Federal Government Not the Solution to Income Inequality

Feb 11, 2014 by AFP

By: Eric Peterson

While the American dream of starting from anywhere and working to the top still exists in the American consciousness, many have begun to question whether that dream remains plausible. In last month’s State of the Union Address, President Obama addressed his position on the issue. “Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by – let alone get ahead.”  His solution to this problem is predictable, — more federal government programs.

Despite the President’s rhetoric, however,  a new study by the Equality for Opportunity Project, written by a group of Harvard and Berkeley economists, finds that the probability of moving up or down on the income ladder has remained stable over the past twenty years.  And while the White House may believe big government has the power to influence income mobility, the study suggests the factors that affect equality of opportunity are concentrated more at the local and family level.

Recently, the federal government has attempted to reduce perceived opportunity inequality. As a result President Obama has pushed for both increasing the minimum wage as well as for higher taxes on the wealthiest one percent.  Studies have shown that higher minimum wage rates often make it harder for lower skilled workers to find and keep employment. Higher minimum wage laws have an even more devastating affect for teenagers looking for employment.  As the study notes, teenagers who participate in the labor force have a much higher probability of moving up the income ladder.  The proposed minimum wage hike could deny many teenagers the opportunities to gain the skills necessary to become successful adults.

Another perceived problem is the rise of income inequality driven by the top one percent of earners   The President has proposed the “Buffet Rule” which would increase the tax rate for high earners to deal with this inequality.  However, the study finds that there is little to suggest that those with higher incomes have any negative effect at all on income mobility. Taxing the wealthy does not solve the fundamental problem of opportunity inequality, but has proved to be politically popular to Obama’s base.

While the federal government has proven to be ineffective at dealing with the issue of inequality of opportunity, factors at the local level can be effective at improving outcomes. One of the largest predictors of success for young people is the quality of local schools.  The federal government has invested billions, for example, into programs like Head Start in an attempt to improve outcomes for younger students — but the positive effects of the program all but disappear by 3rd grade. By contrast, positive measures from schools such as high income-adjusted test scores and low dropout rates have shown to lead to an increased probability of that student being economically mobile. Rather than the federal government attempting to impose heavy-handed rules and regulations on local schools, more power should be given to parents. This means increasing choices for parents through the use of charter schools and voucher programs so families have the opportunity to make the best choices in their child’s education.

Local government certainly has an impact on outcomes, but by far the biggest factors which influence opportunity equality are family and community.  Aspects such as community involvement and percentage of dual parent households in communities are positive indicators that a child is likely to move up economically. These factors have a much greater impact than any federal or local program on the ability to be socially mobile.

While opportunity equality is not yet a reality for all Americans, often the proposed government solutions to the problem have had little impact. Too often, politicians and bureaucrats in Washington, DC see themselves as the solution to all of America’s woes while in reality; these problems can be best solved at the local and family level.

Instead of spending billions of dollars on federal programs that yield few positive results, policymakers should reduce spending on these intrusive and ineffective programs and return power to local government and families. Rather than a one –size- fits- all government approach, we should allow those who are closest to the problem to use their local knowledge to solve the challenge of opportunity inequality.