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Daily Journal

What Shouldn't Worry Us

Feb. 6th, 2012
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RALEIGH – There are good reasons to be worried about the economic future of North Carolina and the United States – but they aren’t the ones you hear about the most from liberal politicians or the media.

If all you knew about recent economic history what was you read about on the front page, heard about on TV newscasts, or saw in President Obama’s State of the Union address, you’d think that our biggest problems were rising income equality, inescapable poverty, the death of American manufacturing, the death of the American Dream, and the rich paying a lower effective tax rate than the poor.

In reality, income inequality has changed little in America over the past three decades, chronic poverty is primarily a social and family issue rather than an economic one, American manufacturing is a story of success rather than one of failure, the American Dream is very much alive, and the rich pay vastly more taxes than poor or middle-income taxpayers do.

Let’s take each of these in turn.

When it comes to income or wealth inequality, there is no doubt that during recent growth spurts – the dot-com boom of the 1990s, for example, or the finance-led boom of the 2000s – the income and assets of wealthy households grew faster than the income and assets of poorer households did.

But the flipside is that when the booms turned into busts, the wealthy suffered larger losses in income and wealth than the poor. If you look at the full trend, what you will find is that standard measures of income inequality did rise during the early to mid 1980s, in part because of changes in tax policy led wealthy households to take more of their income and assets out of tax shelters. After that, inequality has gone up and down as economic growth has quickened or slackened, but the overall trend is basically flat.

It stands to reason that wealthier households see their income and assets fluctuate more than poorer households do. Wages are stickier than other prices. The more a household’s annual income directly reflects changes in the value of financial assets, the more it will show annual fluctuations. Researchers disagree about whether there is more income mobility than there used to be – it depends on what measure you choose – but there should be no disagreement about the need to measure income trends through both good times and bad before jumping to conclusions and depicting America as some sort of Dickensian nightmare.

On the second issue, chronic poverty, there is no doubt that millions of Americans, including a distressing number of North Carolinians, live at or below the poverty line. But both the causes and consequences of poverty are very much debatable. Many “poor” households have substantial assets or off-the-books income, and if you look at consumption rather than income data as a measure of living standards, you get a different picture.

More importantly, even in the midst of the Great Recession, persons that 1) graduate from high school, 2) work full-time or live with a full-time worker, 3) avoid having children out of wedlock, and 4) avoid drugs and alcohol are very unlikely to be poor.

That’s not to say these causal factors are easy to address. They are not. Many self-destructive decisions are made by people when they are young, inexperienced, and unconcerned about the future. I wish I knew how to prevent them from making poor decisions. My point is simply that economic policymakers have limited influence over most of these decisions. Failing to account for them when talking about income and wealth trends is a serious error.

My third point has to do with manufacturing. It is important not to mistake the health of the manufacturing sector with the availability of manufacturing jobs. American manufacturing remains highly successful, continuing to lead the world in many industries, because it has become so productive. American firms create more value per worker than do firms in most other countries.

Yes, that means that those who might once have worked in manufacturing have to look elsewhere for employment. But productivity is good news for the economy, not bad news. To think otherwise is to believe that we’d be better off if most Americans still worked in agricultural production, as was the case for the first century of the country’s existence. No, we are clearly better off getting our food and fiber produced more efficiently, by a shrinking, increasingly productive share of the workforce. The same is true for manufactured goods.

As for the notion that the American Dream is no longer a viable one, it depends on what you mean. If the American Dream is defined specifically as everyone owning his or her own home and attending college, then it was never realistic or even desirable. Such a definition confines rather than liberates the American family.

The real American Dream is this: the next generation of Americans will be happier, healthier, and wealthier than the current generation of Americans. They will be more likely to own assets – but not necessarily their dwellings, if they’d rather rent and invest their savings in more liquid or productive assets. They will be more likely to build up human capital in the form of knowledge and skills – but not necessarily by paying a formal educational institution an ungodly amount of money to sell them a credential.

By defining the American Dream properly, we can avoid the problem of underestimating the benefits that Americans derive from innovation and quality improvement. Health care is more valuable today than it was two or three generations ago. Technology has vastly expanded our horizons for education, research, consumer information, political news, entertainment, and social connection. The average home today is larger, better furnished, and more comfortable than the average home of the 1960s or even the 1980s.

These are all very real improvements in the standard of living that are not captured by many of the usual statistics trotted out by the usual suspects to make the usual political points. Furthermore, careful analysis of just the recent income data reveals that the American Dream remains very much alive. The Brookings Institution’s Scott Winship, for example, points out that if you compare children born between 1962 and 1964 with those born between 1980 and 1982, you find that “upward mobility from poverty to the middle class rose from 51 percent to 57 percent between the early-’60s cohorts and the early-’80s ones.”

Are there public-sector programs implicated in helping people achieve the American Dream? Certainly. Sustained progress would be impossible without the maintenance of law and order and the enforcement of contracts. Education and infrastructure are important building blocks for growth. But it’s not about spending more money. It’s about spending existing dollars more wisely.

Finally, as I have pointed out on several occasions, the notion that the Mitt Romneys and Warren Buffetts of the world have a lower effective tax burden than the rest of us is utter nonsense. If you include taxes at all levels, the poorest quintile of Americans pay about 16 percent of their income in taxes while the wealthiest quintile pay about 32 percent of their income in taxes.

That’s steeply progressive by any reasonable definition. In fact, America has one of the most progressive tax systems in the developed world. Our current fiscal problem, both at the state and federal levels, is not that our tax rates are too low. It is that the rate of economic growth is too low.

And that is the real problem to which we should direct our attention.

Hood is president of the John Locke Foundation.