jec.senate.gov/republicans Page 1 REPUBLICAN STAFF COMMENTARY Economic Inequality: Causes and Solutions Where Do We Go from Here? June 27, 2012 Factors Driving Economic Well‐Being and Mobility What policies would ameliorate economic inequality and increase economic mobility? The first in this series of three commentaries discussed the difficulty of measuring economic inequality over time. The second commentary discussed economic mobility. This commentary examines the causes of economic inequality and lack of economic mobility and evaluates the effectiveness of various policy options to reduce economic inequality. First, individual behavior—especially decisions about completing high school and pursuing a college education or other specialized training, marriage, and parenting children— greatly affects economic mobility and well‐being. 1 Second, the information technology revolution over the last several decades has changed the demand for, and consequently the real wages paid to, different types of workers. This phenomenon, known as skill‐biased technological change, has increased the education premium workers receive for a college education and for graduate or professional degrees. Thus, education achievement is more important today than it was in the past to economic mobility and well‐being. Third, the interaction between taxes and the phase‐outs of social welfare benefits as household income increases frequently imposes an excessively high effective marginal tax on earning additional income. This phenomenon, known as the poverty trap, discourages individuals in low income households from entering the labor force, working extra hours, or seeking career advancement that would contribute to their economic mobility and well‐being. Therefore, when examining policy options, policymakers should keep in mind what makes Americans so mobile. The following conclusions are (Continued on the next page …) A rising percentage of families with a high net worth indicates that wealth is becoming more widely dispersed, not concentrated... The ownership of stock and homes has become more widely dispersed, not less so, as has the ownership of college degrees. ‐‐ Alan Reynolds, Income and Wealth 1
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REPUBLICANSTAFFCOMMENTARY
EconomicInequality:CausesandSolutionsWhereDoWeGofromHere?June27,2012FactorsDrivingEconomicWell‐BeingandMobilityWhat policies would ameliorateeconomic inequality and increaseeconomicmobility? The first in thisseries of three commentariesdiscussed thedifficultyofmeasuringeconomic inequality over time. Thesecond commentary discussedeconomicmobility.Thiscommentaryexamines the causes of economicinequality and lack of economicmobility and evaluates theeffectiveness of various policyoptions to reduce economicinequality.First,individualbehavior—especiallydecisions about completing highschool and pursuing a collegeeducationorotherspecializedtraining,marriage,andparentingchildren—greatlyaffectseconomicmobilityandwell‐being.1Second,theinformationtechnologyrevolutionoverthelastseveraldecadeshas changed the demand for, and consequently the real wages paid to,different types of workers. This phenomenon, known as skill‐biasedtechnological change, has increased the education premium workersreceive for a college education and for graduate or professional degrees.Thus,educationachievementismoreimportanttodaythanitwasinthepasttoeconomicmobilityandwell‐being.Third, the interaction between taxes and the phase‐outs of social welfarebenefits as household income increases frequently imposes an excessivelyhigheffectivemarginaltaxonearningadditionalincome.Thisphenomenon,known as the poverty trap, discourages individuals in low incomehouseholds fromentering the labor force,workingextrahours, or seekingcareer advancement thatwould contribute to their economicmobility andwell‐being.Therefore, when examining policy options, policymakers should keep inmind what makes Americans so mobile. The following conclusions are
barrierstoeconomicmobility isto improveaccessandopportunityforeducation.
8) Policies meant to reduce current economic inequality throughmeans‐tested cash and non‐cash benefit programs can exacerbateeconomic immobilityover time. Therefore, carefulpolicydesign iscriticaltoaprogram’ssuccess.
