.8% during the 16-year period between 1993 and 2009 when the Gini coefficient dropped from .395 to .388."
In his speech President Obama cited a study by economists from Columbia University to bolster his case. But, this study also found that already enacted benefits and tax programs have reduced America's effective poverty rate by 40% since 1967 -- to 16% from 26%. Mr. Grady points out that this observation makes Ohanian and Hagopian's research more accurate, and less than an outlier.
The Congressional Budget Office (CBO) released a study in October 2011 that came to a similar conclusion. In it, the CBO study picked an artificial starting point of 1979, amid a a crushing period of stagflation. Yet it showed that family income, including benefits, on average, experienced a 62% gain above inflation from 1979 to 2007. It also showed that all five quintiles of the income distribution spectrum experienced real gains in family income. This study seems to contradict President Obama's claims during his 2008 run for the presidency that the middle class was "falling behind."
The real concern, it seems, is that some people were getting too far ahead.
Longitudinal studies conducted by the Treasury Department have found that there was "considerable income mobility" in the decades 1987-1996 and 1996-2005. Roughly half of those in the bottom income quintile in 1996, for example, had moved to higher quintile by 2005.
So what is the bottom line, according to Mr. Grady?
In periods of high economic growth such the 1980's and the 1990's, the vast majority of Americans gain, and have the opportunity to gain. In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed.
In periods of high economic growth such the 1980's and the 1990's, the vast majority of Americans gain, and have the opportunity to gain. In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed.
If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth -- not income inequality or the redistribution of wealth -- is the defining challenge of our time. This is the conclusion Mr. Grady makes.
What do you think?
