The Wall Street Journal reports: “As he urges support for a minimum tax on millionaires, President Barack Obama on Tuesday said the gap between the ‘ultra-rich’ and everyone else is a drag on the U.S. economy.” The problem is that the empirical evidence doesn’t say that.
Douglas Holtz-Eakin, economist and head of the pro-market American Action forum, e-mailed me, “There is no evidence to support the President’s claim. It must have been researched by the same aides that developed the Buffet Tax.” Nick Shulz of the American Enterprise Institute told me roughly the same thing. He said that the assertion “makes no sense.” He explained: “After all the [income] gap shrank during the recession which suggests if there’s any connection it would be the opposite [i.e. lessened inequality occurs in a down economy].”
Even the liberal Brookings Institute doesn’t much help the Obama administration. Patrick Brennan summarizes:
Scott Winship of Brookings, who has researched and written extensively on income inequality, points to one IMF paper which vaguely supports the administration’s contention, concluding that there is a link between more income equality and longer lasting periods of economic growth. As Winship explains, “I’m pretty sure that if pressed, the administration would cite the IMF paper. The ‘stronger and steadier’ . . . gives it away.” However, Winship notes that the IMF paper “focuses on a very broad set of countries, including lots of developing countries, so I’d argue it’s not that relevant for developed countries.” . . .
Winship points to a much more relevant study that finds no significant relationship between economic growth and income inequality, among a proper sample (twelve wealthy nations) and the proper time series (the 20th century). In fact, an increase in the top decile’s income correlates with slightly stronger economic growth.
Left-wing pundits have pointed to a different study by Alberto Alesina and Dani Rodrik. But that merely stands for the proposition that in hard economic times pro-statists take the opportunity to expand government in an attempt to redistribute the wealth, and that in turn acts as a drag on the economy (pp.484-485). Oops! Sort of like Obamanomics, isn’t it?
Why then does Obama make the specious claim? Maybe it is because, despite liberal pundits’ efforts, income inequality isn’t the hot issue the White House thought it was. So instead of actually focusing on different policies, the president dresses up income distribution as a pro-growth measure. But it isn’t. Nevertheless, the effort is a powerful indication that income inequality is not a political winner.
Hence, we see the president invent a new theory of growth (spend-more Keynesianism becomes tax-and-level-more Obamaism) and mouth free-market rhetoric and the language of economic opportunity. (“I believe the free market is the greatest force for economic progress in human history.”) Too bad his policies don’t reflect his new found appreciation for conservative economic themes. (The dead give away is that he keeps calling spending “investment.”)
The president is right about one thing: One presidential candidate is about growing the government to try to produce more income equality and the other is about shrinking the government to try to create more economic opportunity. Let’s not be confused about which is which.