Obama's inequality speech

President Obama recently delivered an address on inequality which was quickly hailed by the usual suspects, with Ezra Klein declaring it his "best speech on the economy" and Paul Krugman stating that it was deserving of a "serious hearing." So let's give it one.

After reciting a bunch of statistics regarding income inequality and providing a slanted version of recent economic history (points ably addressed by Russ Roberts and James Pethokoukis), the president appears to get at the heart of this argument about here:

The problem is that alongside increased inequality, we’ve seen diminished levels of upward mobility in recent years.  A child born in the top 20 percent has about a 2-in-3 chance of staying at or near the top.  A child born into the bottom 20 percent has a less than 1-in-20 shot at making it to the top.  He’s 10 times likelier to stay where he is.  In fact, statistics show not only that our levels of income inequality rank near countries like Jamaica and Argentina, but that it is harder today for a child born here in America to improve her station in life than it is for children in most of our wealthy allies -- countries like Canada or Germany or France.  They have greater mobility than we do, not less. 

This argument, which relies on the use of quintiles and relative mobility as a statistical sleight of hand, has already been addressed by this blog here. In short, under such a measurement it is possible for someone to advance to a different quintile with a $20,000 increase in income in one country but would stay in the same quintile with a $30,000 increase in another country where the quintiles are further apart. That the former is actually better off or more mobile in any consequential sense is not at all apparent.

Moving along:

The idea that so many children are born into poverty in the wealthiest nation on Earth is heartbreaking enough.  But the idea that a child may never be able to escape that poverty because she lacks a decent education or health care, or a community that views her future as their own, that should offend all of us and it should compel us to action.  We are a better country than this. 

True enough (at least with regard to health care and education -- it is not apparent what "a community that views her future as their own" means), but what does this have to do with inequality or mobility? Lack of a decent education or health care is a problem in its own right. It doesn't suddenly become a problem because the number of billionaires is surging or movement between income quintiles is stagnating. 

More from the president:

So let me repeat:  The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.  And it is not simply a moral claim that I’m making here.  There are practical consequences to rising inequality and reduced mobility.  

 

For one thing, these trends are bad for our economy.  One study finds that growth is more fragile and recessions are more frequent in countries with greater inequality.  And that makes sense.  When families have less to spend, that means businesses have fewer customers, and households rack up greater mortgage and credit card debt; meanwhile, concentrated wealth at the top is less likely to result in the kind of broadly based consumer spending that drives our economy, and together with lax regulation, may contribute to risky speculative bubbles.

National policy should be based on "one study finds" and a collection of unsupported assertions? The reality is that linkages between inequality and macroeconomic performance are thinly supported and understood by economists. But don't take my word for it, here's noted lefty John Podesta in yesterday's Politico:

The fact is that we don’t know nearly enough about what high inequality means for economic growth and stability. We need a better understanding of how inequality affects demand for goods and services and macroeconomic and financial imbalances. We are in the dark on whether and how inequality affects entrepreneurship, or whether it alters the effectiveness of our economic and political institutions, or how it affects individuals’ ability to access education and productively employ their skills and talents.

Brad Plumer of Ezra Klein's Wonkblog has a detailed post which also explains the lack of any proven causality between inequality and negative economic impacts.  

Obama continues:

And rising inequality and declining mobility are also bad for our families and social cohesion -- not just because we tend to trust our institutions less, but studies show we actually tend to trust each other less when there’s greater inequality.  And greater inequality is associated with less mobility between generations.  That means it’s not just temporary; the effects last.  It creates a vicious cycle.  For example, by the time she turns three years old, a child born into a low-income home hears 30 million fewer words than a child from a well-off family, which means by the time she starts school she’s already behind, and that deficit can compound itself over time.

Again, more garbage rhetoric about "studies show" and "associated with," which amount to precisely nothing. The president, however, manages to raise an interesting point in the final sentence. Inequality no doubt at least partially has its roots in parenting which downplays the importance of education. But yet again, this would be a problem even if the percentage of the wealth held by the top 1, 5 or 10 percent increased not at all over recent decades.

Obama then wraps up his explanation of why inequality is a problem with this passage:

And finally, rising inequality and declining mobility are bad for our democracy.  Ordinary folks can’t write massive campaign checks or hire high-priced lobbyists and lawyers to secure policies that tilt the playing field in their favor at everyone else’s expense.  And so people get the bad taste that the system is rigged, and that increases cynicism and polarization, and it decreases the political participation that is a requisite part of our system of self-government.

It is unclear what the president means by "political participation," but it's worth noting that voter turnout in the last three presidential elections was higher than in the previous eight dating back to 1972, so this assertion is debatable at the very least. 

As for the rich tilting the playing field, this is perhaps where Obama is most on point. Indeed, right-wingers such as The Washington Examiner's Tim Carney and the Cato Institute's Julian Sanchez have similarly noted the corrosive impact of wealth generated by government cronyism. The phenomenon of the rich enjoying disproportionate influence among policymakers, however, is not exactly new.  Indeed, one would be hard pressed to name any country where this is not the case. Thus, if one wants to reduce the ability of the rich to use government to its own end, the obvious solution is to reduce the amount of power held by politicians. Less power means fewer favors to dispense and reduced ability to bend the rules for a favored few. 

If we truly desire to rein in the rich and powerful, let us cast them into the competitive fires of the free market where their government connections will be less able to assist them, and they will either wither or prosper based on the quality of their offerings.

Related: Ben Domenech looks at some of the cultural factors behind income inequality while Mark Perry examines the role of demographics.

Update: Forgot to mention Greg Mankiw's fact-check.