by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Monica Potts recently crowed in a Daily Beast column that a new report proves what progressives have known for a long time: income inequality hurts economic growth. Not so fast, answers Salim Furth of the Heritage Foundation.
Potts’ proof is an August 5 report by Standard and Poor’s, which she characterizes as saying, “rising inequality—gaps in both income and wealth—between the very rich and the rest of us is hurting economic growth.”
However, Potts misreads S&P and the underlying research on inequality. Furthermore, she mischaracterizes conservative ideas on the issue. …
… Honest scholars on the left admit that there is no decisive link between income inequality and growth. When the S&P report came out, the Washington Center for Equitable Growth – a left-wing think tank devoted to studying potential links between inequality and growth – threw cold water on it: “[The] overall findings in this academic arena are mixed. Inequality has been found to reduce growth, boost growth or have no effect at all. The varying methods used in these papers end up producing a variety of results.”
Another liberal economist, Jared Bernstein, makes clear that although he instinctively agrees with S&P’s conclusion he can’t find convincing evidence of an inequality-growth link. He concludes, “I’m quite certain there’s something to this important connection but I don’t think you see it through some of the most expected channels. Which makes it that much more interesting.”
So the S & P report simply doesn’t prove the connection between rising inequality and stale economic growth. …
… More broadly, Potts sees unbridgeable disagreement between progressives and conservatives in an area where there is actually broad agreement. Contrary to pundit caricatures, progressives understand that success always involves personal effort and conservatives reserve their greatest concern for those least able to help themselves. Potts ascribes to conservatives the idea that a culture of opportunity and work, and a disdain for handouts, are central to the American character and upward mobility. As much as we would love to own these ideas, they are widely shared – including by progressives. University of Chicago economics professor James Heckman and writer Paul Tough have performed and popularized the rigorous research showing that character traits like conscientiousness and grit are central to children’s success. Two generations ago, President Lyndon Johnson’s Department of Labor sounded the alarm that government programs were fueling dependency and encouraging the breakdown of African-American families. And it wasn’t a conservative who recently said, “I think every kid needs to get a taste of what it’s like to do that real hard work.” That was Michelle Obama.
To Potts’ chagrin, there is no contradiction between a belief that almost everyone can take care of himself or herself with hard work and the understanding that some cannot. In contrast to European social states, the U.S. welfare system has always been heavily targeted at families with young children, the elderly, and the disabled. Some welfare systems are designed to guarantee a modest lifestyle to everyone, regardless of effort. At its best, our system is designed to enable the young to prepare themselves for opportunities and prod healthy adults toward tackling whatever opportunities are available.
Potts proceeds to mischaracterize conservative economic thought as “trickle-down.” The conception of “trickle-down” economics is essentially Keynesian. It is a static view of the economy as a waterpark with a circular flow of existing money.