If you watched Obama’s State of the Union speech (I didn’t) then you know he spent a lot of time talking about Income Inequality.  If you think this is just a short term talking point then you haven’t been paying attention to what the Left is doing and you need to be armed to battle their most recent meme.

Unlike some conservatives, I do believe that there has been a real shift in income inequality over the last 20 years and a very powerful graph from this blog post proves it.

True, there was a recent study that showed no change in upward mobility in the US over the past 20 years but upward mobility and income inequality are two different things.  From the NPR story about this study:

“The researchers, led by Raj Chetty of Harvard University, looked at low-income people born in the early 1970s, and how likely they were to advance to top income brackets. The researchers then compared their economic mobility with that of people born later.”

“What we found is that mobility has remained remarkably stable,” says Harvard’s Nathaniel Hendren, a co-author of the study. “The chance in which kids can climb up or down the income ladder has remained pretty stable over the last 20 to 25 years.”

So there is no change in the percent of people moving into higher tax brackets over the last 20 years but the graph above clearly shows the percent change in income of the top 10% has more than doubled those in the bottom 90%.

Instead of following the path of the Obamas and Elizabeth Warrens of the Left who seek to treat the symptoms of Income Inequality (increasing the minimum wage, increasing taxes on the wealthy, etc.) which will not have any impact on income inequality, I’d prefer to attack the underlying causes of this Income Inequality.

So without further ado, here is my 4 point plan to attack these real drivers of Income Inequality.

Welfare Is Not Working

As I have shown in a previous post, we’ve drastically increased the amount of Welfare spending since the US declared its ‘War on Poverty’ but yet the poverty rate has been basically unchanged for the 40 years.

Throwing money at this problem has not helped so Congress should take a serious look at the outlays of these Welfare programs (and other ‘entitlement’ programs) and reduce them.  It’s well known that the definition of insanity is doing the same thing over and over again and expecting different results so 40 years should be enough time to realize Welfare, as we know it, isn’t working.

Let’s try something else that will lift people out of poverty.

Family Values Pays

There was a study performed in 2006 that showed how changes in the family structure and changes in poverty are closely related.  From the chart below, you can see that single parent households with children are much more likely to fall into the poverty rate and the situation has worsened over time.

In 1969, only 10% of households could be categorized as having a single parent (8% with a female and 2% with a male) but that figure increased to 17% in 2006 (13% with a female and 4% with a male).  Conversely, the amount of households categorized as having married parents went from 67% in 1969 to 46% in 2006.  So the US has decreased the amount of 2 parent households by 31% and increased the amount of single parent households by 70%!

Is that bad?

Well, Yes!  In 2006, single female families with children had a 39.9% chance of falling within the poverty rate and single family male families with children had a 19% chance of falling within the poverty rate.  Compare that with a 7.5% chance of married couples with children and you see that single parent families have a 2.5 to 5.3 times higher likelihood of falling into poverty when compared with 2 parent households.

The harsh truth here is that we can totally reverse this trend if we are willing to confront this brutal fact.  Babies do not materialize out of the vacuum of space; two people have to engage in the act of sex to make a baby.  Having children ‘accidentally’ is something that is very preventable and it doesn’t take a blue ribbon government commission to figure it out.  Stop having unprotected sex or at a minimum learn to use birth control!

This data needs to be publicized so young men and women can become educated and realize that the choices they make in the heat of passion can not only affect their earning potential but the futures of their children.  We can’t ‘legislate morality’ but we can show people that there is some sound economic logic in waiting until marriage to have kids and to deny this brutal fact and avoid appearing prudish is really doing a disservice to our youth and causing more long term pain to our next generations.

Education Is The Tide That Floats All Boats

Another reason for the decline in earning potential for the middle class is the movement of manufacturing jobs to foreign countries.  This was a good thing in that Union memberships plummeted in the US but many hard working people lost their jobs (and the economy lost their spending) because they were not prepared for this paradigm shift.  People were incapable of finding other high paying jobs in more technical fields because they thought they’d be able to work for 40 years turning a wrench on an assembly line.

As a Free Market zealot, I not only expected this off shoring of manufacturing and other industries but I welcomed it.  This is what Companies have a duty to do – Find a way to cut as much cost out of the production of their goods and services  as they can while not sacrificing quality.  A publicly traded company has a fiduciary responsibility to do this so as to maximize profits and returns to their shareholders.

