Four reasons why Obama can’t do much about income inequality

President Barack Obama delivers the State of Union address on Tuesday. (AP Photo/Larry Downing)
President Barack Obama delivers the State of Union address on Tuesday. (AP Photo/Larry Downing)

Income inequality is the hottest topic in a frozen Washington these days. In his State of the Union address, President Obama lamented that “inequality has deepened” and “economic mobility has stalled.”

He highlighted the growing disparity between the fortunes of the few and the misfortunes of the many: “Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged.”

Those are what we call true facts. The typical household makes the same amount this year, about $50,000, as it did a generation ago, while the share of income going to the top ten percent is higher than it’s been in a century.

While Obama should be commended for drawing attention to the twin problems of income inequality and social immobility, he realistically can’t do much about them, so he shouldn’t get tied up in knots over them.

Here are four reasons why.

1. The United States is a “Great Gatsby” country where the rich stay rich and the poor stay poor

A couple of years ago, Alan Krueger, who was then Obama’s chief economist, created the “Great Gatsby curve” that showed how the American economy has become one where the privileged few remain the privileged few. There’s not just a huge gap between those at the top of the income distribution and those at the bottom. It’s really hard for those at the bottom of the income distribution to move to the top.

From 1979 to 2007, according to Krueger’s calculations, the inflation-adjusted after-tax income of the top one percent nearly quadrupled while income for the middle 60 percent didn’t even come close to doubling. As Krueger explained, if the rungs on a ladder represent income distribution, those rungs have grown further apart over the past thirty years.

Income inequality has troubling consequences. As Krueger, who has now returned to Princeton University, said, “Inequality in incomes is causing an unhealthy division in opportunities, and is a threat to our economic growth.”

All that is true. But, there’s one thing to think about in considering those at the tippy top. This growth partly reflects the winnings of a few doing things that we want them to do —consider Google, Facebook, LinkedIn and Twitter — and isn’t something that should be discouraged.

As Harvard professor Larry Summers said at last week’s World Economic Forum, “America succeeds by raising everybody up. It doesn’t succeed by tearing anybody down.”

2. Winning the “birth lottery” is the biggest factor in determining your place in the income distribution

Obama believes that “in America, our success should depend not on accident of birth, but on the strength of our work ethic and the scope of our dreams.”

Unfortunately, the most recent research shows that the “birth lottery” — being lucky enough to have successful parents — is the most important factor in explaining social mobility.

This rather sober conclusion comes from an impressive study by a group of really sharp economists led by Raj Chetty of Harvard who evaluated confidential tax data on 50 million people born between 1971 and 1986. These economists found that the poorest young adults entering the job market today under Obama’s presidency are no more likely to join Eric Schmidt, Bill Gates, and Mark Zuckerberg at the top fifth of the income distribution than the same low-income kids who were born when Richard Nixon was president.

To put those chances in perspective, a low-income kid is as likely to move from the bottom to the top as the Washington Nationals are to win the World Series this year.

Again, these are long-term trends that one president can’t do much about.

3. Because more and more highly-educated people are marrying other highly-educated people, it’s harder and harder for those with less education to move up the ladder

Marriage is one of the unexpected causes of the growing income gap. Research from a team of international economists led by Jeremy Greenwood at the University of Pennsylvania found that a common measure of income inequality (known as the Gini index) is about 30 percent higher than it would otherwise be if better-educated people randomly married other people instead of marrying people with similar levels of education.

What this means is that income inequality has grown worse over time partly because highly-educated people are marrying other highly-educated people.

That’s a contrast with the old days when men with a college degree would marry a woman with a high school degree and pull her up the income distribution. Those kinds of “mixed marriages” are becoming rare. The more common marriage today is one like the Obamas’. People like the president, who has degrees from Columbia and Harvard, are more likely to marry people like Michelle Obama, who has degrees from Princeton and Harvard, than to marry someone who doesn’t have a college degree. Since income is very strongly correlated with education, these marriages aren’t helping reduce income inequality.

One reason for the phenomenon, of course, is that more and more women are going to college. That’s certainly not something anyone would like to discourage just to make the income distribution more equal.

4. It’s harder and harder for low-income Americans to become highly-educated because college is getting more and more expensive

The president has repeatedly used his State of the Union address to focus on the high cost of a college education. Two years ago, he said, “When kids do graduate [from high school], the most daunting challenge can be the cost of college.” Last year, he said that “skyrocketing costs price way too many young people out of a higher education, or saddle them with unsustainable debt.” This year, he seeks to “reduce inequality in access to higher education and to help every hardworking kid go to college and succeed when they get to campus.”

Yet, college is becoming an impossible dream for more and more students.

Since Obama became president, the amount of money a student must pay out of pocket just for tuition at a public four-year institution has risen from $1,940 to $3,120, according to data from the College Board. Tuition and fees, of course, are only part of the cost of a year of college. A student must eat, sleep and study, meaning that the typical student must find another $9,500 for room, board and books, leaving that student $12,620 short of covering one-year in college.

Students are even worse off from a financial point of view at the four-year private institutions that train many of America’s elite. If a student wishes to join the elite, he or she better be able to find an extra $23,290 to cover tuition, room, board and books every year.

You don’t need a college education to do the math and figure out that a household making about $50,000 a year probably can’t afford to spend nearly one-fourth of that income for a year of public education, or half of that income to attend a private institution.

Keeping college costs down and pushing wages up are admirable goals.  Yet, the president can’t do much here without the help of college presidents and a change to the structural problems that are keeping the typical American family’s income so low.

 

Joann Weiner teaches economics at George Washington University. She has written for Bloomberg, Politics Daily, and Tax Analysts and worked as an economist at the U.S. Treasury Department. Follow her on Twitter @DCEcon.
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