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In Asking About Income Inequality, Obama Begins With The Wrong Question (Forbes.com) February 26, 2013

Posted by daviddavenport in Op/Eds.

In his novel Gravity’s Rainbow, Thomas Pynchon, winner of major book awards as well as the McArthur “Genius Grant,” said: “If they can get you asking the wrong questions, they don’t have to worry about the answers.” This describes to a T what President Obama has done in seeking to make income inequality, as he put it in one of his speeches, “the defining issue of our time.” If that is the question, then higher taxes on the wealthy, a large increase in the minimum wage and other redistributionist measures become the answer. But, in fact, the president is either mistaken or misleading because income inequality is not the right question to be asking.

When Obama and his supporters refer to income inequality, they are taking a complex set of economic and social issues and boiling them down to a single data point: how large is the difference between the annual incomes of top earners compared with those on the bottom of the income scale. While that is one interesting question—though even as it is there are problems with it—having it stand alone as the driving force for change is a gross oversimplification that will lead to bad outcomes. It would be as if we decided to judge baseball pitchers by the number of walks they issue, not taking into account the vast array of appropriate measures (wins and losses, earned run average, strikeouts, hits given up, innings pitched, etc.) that combine to give a fuller and more accurate understanding of a pitcher’s effectiveness.

Asking about the gap between high and low income earners is at best an incomplete question. It tells us nothing about why the gap may be growing or shrinking. For example, it may be the case, as is shown in recent studies, that income at both the top and bottom has grown, but income at the top grew faster. But even that isn’t enough to know, because you would want to understand why the top is growing faster. Is it at the expense of those at the bottom? Actually it is not, since theirs is growing also, but it is because of greater investment income at the top. Do we then want to penalize Bill Gates and Steve Jobs for creating wildly successful companies and also the people who invested in them?

A further problem is that most of the data collected on this is before taxes, so it doesn’t take into account the effects of our progressive tax system. But that prompts an even deeper question: is it the role of government, and its system of taxation, to equalize income among citizens? The U.S. already has one of the most progressive tax systems in the world, so absent this red herring question about income inequality, taxing the wealthy would be an even tougher case to make.

A more relevant question would be whether there is mobility among the various income levels. In an equality of opportunity society such as the United States, income inequality should only be a problem if an individual’s income is static. A U.S. Department of Treasury study looked at income mobility from 1996 to 2005 and concluded that, during the study period, over one-half of taxpayers moved to a different income quintile. Approximately one-half of taxpayers in the bottom income quintile had moved to a higher income group, and only 25% of those in the top quintile remained there. With people moving up and down the income distribution scale, there would appear to be equality of opportunity, if not equality of outcome. And nearly everyone agrees that the answer to more mobility is education, not income redistribution. Education is where the policy emphasis should be.

Legendary football coach John Madden was asked to comment when a team signing a notoriously flaky quarterback announced that he was “the answer.” Madden’s response was, if he is the answer, I guess I don’t know what the question is. If income inequality is the answer, the question is not how to have an equality of opportunity society. Instead, it is the much more Machiavellian question of how to build a case for income redistribution, which is altogether the wrong question to be asking in a free society. Unfortunately my conclusion to this whole matter is that President Obama wants to ask that very question—how can we redistribute income in a way that he thinks creates greater equality—but knowing how controversial that would be, he has masked it in the cloak of income inequality. Let’s hope Congress and the American people see through his redistributionist cloak.

Please click on the link to view the op/ed on Forbes.com: http://www.forbes.com/sites/daviddavenport/2013/02/25/in-asking-about-income-inequality-obama-begins-with-the-wrong-question/

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