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Friday, Jan 20, 2017

How to cure income inequality

If you’re a low-income African-American with a talent for braiding hair, you might have the idea of making money that way. You could start out doing it for relatives and friends and gradually build a clientele that could provide a decent income without a lot of capital. It could offer a way out of poverty and into the middle class.

But in many states, including Illinois, it’s not so simple. If you want to braid hair professionally, you must be a licensed cosmetologist. And to get that license, you have to get 1,500 hours of training. A poor woman who wants to pick up a little cash off the books can usually get away with it. But if she hopes to earn a living and can’t afford the training, she’s out of luck.

That’s one of the ways in which the American economic system hinders those at the bottom of the income scale. Many of them grew up with bad schools, crime-ridden neighborhoods and boarded-up shopping centers. Lots of the auto and steel plants that used to provide a middle-class lifestyle on a high school education (or less) have closed. So even as America has grown wealthier, many Americans have not.

From 2000 to 2011, reports the liberal Economic Policy Institute, the median income of working-age households fell by 12 percent. Wages now make up the smallest share of national income since 1966. “From 1973 to 2005,” wrote Harvard economists Claudia Goldin and Lawrence Katz in The Milken Institute Review, “the bottom fifth of families realized almost no growth in real income, whereas the top fifth enjoyed an average annual gain of 1.6 percent.”

The issue is gaining prominence. President Barack Obama gave a major speech this month arguing that growing income inequality “challenges the very essence of who we are as a people.” Pope Francis recently rejected what he called “trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.”

But highlighting the issue is a lot easier than offering viable remedies. And inequality is not the real problem. The highest earners generally come by their wealth honestly. Microsoft’s Bill Gates and Nike’s Phil Knight got rich by giving people something that made their lives better. Entrepreneurial capitalists usually hit the jackpot only by serving the needs of customers.

Goldin and Katz found that most of the increase in wage inequality came about from “increases in economic returns to investments in education.” In other words, the payoff for college and graduate schools rose because the capabilities they confer became more valuable in the marketplace.

So the true solution is not to take money away from the rich. Redistribution doesn’t necessarily improve the long-term prospects of the poor and working class. What they need are the skills and habits necessary to succeed in the modern economy, and the opportunity to make use of them.

The widening gap in earnings is the product of complex forces in a national and global economy that can’t be reversed. But to the extent they can be ameliorated, the key is not penalizing those at the top. It’s empowering those at the bottom.