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How Do We Best ‘Save the Poor’?

Research & Commentary
February 20, 2017

by Bob Lord

The data is in: Shared growth, not top-heavy growth, helps the poor.

Two months ago, in Equality for Taxi Drivers and Surgeons, I challenged the logic of Illinois professor Deirdre McCloskey in her New York Times op-ed, Growth, Not Forced Equality, Saves the Poor.

My point was simple: In defending the grotesque level of economic inequality in America today, it is not sufficient simply to make the case that some level of inequality is needed to optimize growth in the economy. Put another way, proving that Soviet style communism doesn’t work well does not justify America’s economic model of the last 40 years.

The question is not, as McCloskey suggests, whether zero inequality would be a good thing. Rather, it’s whether extreme inequality is a bad thing.

Our analytical starting point ought not be exploring whether paying brain surgeons and taxi drivers equally would be a good idea, but exploring what level of income disparity between brain surgeons and taxi drivers ought to give us pause.

Would our society benefit, for instance, if brain surgeons made 300 times what taxi drivers do, such that brain surgeons would earn more on the first work day of the year than taxi drivers could earn in an entire year?

Would you consider this 300-times gap unconscionable? Much of our economy already is operating at that level of disparity. CEOs currently take home over 300 times the pay of average workers at America’s large corporations, many of which pay little or nothing in corporate tax.

To my surprise, Professor McCloskey commented rather extensively on my piece, engaging in a wide-ranging debate with other commenters. I found little in those comments, however, that reconciled her views and mine.

But the newest data on this subject, from a recently released paper by Thomas Piketty and others, sheds considerable light on this subject. Piketty and his colleagues conclude that the income share of the bottom 50 percent in America is “collapsing.” Between 1978 and 2015, the income share of the bottom 50 percent in America has declined from 20 percent to 12 percent. That has been slightly more than enough to offset the help the poor in America received from the overall growth in the American economy.

The result: The real income of the bottom 50 percent in America declined by 1 percent between 1978 and 2015, despite 59 percent real growth in the American economy over the same period.

To borrow Professor McCloskey’s words, over that 37-year period, the country’s growth did not “save the poor.” [pullquote]The income share of the bottom 50 percent in America is “collapsing.”[/pullquote]

The experience of the bottom 50 percent in France over the same period was entirely different. They saw their real income increase by 39 percent, even though overall growth in France was only 39 percent. That’s not a clerical error. In France, the participation of the bottom 50% in the country’s growth was exactly proportional. During the same period that the income share of America’s bottom 50 percent was plummeting, the income share of the bottom 50 percent in France stayed remarkably constant, never straying more than a percentage point or so from 22 percent, with zero overall movement between 1978 and 2015.

The bottom line? The data disprove McCloskey’s theory that “Growth, Not Forced Equality, Saves the Poor.” Rather, it is shared growth, not top-heavy growth, that’s needed to help the poor.

Bob Lord, an associate fellow at the Institute for Policy Studies, practices tax law in Phoenix. 

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