CharacteristicsofEconomicallyMobileIndividualsIndividualbehaviorisamajordeterminateofeconomicmobility.Accordingto an analysis of 2009 Census data from the Brookings Institution, adultswhograduatedfromhighschool,wereemployed,andreachedtheageof21and married before having children, had a 2 percent chance of living inpoverty and a better than 70 percent chance of upwardmobility into themiddle class, defined as $65,000 or more in annual household income.Thosewhodidnotmeetanyofthethreecriteriahada77percentchanceofliving inpovertyanda4percentchanceofmobility into themiddleclass.2AdditionalCensusdatademonstratesthatmarriedcoupleswithchildrenarerare in the lowest income group; currently, only 8.8 percent are in thelowestquintile,upfrom6.7percentatthestartoftheDecember2007‐June2009recession.Bycontrast,ofthetwo‐fifthsofbottomquintilehouseholdsthat are families, 83 percent are headed by single mothers. Even whenaccountingforunmarriedcohabitersandmarriagesthatoccuraftergettingpregnant (“shotgun” unions), researchers found that those who marriedprior to the birth of children had a significantly higher standard of living,werelesslikelytosplit,andwerethereforelesslikelytoimportfamilyandeconomicinstability.3The savings behavior of individuals in the lowest income group alsosignificantlyaffects the likelihoodofupward intergenerationalmobility. Arecent report from the Pew Charitable Trusts’ Economic Mobility Projectfound that71percentof childrenborn tohigh‐saving, low‐incomeparentsmoveupwardfromthebottomincomequartileoveragenerationrelativetothe50percentofchildrenwhomovedupwardfromlow‐saving,low‐incomeparents. This is also true for upwardmobility of individualswithin theirownlifetimes;55percentofadultsinthebottomquartileduring1984‐1989movedoutof thatquartileby2003‐2005 if their initial savingswerehigh.This compares to the 34 percent of those who moved out of the bottomquartileiftheirinitialsavingswerelow.4
Personaldecisionsmadewhileyoungarenotnecessarily limiting,buttheycancomeintoplayindeterminingthedegreeofrelativeeconomicmobilityexperienced in one’s lifetime and between generations. Given theseindividual choices, the government is limited in what it can do to makecertainindividualsmoreeconomicallymobile.EducationPremiumsThegrowingdisparityinwageincomeisnotaresultofthetoponepercentearningvastlymoreamountsovertime. Ascanberecalledfromanearliercommentary in theseries, these individuals in the toponepercentarenotthe same people over time, and more importantly, like gains from trade,income is not a zero‐sum game. In recent testimony before the JointEconomicCommittee,FederalReserveChairmanBenBernankestated:
[I]t is not so much a question of bringing down the top 1percentasitisbringingupthelower99percent.Thequestionis: How can you strengthen themiddle class? How can youmakemiddleclassincomeshigherandmoresecure? Thishasbeen,asyouknow,atrendthathasbeengoingonfor35yearsanditisrelatedtoalotoffactors,includingglobalization,thetechnical change which has made a high school educationsimply less valuable. So I would be verymuch in favor ofmeasures to strengthen the middle class and to help theaverage American do better and approaches like educationandsoonIthinkwouldbeveryconstructive.5
AccordingtoHarvardeconomistLawrenceKatz,evenifthegainsofthetopone percent were distributed to the lower 99 percent, household incomewould increase by less than half of what could be earned if everyoneobtainedacollegedegree.6Skill‐BiasedTechnologyChangeDuringthelastfourdecades,therapiddeclineinthecostofcomputersandcomputer‐driven machinery has significantly changed the demand fordifferent types of workers. Between 1975 and 2011, the real cost ofcomputerequipmentdroppedastaggering99.6percentandtherealofcostofsoftwaredecreased27.6percentoverthesameperiod.7Information technology has boosted the marginal productivity of highlyskilled, college‐educated workers. The real wages paid to highly skilled,college‐educatedworkershaveincreasedrapidlyaswelloverthepastfourdecades as the demand for these workers grew more rapidly than theirsupply. At the same time, information technologydirectly competeswithsome generally less skilled and less educated workers, whose real wageshave tended to stagnate. Economists refer to this phenomenon as skill‐biasedtechnologicalchange(SBTC).SBTChasexpandedthe“premium”intermsofrealwagesthatworkerswitha college education or an advanced degree earn overworkerswith a highschooleducation.Collegeeducationandotheradvancedtrainingcreatetheskillsetsdemandedbytechnologicalchangesoverthepastseveraldecades.
