To Address Income Inequality, We Need to Know What Works and Why

Last week I summarized what President Obama has done to address the issue of income inequality. Even so, there are those who claim that the gap between rich and poor in this country has grown during his presidency. As we continue to advocate for policies that address this problem, it is important to know how to measure their success.

One thing that is important to note is this is an issue that has been building over the last 30 or 40 years. During the Great Recession, the income gap actually narrowed rather considerably. That means that using a year like 2009 as a starting point will confirm that the problem has grown during the Obama presidency.

The other thing to keep in mind is the difference Krugman noted between the kinds of policies that address income inequality.

Step back for a minute and ask, what can policy do to limit inequality? The answer is, it can operate on two fronts. It can engage in redistribution, taxing high incomes and aiding families with lower incomes. It can also engage in what is sometimes called “predistribution,” strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums. In practice, governments that succeed in limiting inequality generally do both.

Zachary Goldfarb

explains why the difference is important in measuring the success of these policies.

Much of the attention in the inequality debate has focused on market inequality, which is the income we receive before any government policy is taken into account. This type of inequality measures what the economy is doing on its own: what companies are paying workers in salary and benefits, the gains or losses of investors, etc.

Then there’s post-policy inequality, once you consider the effect of taxes and transfers such as Social Security payments and food stamps. This type of inequality measures what people actually experience: the income they have to spend at the end of the day on goods and services for themselves and their families.

Policies that are aimed at predistribution (Dodd-Frank, new overtime rule) address market inequality, while redistribution policies (Obamacare, taxes) address the amount of income people have to actually spend. This graph shows that income inequality was reduced after the redistributive policies of Obamacare and tax increases on the wealthy went into effect in 2013.

That is what led Goldfarb to this conclusion in 2014.

It’s true that the ACA and tax code will continue to reduce post-policy inequality as Obama wraps up his presidency. But market forces will be continuing to widen inequality.

Proposals to increase the minimum wage, extend overtime, invest in infrastructure and reduce the size of the financial sector are all aimed at challenging the market forces that lead to income inequality. On an even longer-term basis, access to universal pre-K and affordable college do the same thing.

These are all measures that Hillary Clinton supports going forward. But she also has one idea to address the market forces leading to income inequality that hasn’t gotten the attention it deserves. Clinton proposes to give a two-year 15% tax credit to any company that engages in profit-sharing with employees.

These are the kinds of innovative proposals that incentivize change in the systemic market forces that lead to income inequality.

Nancy LeTourneau

Nancy LeTourneau is a contributing writer for the Washington Monthly.