Confronting Income Inequality: Economic Growth is the Answer

Joel Fox
Editor of Fox & Hounds and President of the Small Business Action Committee

Income inequality is taking center stage as a high profile issue in both national and California politics this year.

An op-ed in Friday’s Washington Post by billionaire industrialist Charles Koch gained attention when he wrote there was one issue he agreed with Democratic Socialist and presidential candidate Bernie Sanders. (Sanders) “believes that we have a two-tiered society that increasingly dooms millions of our fellow citizens to lives of poverty and hopelessness… I agree with him.”

The reference to the agreed upon “two-tired society” caught my attention because of a speech the late congressman and Housing and Urban Development Secretary, Jack Kemp, gave to the Heritage Foundation over a quarter century ago. Kemp was addressing the argument put forth by former New York governor Mario Cuomo that America had created a society of two static classes– the rich and the poor. Kemp argued, rather, that America was divided into two economies.

“One economy – our mainstream economy – is democratic capitalist, market-oriented, entrepreneurial, and incentivized for working families whether in labor or management. … The irony is that the second economy was set up not out of malevolence, but out of a desire to help the poor, alleviate suffering, and provide a basic social safety net. But while the intentions were noble, the results led to a counterproductive economy. Instead of independence, it led to dependency.”

Government solutions to address poverty have been offered since President Lyndon Johnson declared his War on Poverty. Yet, over 50 years after the War on Poverty began — and with about $22 trillion spent — the poverty rate is about the same.

The issues of poverty and income inequality are expected to take a prominent place in this election year. As soon as Gov. Brown released his latest budget, advocates for more money for poverty programs started complaining and campaigning to expand poverty programs. An initiative has been filed to raise and spend more money on poverty issues.

The real solution for poverty and income inequality is economic growth. That was the message Kemp was offering a quarter-century ago and it is still the best answer today.

An essay by Professor John Cochrane at Stanford’s Hoover Institution lays out the powerful argument for promoting strong economic growth.

Cochrane shows the power of economic growth on individuals by demonstrating when the United States enjoyed 3.5% economic growth from 1950 to 2000, an individual’s income rose from $16,000 to $50,000 (measured in 2009 dollars.) Had the economy grown at 2%–about the growth rate the country has experienced since 2000—the individual’s income would be $23,000, not $50,000. Quite a difference.

Economic growth not only provides hope for relieving poverty but also is the key to fortifying the sagging middle class.

While Cochrane’s numbers are national in scope, California policymakers must focus on ways to improve growth in one of the largest economies in the world. With the loss of manufacturing jobs, California’s middle class is in jeopardy. With one third of Californians relying on Medi-Cal and the state’s cost-of-living adjusted poverty level the highest in the nation, enhancements to poverty programs is not a long-term answer. The sooner pro-growth policies are put in place, the quicker people can climb out of poverty and boost the middle class.

This is not to say that government cannot have a role in helping the poor.

California recently joined about half the states in providing an Earned Income Tax Credit. An effort is being made to encourage those eligible to file their tax forms and secure the credit. The Earned Income Tax Credit is a positive program to encourage workers to stick with employment as they work on raising their standard of living.

In fact, in that aforementioned speech by Jack Kemp, he included the Earned Income Tax Credit as one part of the solution for lifting people out of poverty.

Kemp’s goal was to reestablish the link between effort and reward.

He said of the poor in his Heritage Foundation speech: “They don’t want lectures on income redistribution and capitalist exploitation, they want income and capitalism.

“They don’t want more government promises and egalitarian welfare schemes, they want to live in neighborhoods free from crime and drug abuse, with good jobs and opportunities to own property and homes; they want quality education so that they and their children can live better lives. They want what we all want – a chance to develop their talent, potential, and possibilities.”

Yet, in Sacramento we hear too much about the need for more and larger poverty programs and too little about encouraging and developing economic growth and incentivizing the link between effort and reward. Shortsighted solutions will not solve the deepening crisis of income inequality.

Developing strong models for economic growth would enhance other quality of life aspects that Californians expect. As Prof. Cochrane notes in his essay, “Only wealthy countries can afford environmental protection and advanced health care.”

The way to increase the wealth for all, to fortify the middle class, and to help take people out of poverty is to promote ideas for economic growth and good jobs. People will have the opportunity to rise—something across the ideological divide that all agree is the goal.

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