Pick your problem: Unemployment or income inequality

December 13, 2013

It’s increasingly clear that the organizing economic concern of the American left is — or is becoming — income inequality. It’s the issue that led protestors to occupy New York’s Zuccotti Park in 2011. It’s the anxiety that powered Bill de Blasio’s campaign for mayor of New York. Last week, President Obama called it — and the decline in social mobility it heralds — “the defining challenge of our time.”

Income inequality is easy to worry about. It offends our moral intuitions. It tears into the fabric of the American dream. “That we’re all created equal is the opening line in the American story,” Obama said. “And while we don’t promise equal outcomes, we’ve strived to deliver equal opportunity.”

Those who aren’t unnerved by the datum that the income share of the top 1 percent has shot from about 10 percent of the country’s total in 1980 to more than 20 percent today can worry instead about inequality’s attendant consequence: declining social mobility. As Obama said, “A child born in the top 20 percent has about a 2-in-3 chance of staying at or near the top. A child born into the bottom 20 percent has a less than 1-in-20 shot at making it to the top. He’s 10 times likelier to stay where he is.” America now has less social mobility than countries such as Canada, Germany and France.

But is inequality really the country’s most pressing problem? Imagine you were given a choice between reducing income inequality by 50 percent and reducing unemployment by 50 percent. Which would you choose?

Some argue that that’s a false choice: Joblessness is a consequence of inequality, and vice versa. The popular mechanism here is that inequality puts money in the hands of people who don’t spend it, and so the economy is suffering from a persistent demand shortfall. Cure inequality, and you’ll solve many of the economy’s other problems, too.

Economist Jared Bernstein has been worrying about inequality since way before worrying about inequality was cool. But in a careful paper released on the same day as Obama’s speech, Bernstein found that there wasn’t strong evidence for the idea that inequality is weakening demand — or for any of the other theories tying inequality to a weaker economy. There “is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth,” Bernstein wrote.

That doesn’t mean inequality isn’t hurting growth. It just means it’s difficult to find firm proof of it. But if inequality really was the central challenge to growth, would proof really be so hard to come by?

Meanwhile, evidence of joblessness and weak growth are pervasive. In a startling speech before the International Monetary Fund, Larry Summers ranged over the past few decades of U.S. economic history and wondered whether the country’s growth machine was so fundamentally broken that adequate demand required credit bubbles.

Today, as Summers notes, the economy seems mostly back to normal — but joblessness is still endemic. Growth simply isn’t producing enough jobs. This is a more severe and more urgent problem than inequality. Moreover, fixing it is necessary, though not sufficient, to making real headway against inequality.

This type of unemployment is, however, a harder problem to mobilize a political coalition around. It doesn’t offend our moral intuitions so much as confuse them. Someone making $85,000 annually can look at the incomes of the top 1 percent and be angry and scared. We can hear that Germany has more social mobility than the United States and be offended.

But the plight of the long-term unemployed and the economy’s stubborn refusal to generate catch-up growth are more abstract concerns to someone with a good job. It’s harder to build a political movement around the intense pain of the few than the more generalized anger of the many.

It’s fair to wonder whether any of this matters. The Obama administration would like to boost demand. But Congress isn’t going to let it. The same logic applies to inequality: The policies Obama mentioned in his speech — such as raising taxes on the rich — also don’t have a shadow of a prayer of passing the House.

The game being played here is a longer one. Of late, inequality has become a much more popular research topic — and much more money has been devoted to researching it. Obama consigliere John Podesta founded the Washington Center for Equitable Growth, a think tank dedicated to funding research into inequality. The political system’s focus on the issue is leading to more thinking, more concern, more ideas and more pressure for action.

None of that will matter much now. But it will matter eventually. When the left next gets a chance to make economic policy, what will it choose to do? A world in which inequality is the top concern is a world in which raising taxes on the rich is perhaps the most important policy choice the government can make. A world in which growth and unemployment are top concerns leads to very different policies, from stimulus spending to permitting more inflation.

For previous columns by Klein, go to postbusiness.com.

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