While there are stories coming out how this off shoring trend is reversing now that wages in China are rising (leading to ‘re-shoring’), we will never be back to the golden years of US manufacturing of the 50’s and 60’s.  We need to acknowledge that fact and educate our children and adults to adapt to this move to a knowledge based economy.  I wrote about that here:

“But here is the rub.  Moving to a Knowledge Based Economy demands a workforce that is highly skilled and those employees are required to have more education than a high school diploma provides.  Americans need to recognize this now, better yet we should have recognized it 10 years ago, or we will be left behind.   China, Mexico and India are not going away and there is no way to put the genie back in the bottle.  America needs to set a priority on producing a highly skilled workforce which means more graduates from technical schools and traditional 4-year colleges.”

While this isn’t a quick fix, Education is truly the tide that floats all boats.  Only through an education curriculum geared toward giving students tools to thrive in this new economy can we have a more educated citizenry that can get jobs, start companies and innovate our way out of this malaise.

There is still plenty of innovation left in this new knowledge based economy and plenty of jobs for all people but we have to change in order to take advantage of it.  A Bloomberg article said it best:

“Will there be enough decent jobs in this new world — or will the new technologies just make the rich richer while impoverishing everybody else? Brynjolfsson and McAfee meet this second kind of pessimist halfway. Just like its predecessors, the next phase of innovation will eventually destroy a lot of jobs, they say. But it will create a lot as well. This won’t happen all at once. There’ll be time to adjust, as economies have in the past. If policy makers rise to the challenge, they can make the adjustment easier and the gains more widely shared.”

“To support growth in the second machine age, the government needs to retool the education system (digital technologies can help), foster a favorable climate for entrepreneurs and new business startups (where most of the new jobs will be), encourage research and development, build modern infrastructure, and liberalize immigration to help meet the demand for skills. In all these areas, the U.S. has advantages it’s in danger of surrendering, especially if undue pessimism drives it into a defensive crouch.”

Did you catch that very important sentence in the 1^st paragraph above?

“If policy makers rise to the challenge, they can make the adjustment easier and the gains more widely shared.”

Which brings me to my last point…

Big Government Is Not The Solution, It Is The Problem

Unless we can get Big Government out of the way and have Washington DC focus only on their Constitutional duties, we’ll never be successful in implementing any of the real solutions above.

Yes, companies will move some of their manufacturing back to the US once labor rates are no longer attractive overseas but many companies will still stay in foreign countries because of the high US corporate tax rates.

The US has the highest corporate tax rate in the world and this is an obvious motivation for companies to relocate in other countries (sending important jobs with them).  The solution to this is really simple.  Lower the US corporate tax rate (I prefer 0% but really anything equal to the world average of 24% would be better than our current 40%) and watch the magic happen.  Companies will move jobs back to the US, these new jobs will involve people paying income taxes (that the US isn’t getting now), spending money (which will stimulate the economy and create new jobs) and the net effect will be lower unemployment and more Federal/State tax revenue even with the lower corporate tax rate.

Big Government’s hindrance to real income equality goes even further when we factor in crony capitalism that upsets the Free Market and gives sweetheart contracts to a politician’s biggest donors.  See Solyndra.

This Forbes article takes it a step further in stating that if you want to reduce Income Inequality then you need to take Big Government out of the currency business.

“Don’t blame “the rich” for America’s growing inequality. The problem is our unstable fiat dollar, which is to say, the problem is government. If we want prosperity for all, we have to go back to basics. We have to go back to gold.”

Our current Government is too involved in the weeds to take a strategic view of the problems we’re facing and work WITH private businesses instead of working AGAINST them.  Washington DC spent months wringing their hands of the Sequester cuts that amount to just 2.4% of overall Federal Government spending and then, months later, reinstituted some of that spending.  That is spending way too much time in the weeds while more US companies moved jobs overseas during this mental masturbation over sequester cuts.

I’m not a fan of the Department of Education but if we have to have it then let’s have them focus on retooling our system to educate our kids so they are prepared for this new knowledge based economy.  The DOE is too involved in Common Core and other useless initiatives that do little more than create paperwork that justifies their existence.

Conclusion

So there you have my 4 point plan to really address Income Inequality and return the US back to an economic power that it once was – 1) Reform Welfare and other ‘entitlement’ programs, 2) Encourage the two parent household, 3) Improve Education and 4) Get Big Government out of the way.

Let’s see if the Left and the GOP establishment are willing to confront these brutal facts and implement these solutions to fix our current (and future) Economic problems.