On September 19, the House Committee on the Budget held a hearing, titled: “Solutions to Rising Economic Inequality.”
During the hearing, Rep. Dan Crenshaw (R-TX) dispelled a common myth regarding income inequality, and spoke with American Enterprise Institute’s (AEI) Romesh Ponnuru about where the focus should be as it pertains to reducing poverty in the United States.
Crenshaw first noted the stark differences between progressive and conservative views on poverty.
CRENSHAW: [It’s] great to be at this hearing, and it’s great because it exposes two very different ways of thinking about our economy, opportunity, and the mutually-shared goal of overcoming poverty.
So, on the one hand, you have a deep and persistent focus on inequality – it’s defined as the gap between the rich and the poor – and at first glance, that seems pretty reasonable. But in reality, it means you’re dividing your attention. Half your attention is focused on protesting the wealthy – and these days that seems actually where most of the attention is – and that leaves only a small amount of focus on the real issue, which is people in poverty and their ability to move up the economic ladder. This is the kind of backwards thinking that leads to ideas like Andrew Yang’s, where we raise taxes on the rich only to give it right back to them in the form of universal basic income. It’s hard to imagine a more inefficient and ineffective way to reduce poverty.
As a conservative, our approach is different. Instead of creating resentment against success, we focus on who actually needs our help, which is the people who are having trouble moving up the economic ladder. After all, the fact that there’s a much wealthier person down the street from you is not the problem. The problem occurs that if you can’t find opportunities even when you make all the right decisions. So, the first step to understanding any problem is to get to the truth. Mr. Ponnuru, I want to go to you on this. We’ve heard inequality is worse than ever. Is that true – especially if we use a more accurate measure of inflation and account for welfare programs and cash transfers?
PONNURU: No, it does not appear to be true. The Congressional Budget Office’s reports on the distribution of income suggest that income inequality peaked in 2007, that it has been falling since then, and so, we are, I think to some extent, looking at a problem in the rearview mirror. Of course that could change. Maybe next year’s numbers will be different, but the trends over the last decade or so have been toward shrinking inequality.
Ponnuru’s claim is accurate. According to the Congressional Budget Office, between approximately 2007 and 2016, the gap between the upper, middle, and lower quintiles shrank, after “transfers and taxes” are taken into account.
Crenshaw then asked Ponnuru to explain the demographics of those in the bottom quintile.
Ponnuru replied, making a critical point in the process about the way in which quintiles are measured:
So, people in the bottom quintile differ from people in the other quintiles across a variety of measures. One of the more important things to look at is the number of workers in the household. The top quintile is going to be much more likely to have two earners in that household, and the bottom quintile is much more likely to have zero earners in the household. Obviously, that’s going to make a huge difference in how much income you’ve got. There’s also the question of age. If you’re retired or if you’re young and in school, you may very well be in the lowest quintile – it doesn’t mean you are always going to be in that quintile or always were. Lifetime inequality is lower.
Crenshaw then offered several statistics on economic mobility:
It also turns out that 56% of Americans will at some point in their lives be in the top 10% of earners. 73% of Americans will be in the top 20% of earners in their lifetime. It’s an amazing statistic. Doesn’t mean we can’t always do better, but it’s an amazing statistic. Also turns out my colleagues are right that the middle class is shrinking – it’s just not in the way that they think. Turns out the data shows the middle class is shrinking because they’re moving up into higher income households over time. This is all good news – doesn’t mean we can’t improve – the point is that the rhetoric about inequality is not only inaccurate, but it’s just flat-out unhelpful to the people we are actually trying to help.
According to AEI’s Mark Perry, using data from the U.S. Census Bureau, from 1967 to 2017, the percentage of high-income households in the United States increased from 9% to 29.2%. Meanwhile, the percentage of low-income households decreased from 37.2% to 29.5%. The share of middle-income households did shrink (from 53.8% to 41.3%), but many moved upward.
A 2018 publication from Pew Research states: “From 1971 to 2011, the share of adults in the middle class fell by 10 percentage points. But that shift was not all down the economic ladder. Indeed, the increase in the share of adults who are upper income was greater than the increase in the share who are lower income over that period, a sign of economic progress overall.”
Crenshaw then spoke of potential solutions, as well as barriers to such solutions. Ponnuru agreed that one of the best ways to try and reduce poverty is to eliminate barriers to mobility, which, he says, are “often created by the government.”
CRENSHAW: If you want to empower people to rise up instead of disempowering them with more handouts, how do we do that? You don’t need to take my word for this. Mayor Bloomberg, a prominent Democrat, studied this extensively with 30 different pilot programs, and what they found is there’s different solutions for different kinds of poverty, and they’re localized solutions. We have to be thinking about it that way.
So back to you, doctor. How else can we empower people to rise up? We talked about occupational licensing. I have a constituent in my district – her name is Ashley. She owns a hair wash and style company – she can’t find stylists because Texas requires a thousand hours of licensing to wash and dry hair. I learned how to free-fall out of an airplane at 30,000 feet in less time than that. That’s crazy. Can you talk about more solutions like that. You mentioned housing. What kinds of deregulation, what kind of vocational training can we be working on so that we empower people to rise above their current economic status?
PONNURU: So, I think with the little time I have here, what we should be doing is focusing specifically on mobility, opportunity, and fighting poverty, not as much on inequality, per se, and identifying barriers often created by the government that we can get out of the way.
Regarding occupational licensing, the Foundation for Government Accountability (FGA) writes:
A 2012 study by the Institute for Justice that examined licensing requirements for 102 different low- and medium-income occupations found an average requirement of $209 in fees, one exam, and approximately nine months’ worth of education and training for licensure. Manicurists in Virginia need to pay $290 to work legally, and cosmetologists in Michigan must pay $291 for an application, license, and exam—in addition to the cost of state-required schooling. After completing the required training, residential painters in Arizona must pay $870 to receive a license. These administrative charges, testing fees, tuition payments, and time requirements all make it harder for low-income Americans to climb the economic ladder.
In April 2011, Professor Morris Kleiner from the University of Minnesota, as well as Princeton’s Alan Krueger and Alexandre Mas, penned a “proposal to the Brookings Institution … to encourage states to rationalize occupational licensing practices and make them more efficient and fair.”
In their proposal, the professors wrote about the ways in which occupational licensing can negatively impact workers.
Upon analysis, Kleiner “found that partially licensed occupations had a 20% lower growth rate in states with licensing relative to states without licensing and relative to the difference in growth rates between these sets of states of fully licensed and fully unlicensed occupations. This estimate implies that a licensed occupation that grew at a 10 percent rate between 1990 and 2000 would have grown at a 12 percent rate if it were unregulated.”
To get a sense of magnitudes of the effect of licensing on employment and consumers, consider the following (“back-of-the-envelope”) calculation. Suppose that the entire 15 percent wage premium for licensing is from rents (as opposed to human capital), labor supply is perfectly elastic and the labor demand elasticity is 0.5. There are approximately 38 million licensed workers in the US with average annual earnings of $41,000. Under these assumptions, licensing results in 2.8 million fewer jobs with an annual cost to consumers of $203 billion…
The authors note that they would require a much greater data set to understand which occupations are more suited to licensing, however, they add that studies “have found at least in a number of cases licensing reduces employment, increases prices, but does not result in better services.”
The authors then offer an example pertaining to dentistry, citing a finding that occupational licensing for dentists increased overall costs to consumers for “certain services,” but did not “lead to improved measured dental outcomes…”