Inequality and Opportunity

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

I agree with President Obama’s assertion in his (sadly partisan and seemingly interminable) July 24 speech in Galesburg, Ill., that inequality is an important concern for the nation and that American economic policies should take this issue into account. This is especially the case for the “inequality of opportunity” that Mr. Obama says “undermines the very essence of America.”

I am not convinced, however, that the president’s proposals are well matched to the problem he describes. Indeed, Mr. Obama is better at describing the outcomes he seeks than at putting forward a coherent set of policies to reach those outcomes. But I think I see what he has in mind.

Mr. Obama is looking at two horizons. The main determinant of inequality is what the Harvard economics professors Claudia Goldin and Lawrence Katz call a “race between technological change and educational attainment.” Technology has increased the demand for skilled workers but educational attainment has not kept up, leading to rising payoffs for those at the top.  Widening inequality reflects the fact that too many Americans do not have the skills needed for today’s economy.  But changing this takes time. So while he proposes universal preschool to benefit the future work force and new training programs delivered through community colleges for existing workers, Mr. Obama seeks to foster a stronger economy here and now, to drive higher earnings for people at all income levels rather than just those at the top.

The training proposal seems well targeted, with the potential to improve participants’ earnings. The problem, however, is that the federal government already spends around $18 billion a year on training programs with modest evidence of success. The new program might be useful, but it would be better to first focus existing federal training dollars on programs with the best payoff (for a proposal, see a paper I wrote with Kenneth Troske, a professor at the University of Kentucky).

There is reason to believe that appropriate interventions in early childhood such as quality preschool could improve lifetime outcomes for disadvantaged children: a good start in life has the potential to translate into more of the good later on such as higher earnings and less of the bad such as remedial education.  The problem again is that it is difficult to know exactly which efforts to support.

The administration pushes Head Start, but the evidence for the long-term impact of the program is decidedly mixed, with most evaluations not finding sustained improvements in participants’ educational outcomes and earnings. Without better information on which programs succeed and can be scaled up, the president’s preschool initiative has the feel of his earlier efforts to create green jobs, which five years later looks to have been a colossal waste. Even worse, the preschool proposal too readily turns into a political ploy to brand people who want to aim before spending billions of taxpayer dollars as being against poor children. This is a familiar tack for the president’s team.

Still, once better developed, the preschool and training proposals have the possibility of eventually increasing earnings for those who have been left behind by technological change.

Over the shorter term, President Obama has in mind that a vibrant economy will lead to gains at all income levels. This was the case in the 1990s expansion, as the booming economy propelled across-the-board wage gains until the Internet bubble burst in 2000.

The president might say that all of his proposals would lift the economy.  But the focus in his recent speeches has been on subsidies for manufacturing, government spending on infrastructure for transportation and information networks, and most recently money to lower interest rates for some homeowners and rehabilitate rundown homes. It is difficult to go from this grab bag of Obama policies that were proposed at different times for different reasons to an economy in which employers are competing for workers and bidding up wages. Establishing new government centers for manufacturing, for example, seems more like a political talking point than a proposal to make a meaningful impact on the overall economy or on inequality.

Like anyone who travels through the nation’s airports or over its highways and bridges, I can see the point of increased infrastructure spending. The problem is that it is hard to take seriously an infrastructure proposal from a president who still seeks to burn taxpayer dollars on wasteful ventures such as the high-speed train to nowhere in California. A sustained program of government spending on infrastructure can make sense even in the face of the federal budget gap - after all, the Treasury has little trouble financing federal activities.  But the quality of the expenditure matters.

Moreover, the positive economic impact of such focused new spending will be greatest if done in tandem with a credible program to address the fiscal imbalance over time. This combination would help the economy directly with (socially useful) government spending and indirectly as it reduces private sector uncertainty by making more clear the path of future deficits and thus the taxes that will be needed to cover those deficits.  This is textbook economics to combine near-term stimulus and long-term adjustment. One can only hope that Mr. Obama will put forward a proposal for the needed fiscal changes before the end of his term rather than his approach of “whistling past the graveyard” and leaving a mess for his successor.

A cautionary note for Mr. Obama is that achieving a stronger economy might actually increase inequality rather than reduce it.  This too is familiar from the 1990s. As calculated by the economics professors Emmanuel Saez and Thomas Piketty, real incomes grew on average by 31.5 percent from 1993 to 2000, but this involved 98.7 percent real income growth for the top 1 percent and 20.3 percent income growth for the other 99 percent. Some 45 percent of total growth accrued to the top 1 percent.

This outcome might actually be acceptable, even to President Obama. While inequality widened in the 1990s expansion as those at the top achieved larger gains than the rest, what appears to have mattered most to Americans is that the income gains were widespread. The strong economy meant opportunity for all, despite having the gains accrue disproportionately across society.

The difficulty is to find political common ground to move forward on both of the policy horizons identified by President Obama: for the recovery to strengthen considerably further while putting into place education and training programs that will get at the root causes of the slow income growth experienced by too many Americans.  This task of finding common ground moves beyond the realm of economics, but one way to start would be for the president to work with Republicans to enact a bipartisan fiscal program that replaces the sequester with a credible adjustment over time.

The White House promises three more speeches on economic issues, focusing on education, health care and retirement security. These topics seem ripe for Mr. Obama to emphasize partisan differences. It would be more useful for the economy and for the president’s supposed priority of expanding opportunity for him to take a different approach.