Reducing Inequality Could Boost Economy

President Obama’s inequality agenda that targets key areas of social inequity – such as raising the minimum wage and unemployment insurance – will be a major partisan battle in 2014; but lawmakers need to move away from the issue’s political flash-points and focus more on the economic benefits of reducing inequality.

Mike Konczal, on how economists agree that raising the minimum wage would reduce poverty and help reduce inequality:

“As many economists have argued, the minimum wage ‘substantially ‘held up’ the lower tail of the U.S. earnings distribution’ through the late 1970s, but this effect stopped as the real value of the minimum wage fell in subsequent decades … It is a powerful complement to the rest of the policies the government uses to boost the living standards of the worst off, including the Earned Income Tax Credit, food stamps, Medicaid, etc.”

Larry Summers, on the optimal approach to ending economic stagnation:

“This means ending the disastrous trends toward ever less government spending and employment each year and taking advantage of the current period of economic slack to renew and build out our infrastructure. If the federal government had invested more over the past five years, the U.S. debt burden relative to income would be lower: allowing slackening in the economy has hurt its long-run potential.”

E.J. Dionne concludes that tackling social inequity is what the majority demands:

“A substantial part of the conservative movement is now determined to blow up the national consensus [over unemployment insurance and the minimum wage] that has prevailed since the Progressive and New Deal eras … On matters of economic justice, we shouldn’t let a defective political system distract us from what we have in common.”

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  • These people all see the right problem – economic inequality – but they are proposing the wrong solution. Income inquality was fairly flat from the end of WWII to about 1980. Since then, the gulf between rich and poor has been growing wider and wider. What caused it? The drop of upper-level income tax rates. When wealthy Americans can keep more of the money they make, they have incentive to make and keep more and more of it.

    A higher minimum wage is a good thing – but even better would be a return of the 70% tax bracket and higher rates on capital gains.

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