Steven Rattner’s Missing Case for Reducing Inequality

In yesterday’s New York Times, Wall Street executive Steven Rattner attempts to revive income inequality as a political issue. Rattner is perplexed that inequality “resonated so little with politicians” during the election and speculates that “we are inured to a new Gilded Age.” Surveys, however, consistently show that while Americans believe inequality is rising and too high, it is nevertheless a low priority for them as a policy problem. The results of a 2011 Gallup question eliciting Americans’ views of the most important problem facing the nation are typical. Just one percent cited inequality, fewer than were concerned about “lack of respect for each other” or “foreign aid”. Americans are less likely than citizens of other countries to say inequality is a problem, a finding that was as true in 2011 as in 1999. Indeed, we rate inequality as less important than not only unemployment, but the national debt. When voters care little about an issue, it is unsurprising that candidates do not emphasize it.

And why should they care about inequality? Rattner’s opening sentence bemoans the election results “particularly” because they make it less likely we will address income inequality, “even as the problem worsens.” One would think the next move in the op-ed would be to show that income inequality is a problem, but it is not until the penultimate paragraph that Rattner offers a reason to worry about inequality per se. 

There he cites a paper by the International Monetary Fund arguing that lower inequality “could” increase economic growth. As I note in a recent issue brief comparing inequality and living standards across countries, the IMF research fails to distinguish developed and developing countries. I demonstrate clearly in the paper that among developed nations, those with higher inequality tend to have higher living standards among the poor and middle class—a result that is obscured by pooling rich and poor countries. Furthermore, while the evidence is murky, most research using modern datasets and improved research methods finds that, if anything, countries with more inequality have stronger economic growth. 

Rattner is concerned that incomes below the top ten percent have fallen while they have risen a smidge at the top. But for inequality to be the issue here, it would have to be the case that if the top had done less well, families below would have done better. Incomes in the middle fifth fell by six percent between 2009 and 2012. (Rattner mislabels the years as 2010 and 2013.) Does it matter what happened at the top? Would the fact of weak income recovery in the middle class be of less concern if incomes at the top had fallen by, say, twenty percent rather than rising by two percent? The drop in income for the bottom 90 percent was even greater between 2006 and 2012. Does it make Rattner feel better that incomes in the top ten percent also fell over this period?

Rattner decries that tax rates have fallen at the top since 1995, but they’ve fallen proportionally more below the top. According to the Congressional Budget Office, the average income tax rate for the top one percent fell from 24 to 20 percent between 1995 and 2011. For the bottom fifth it went from -3.6 percent in 1995—refundable tax credits actually meant they were better off after filing taxes—to -7.5 percent (that much more better off). The average tax rate for the middle fifth fell from five percent to two percent.

Since Americans are less likely than Europeans to worry about inequality, it should come as no surprise that we redistribute less than in continental Europe. Rattner does not like that we distribute less than he would prefer and that our taxation levels—as progressive as in Europe—are lower than he wants. But the public does not share his preferences, and he has given them no reason to reconsider their views. 

Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.