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Douglas Holtz-Eakin Headshot

The Faulty Inequality Debate

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"And that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America's basic bargain -- that if you work hard, you have a chance to get ahead. I believe this is the defining challenge of our time: Making sure our economy works for every working American." (President Obama, December 4, 2013)

Read carefully, the president did not say that inequality was the "defining challenge," but rather that the ability to "get ahead" was. And he's absolutely right.

Inequality means little. It would be a terrible day when students earn the same as middle-aged workers at the peak of their careers. Or when wages in the buggy whip industry match those in mobile broadband applications. Or if Jeff Spicoli had the same income as Warren Buffett. The obvious point is too often forgotten: the most affluent, successful economy in the history of the planet got that way by paying success more than failure, effort more than slackitude, and rewarding individuals that plan over their entire life-cycle.

Inequality is not the issue.

Poverty, however, is bad. Poverty is human deprivation, poor nutrition, poor health, appalling housing, squandered talents, and broken dreams. Poverty has no virtues. (The fear of poverty is a virtuous motivator, but that's as good as poverty gets.) Chronic poverty begets a host of personal and social ills.

Precisely because poverty is so bad, mobility is the crucial issue. It does not matter if there are rich and poor as long as the poor have the opportunity to climb out of poverty. A powerful allure of America has always been its promise of upward mobility. It is essential that it remain a reality and not merely a global advertising slogan. The well-being of future generations rests on it.

Not all mobility, however, is created equal so a little precision in language is useful. Relative mobility occurs when one individual, family, or household moves up in the economic rankings. Absolute mobility occurs if that same individual becomes better off over time -- earns more or has a better standard of living.

Notice that if the economy as a whole is growing, everybody (in principle) could become better off, but the rankings would not change. That is, there could be absolute mobility but exactly zero relative mobility. In contrast, if the economy is stagnant the only way to achieve upward mobility -- somebody becoming better off in an absolute or relative way -- is to take it from someone else.

It is natural to wish that the American Dream be delivered to every poor person. But in a stagnant economy this requires that the rich live an American Nightmare. Accordingly, sustained rapid economic growth is central to the mobility debate. With sustained rapid economic growth, the overall economic pie gets larger, the hardest working will rise upward in the roster of economic affluence with the additional income. That will include those poor whose effort and merits should allow the American Dream to come to fruition. But their success need not be accompanied by a corresponding American Nightmare.

The president has identified a real problem: diminished opportunities for social mobility. But what should be done? First, recognize that the difference between poverty and non-poverty in the U.S revolves around work. Among those who have a job, poverty is only 7 percent; among the non-working it is more than triple at 22 percent. That means the defining challenge of our time is really a jobs challenge, not challenge to rob Peter and pay Paul.

Second, the difference between high-paying and low-paying work is skills. Higher skills -- knowledge, expertise, and entrepreneurial initiative -- translate into bigger paychecks. That means that the defining issue of our time is also genuine education reform.

Better growth policy and real education reform are the central tenets to restoring acceptable economic mobility in the United States. Unfortunately, these priorities are on the verge of being hijacked by a faulty debate over inequality and redistribution.