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How do we help the poor?

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"The question is, ‘How do we help people at the bottom rather than thwart people at the top?’" Harvard economics professor Gregory Mankiw, who served as a leading adviser to President George W. Bush and Republican presidential candidate Mitt Romney, recently asked. The set of beliefs behind this question — that economic inequality isn’t the problem we should address; that we should focus instead on better educating the poor so they can earn more has increasingly become the fallback position of conservatives in the debate over rising economic inequality.

Some on the right even deny that the distribution of income and wealth has shifted upward, though leading conservative economists such as Mankiw or Tyler Cowen, a professor at George Mason, eschew such flat-earth mythology. Rather, they argue that we should concentrate on helping poor people develop a trade and letting the super-rich retain their hard-earned wealth.

"The returns to growth," Cowen recently told the New York Times, "are going . . . generally to people with high I.Q., no matter where they live. I don’t really know how you could undermine this dynamic, short of wrecking the world."

But the IQ premium, to the extent it exists, is just one among many factors behind the upward redistribution of wealth. A more systemic factor is the shift in income from wages and salaries to investments. A study released this month by Standard & Poors Economic Research — no radicals, they — concluded that labor income accounted for three-fourths of all market-based income between 1979 and 2007, but that it had dropped to two-thirds of such income by 2007. Income from capital gains, by contrast, doubled during this time, from 4 percent to 8 percent. Moreover, the S&P study noted, "capital income has become increasingly concentrated since the early 1990s." Even among the wealthiest 5 percent, more than 80 percent of capital gains were realized just by the wealthiest 1 percent.

More recent data show that inequality has risen even more since the 2008 crash. As University of California economics professor Emmanuel Saez has shown, 65 percent of all income growth went to the wealthiest 1 percent of Americans from 2002 to 2007 - a figure that increased to 95 percent of all income gains since the recovery began in 2009. During this time, wages have stagnated while stocks and corporate profits have soared.

Viewed through this prism, what’s IQ got to do with it? The fundamental dynamic of the contemporary U.S. economy is to reward capital at the expense of labor. That’s a dynamic that follows logically from the transformation of the U.S. corporation from an institution that retained its earnings to fund investments in new and better equipment and worker training into an institution that shortchanged capital investment and scrapped worker training in favor of rewarding shareholders through dividend hikes and share buybacks. The doctrine that the sole corporate mission is to reward shareholders has transformed workers from assets who produce value into liabilities who should be slashed wherever possible.

Why go after the 1 percent? In part because its ascendancy is the result of wealth appropriation that comes at the expense of wealth production. As a recent study in the Harvard Business Review concluded, a "survey of chief financial officers showed that 78% would ‘give up economic value’ and 55% would cancel a project with a positive net present value — that is, willingly harm their companies — to meet Wall Street’s targets and fulfill its desire for ‘smooth’ earnings."

The concentration of wealth within a narrow group of investors impedes consumption, of course, no less than production. While Tiffany and Cartier are flourishing, mass-market retailers are struggling. It’s those mass-market retailers who do the hiring in the United States — or who don’t, if their sales are lagging. That’s one reason Standard & Poors concluded that "increasing income inequality is dampening U.S. economic growth."

The rise of the 1 percent is linked, to be sure, to the growth of outsize rewards to talented people in particular sectors (it still doesn’t pay to be a poet of genius). But there have always been people with high IQs. What has changed is the ability of major shareholders to demand a greater share of income from enterprises that would otherwise put it to more productive use and enable greater consumption. That’s a reason - one among many — why attacking economic inequality needs to be the centerpiece of our national agenda.

— Washington Post

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