More than anything, President Obama wants to fight inequality. As my colleague Zach Goldfarb has reported, that's become the president's major priority for his second term. To that end, he's pushing hard to raise top marginal income tax rates back to where they were under Bill Clinton. But House Republicans have made it clear that they won't have that, even if they concede that more revenue is necessary.
There are ways for both sides to get what they want. One thing neglected by many debates about tax rates on the rich is that there is substantial inequality in the United States even before taxes. According to the OECD, the Gini index — the standard measure of income inequality — in the U.S. before taxes is 0.486. That's less than Britain, Germany, and Italy, and on a par with France, but well above more egalitarian countries like Sweden, Denmark, Canada, or the Netherlands.
That's not an accident. There are policies that the U.S. can pursue that would reduce inequality even before you take taxes into account. If implemented, they could accomplish Obama's goals without running afoul of GOP views on taxes.
1. Make it easier to start and join unions.
Scholars of comparative political economy generally agree that countries with higher union density tend to have less inequality. There are a lot of reasons for this. For one thing, countries with high union membership are likelier to have left-leaning governments, and consequently generous transfer policies that reduce inequality. But even before the government gets involved, there is a correlation, as unions bargain up wages for lower and middle-income workers, which also reduces inequality.
So one way to reduce inequality going forward would be to make it easier for workers to start and join unions, perhaps by passing the Employee Free Choice Act, a bill designed to reduce tampering by management in union elections that, but for the filibuster, would have passed Congress in 2009-2010. One study, admittedly from a pro-union source, suggested that the bill would have increased union density by about 10 percentage points, a near doubling.
Republicans are likely to be loath to support a policy measure that serves to strengthen Democrats' political coalition, and that antagonizes big business. But it's a way to cut inequality without tax hikes nonetheless.
2. Weaken the dollar.
Most trade models suggest that while increased trade improves welfare in all countries affected, it tends to increase inequality in developed countries, because its primary losers are low-skill workers in rich nations. By contrast, it reduces inequality in poor countries, as its primary beneficiaries are the extreme poor in developing nations. This makes intuitive sense if you imagine, say, a textile factory moving from North Carolina to China. That hurts low-skilled textile workers in North Carolina, increasing inequality in the U.S. on the margin, but helps low-skilled Chinese workers, decreasing inequality there on the margin.
That suggests that one way to reduce inequality in the U.S. would be to discourage imports from countries with cheap unskilled labor, such as China. Perhaps the best way to do that is to devalue the dollar, which makes U.S. exports cheaper and imports more expensive. Dean Baker, a notable advocate of a weaker dollar on these grounds, has suggested doing this by penalizing countries that buy up U.S. currency, by trading in futures for other currencies, or by paying higher than the asking price for foreign currencies. All of these moves would make the dollar less expensive, and promote U.S. exports.
On the flip side, those moves would likely increase poverty in the developing world by hurting countries with export-heavy industries. For example, the Chinese manufacturing sector would likely suffer considerably, greatly increasing extreme poverty in that country.
3. Promote trade in highly-skilled professions
Discussion of the effects of trade and immigration tends to focus on the impact of low-skilled workers who either produce goods abroad for the U.S. market or come to the U.S. and provide services for less than the wages demanded by native-born workers. That impact is, as one would expect, largely negative, insofar as Chinese workers can manufacture goods for less than U.S. workers, and low-skilled immigrants can provide cheaper farm and household labor than U.S. workers can.
But there's no reason why the same kinds of disruptions can't occur in higher-skilled professions. As Baker has noted, there are reforms the U.S. could enact to remove barriers to entry for foreign-born doctors, lawyers, and tech professionals. We could be more accepting of foreign licensing standards, for instance, increase or eliminate immigration quotas, or eliminate the requirement that incoming workers already have a job that pays the "prevailing wage" in the industry.
These moves would push down wages for doctors and lawyers in the U.S., which would not just save programs like Medicare a lot of money, but would reduce prices for all workers across the board. More importantly, it would even the playing field between the low-skilled workers currently being hit by trade and high-skilled workers who are largely protected from its effects.
4. Force the Fed to get serious about unemployment.
Traditionally, the Federal Reserve has been borderline obsessed with its mandate to ensure price stability. Even in statements on looser money, such as the announcement of QE3 this past fall, it makes clear that the policy is to be undertaken "in a context of price stability".
Inflation, taken to an extreme, is bad for everyone, especially the poor, who are particularly damaged by price increases. But it's always bad for creditors, and can actually be good for debtors. That is, it hurts the wealthy and those in the financial sector , while helping lower-income people who are in debt. That's a progressive impact.
More to the point, there is often a direct tradeoff between the Fed's desire to maintain low inflation and its desire to promote full employment. When it errs on the side of keeping inflation low, as it has lately, that helps wealthy lenders at the expense of the poorer unemployed. Adopting a policy like NGDP targeting, which would allow higher inflation for the sake of faster growth (and thus lower unemployment), could reorient Fed policy to benefit lower-income workers. Congress could even legislate an NGDP target that the Fed would be required to follow, as Columbia's Michael Woodford has suggested.
5. Reform IP law — especially for medicine.
Movies, books, music, medicine, smartphones, software: these are a handful of things that only cost as much as they do because the federal government has decided to use intellectual property law to grant certain companies monopolies on certain kinds of content. It's intuitive that without patents preventing, say, Samsung from using the same kind of multitouch technology as Apple, smartphones would be cheaper because companies could just copy each others' designs.
Defenders of the current system argue that cracking down on patents and copyright this way would discourage creativity and innovation. It's not clear that's true. A study from the St. Louis Fed that Brad wrote about recently argued that there is "weak or no evidence" to support the conclusion that patents promote innovation. And even if one concedes that patents promote innovation, that has to be weighed against their extreme costs.
