Class Matters

By Sebastian Mallaby
Monday, November 14, 2005

Two months ago, in his prime-time address from New Orleans, President Bush called upon the nation to "rise above the legacy of inequality." He was joking, obviously. The president's congressional allies now propose to cut Medicaid, food stamps, free school lunches and child-care subsides. They do not propose to save money by undoing the tax cuts that have handed an average of $103,000 a year to people making over $1 million.

This is a scandal, and not because every liberal spending program deserves protection. It's a scandal because, whether you support this program or that, inequality is growing poisonous. The meritocratic premise of this country, essential to both its political consensus and its economic success, is starting to ring hollow.

I wish that statement could be dismissed as irresponsible class warfare. But in 1980, the top fifth of families earned 7.7 times as much as the bottom fifth; by 2001, that ratio had risen to 11.4. So even though the bottom fifth of households made modest gains, the inequality ratio jumped by almost 50 percent. If you measure inequality by wealth rather than earnings, the results are even more preposterous.

Inequality in the United States is now more pronounced than in any other advanced country. Comparing the top 10 percent of households with the bottom 10 percent, the United States during the 1990s was nearly twice as unequal as Sweden and about a third more unequal than France.

Why does this matter? Inequality is socially acceptable and even economically desirable to the extent that it reflects differences in talent, risk-taking and hard work. But if it reflects the circumstances of birth, it is immoral and wasteful. The problem with the 50 percent jump in the inequality ratio is that it gives the offspring of the rich such fundamentally different education, health care and social horizons that it's hard for the rest to catch up. Sharper class differences mean more rigid class differences as well. Talent is squandered.

It's not as though rags-to-riches stories were common in the first place. A classic study of children born between 1942 and 1972 found that fully 42 percent of those born into the poorest quintile ended up there also. But this immobility has grown worse: One Federal Reserve study found that in the 1970s, 36 percent of families remained in the same income bracket throughout the decade; in the 1990s, 40 percent were static. At the most selective private universities in 2003, more freshmen had fathers who were doctors than the combined total whose fathers were hourly workers, teachers, clergy or members of the military.

If this is morally intolerable and economically wasteful, what is government doing about it? Shockingly little, is the answer. According to data compiled by the Century Foundation, the U.S. poverty rate before accounting for the effect of government programs is fairly typical for an advanced country. But U.S. government interventions reduce the final poverty rate by just over a third, whereas Canada's cut it by nearly two-thirds, and those of Britain, Sweden and Holland cut it by about three-quarters.

The growth of inequality underlines the absurdity of the Bush tax cuts. Last time America threatened to become a class-bound society, in the Gilded Age of the late 19th century, Teddy Roosevelt advocated an estate tax to reduce concentrations of wealth. In the new gilded age, Bush has repealed the estate tax. Go figure.

But liberals also deserve blame, albeit of a more subtle kind. They muddle their attacks on inequality by defending all government programs -- irrespective of whether these programs are focused on the poor or on the middle classes. Thus they proudly said no to Social Security reform, even though Republicans such as Sen. Bob Bennett of Utah were offering fixes that allowed benefits for the poor to keep growing. Thus they stand equally ready to fight cuts in Medicaid and Medicare, even though Medicaid is a genuinely essential program for the poor whereas Medicare funnels money to seniors, including a lot of rich ones.

Gene Sperling, Bill Clinton's national economic adviser, has just published the book of the moment in Democratic wonkland. Sperling makes a case for endless programs that government would probably screw up: empowerment zones (there's little academic evidence that these ever work), retraining grants (ditto), insurance against the risk that your mortgage becomes unpayable (why can't the market provide that?). The wishful proposals threaten to obscure Sperling's great ones: a more progressive tax system with expanded topping-up of wages for the lowest earners; revamped savings incentives that don't just line the pockets of the rich; and a big push on Head Start-type preschool programs, a proven formula for promoting class mobility.

So here's a plea to Democrats. I know you're better on inequality than the other guys. I know you don't like to be accused of class warfare, so you shy away from attacking inequality head-on and prefer to dream up trendy policies that address middle-class concerns in an era of globalization. But this trendy stuff is a mistake. Let individuals navigate the shift from sunset industries to sunrise ones, which they can do mainly on their own. The core problem is class, which increasingly is destiny.

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