Pharmaceutical patents alone cost patients $230 billion a year, Baker tells me in an e-mail. We spent $277 billion on drugs this year, whereas if every prescription commanded the non-protected generic price of $10 (more than many pharmacies charge) that number would fall to $37 billion. Meanwhile "patent trolls," or companies that exist solely to buy up and enforce patents on stuff other people invented, have cost the economy $500 billion since 1990.
Reforms could change this situation, lowering costs for consumers while maintaining incentives to innovate. For example, Republican House staffer Derek Khanna has suggested changing copyrights so that they only apply for a 12-year term which one must pay to renew, with each renewal costing more and an absolute maximum term of 46 years. Compare that to the current system, which protects copyrights for a staggering 70 years after the death of the author, for free no less. That would lower prices on copyrighted material, to the benefit of low-income people who currently have to choose between quasi-legally downloading material or paying exorbitant amounts for it.
Sen. Bernie Sanders has introduced a bill, supported by Nobel-winning economist Joe Stiglitz and copyright expert Larry Lessig, that would replace the medical patent system with government-issued prizes for medical innovation, a change that would dramatically reduce drug prices. That disproportionately helps low-income people who have trouble affording new treatments.
6. Relax licensing rules.
One major barrier of entry to certain professions are state-enforced rules forcing people to take classes and pay licensing fees in order to perform jobs like barbering, as Matt Yglesias has repeatedly noted. A study from the libertarian-leaning Institute for Justice found that 102 low and middle-income professions require occupational licenses for entry. Those licenses, on average, require nine months of education, $200 in fees, and at least one exam. A third of those jobs require over a year of training. You can see a ranked table of professional by the burden of licensing regulation here.
Eliminating or relaxing those rules would make it easier for low-income people to enter well-paid professions. For example, replacing mandatory state-run licensing with voluntary, third-party licensing would be a welcome step. As IOJ notes, that system appears to work well with auto mechanics. Moves like that would promote low and middle-class wages and reduce prices for consumers, a boon for economic equality all around.
7. Ease up on zoning restrictions.
One of the primary expenses for most families is housing, and many local regulations artificially increase the cost of rent and of owner-occupied housing. A great example is the D.C. Height Act, which by limiting the height of building makes it impossible to build big, high-occupancy apartment buildings like those in many other cities. That reduces housing stock, which increases rents.
The Height Act is an especially egregious example, but more mundane regulations can drive up costs. For example, Ed Glaeser at Harvard has argued that even Manhattan, one of the most densely populated areas in the world, probably has too few apartments because of regulations like "historic districts" that prevent new building in popular neighborhoods like Greenwich Village. Easing up regulations like these would reduce housing costs, which would overwhelmingly benefit low-income people and reduce inequality.
8. Increase transfers.
There's an old joke that the main cause of poverty is people not having enough money. So one obvious solution to inequality is to not just tax the rich more than the poor, but to pay more out to the poor than to the rich. This is what most countries in Europe do. Recall the start of this post, when I mentioned that Germany and Britaain have more inequality before taxes and transfers. Remarkably, both of those countries have more regressive tax codes than the U.S. And yet their after-tax/transfer inequality is much lower than in the U.S. What gives?
The answer, of course, is that those countries all have much more generous social insurance and benefit programs than the U.S. does. For example, the conservative government currently in power in Britain has enacted a £26,000 (or $42,000, not too much lower than the U.S. median household income) cap on welfare benefits. It's impossible to imagine a U.S. family getting anywhere near that much in benefits.
A program like a guaranteed minimum income that greatly increased transfers toward the poor, or more modest policies like expanded food stamps or a bigger Earned Income Tax Credit, could move the U.S. toward most developed countries' levels of redistribution, without raising taxes. Perhaps more than the above policies, this is something you could imagine being incorporated in a fiscal cliff deal.
9. Fund early childhood education.
So far this post has largely focused on inequality of outcomes, or the difference in actual economic conditions for families. But that inequality arises out of a more fundamental inequality of opportunity. People from poor families, or in disadvantaged ethnic groups, have a harder time attaining a middle-class living than their peers from more privileged backgrounds.
That's why some analysts, most notably Nobel-winning economist James Heckman, have argued that the U.S. should invest much more in early childhood education programs. Those greatly improve both cognitive skills like arithmetic and reading, which are important for getting a high-skilled, good-paying job, as well as non-cognitive skills like punctuality and social etiquette that are arguably equally important.
10. Get the lead out
It's hard to overstate how important the removal of lead from household paint and gasoline has been in recent decades. There's something approaching a consensus that deleading is responsible for the majority, if not the vast majority, of the decline in crime rates since the 1970s. One study says that 90 percent of the decline is attributable to deleading.
It's not just crime. Much of the decline in teen pregnancy can be chalked up to deleading, and school performance is highly correlated with lead exposure. Even lead amounts below the so-called "safe" amount can reduce IQ by about 7 points. Lead is just a very dangerous chemical, one that hinders judgment in all manner of contexts.
We've done a pretty good job deleading, but the effort is by no means done. Many communities, primarily poor ones, still have buildings with lead pipes or lead-based paint. Children in such communities are liable to be exposed to crime, which leads to aggressive and cognitive/academic difficulties, to teen pregnancy, to commit crimes themselves, and to have lower cognitive functioning.
All of those reduce their lifetime earnings, and contribute to economic inequality. A more aggressive deleading effort would probably improve the economic prospects of children who otherwise would have been exposed, and in doing so reduce inequality.