Consequently,the“wagepremium”forworkerswithacollegeeducationoranadvanceddegreehaswidened.Broadlyspeaking,typesof labor can be brokendown by skill setcombinations based onthe following: (1)having either arepetitive or creativeelement, in addition to(2)eitheracognitiveormanual element, asshown in Figure 1.8,iSBTChas increased thereal earnings forcreative/cognitive jobs(forexample,engineers,architects, and expertsin marketing, finance,communications,design, analysis, product development, and management), because thedemand for these skills has generally increased faster than the supply ofworkerswiththeseskillsovertheyears.For other types of labor, mostly the repetitive/manual occupations (forexample, assembly line positions in manufacturing), SBTC has caused therealwagesforworkerswiththeseskillsetstostagnateorgrowveryslowly.Workerswith repetitive/cognitive jobs (such as customer service and theserviceindustryingeneral)didnotwitnessasmuchofthenegativeeffectsof SBTC as repetitive/manual skills because these positions still requirehuman‐specificinput.SBTCdoesnotdirectlyaffecttherealwagespaidtootherjobskillsets,suchas the creative/manual combination (for example, firefighters, chefs, andprofessionalathletes). However,SBTChashadindirectpositiveeffectsontherealwagespaidtocreative/manualworkers. Astherealwagespaidtocreative/cognitive workers have increase over time, these workers havebought more services that are provided by creative/manual workers.Consequently, the real wages paid to creative/manual workers have alsoincreased.Between 1989 and 2007, there was a notable wage “polarization” in realwagedata.Thetoptenpercentachieveda23.3percentgain.Thebottom40percentsawagainintherangeof21.8to22.6percent.Themiddlefifthsawanincreaseofonly14.3percent.9
Figure 1 – The task, or skill set combination, of labor isbroken down into the following: creative/cognitive,creative/manual, repetitive/cognitive, andrepetitive/manual.
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Thenuancedviewof the SBTC and the changes it haswrought in the realwagespaidtodifferenttypesofworkersisnotuniquetotheUnitedStates.Theinformationtechnologyrevolutionhasproducedasimilardivergenceintherealwagespaidtodifferenttypesofworkersthroughouttheworld.Indevelopedcountries,SBTChasexpandedwagepremiumsforhighlyskilled,college‐educated workers in the United Kingdom and Germany. Recentcross‐country studies of European countries also show this pattern acrossbroad occupation groups.10 Developing countries have also witnessedgrowth in realwagespaid tohighly skilled, college‐educatedworkers as aresult of technological changes. These SBTC‐induced trends in labormarkets have occurred in most countries around the world regardless ofgovernmentstructure,businesscycles,politicalleadership,andgovernmentpoliciesonrevenue,outlays,andregulations.11MobilityandEducationAseconomistAlanReynoldsnotes,at thehigherendof the income ladder,thedemand forhigh‐skilled individualswith formaleducationappeared togroweven faster thanthe growth of supply.In the past severaldecades, thedifference betweenthe realmean incomeof U.S. workers withhigh school diplomasand those withbachelor’s degrees orhigher hassignificantlyincreased.12 As of2010, high schoolgraduates (37 millionpeople age 25 andover) achieved anaverage of $33,371 inannual earnings. Comparatively, earners with a bachelor’s degree (30million people age 25 and over) received an average $59,737 in annualearnings; master’s degrees (13 million) averaged $71,739 annually, anddoctorates(2million)averaged$126,057.13UsingCensusdata,ScottHodgeoftheTaxFoundationrecentlylookedatthepercent of individualswith a bachelor’s degree or higher and the percentwithahighschooldegreeorlessandcomparedtotalmoneyincomein2010.What Hodge noted was that just 8 percent of individuals at the lowestincome level have a college degree, while 78 percent of those earning$250,000 ormore per year have at least a college degree or an advanceddegree.Alternatively,ofthosewithahighschooldegree,9percentwereinthe highest income category while 69 percent were in the lowest incomecategory (associate degrees and those with some college were omitted).Hodgeargues that thedatarevealaneducationgaprather thanan incomegap.14
Figure 2 – Comparing the different levels of educationalattainment (with slightly different definitions prior to1991, shown in label parentheses), there is a significantwage premium for college education.
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According to researchfrom the BrookingsInstitution’s and PewCharitable Trusts’combined contributionto the EconomicMobility Project, theannual wage gapbetween a high schooldegree and a four‐yearcollege degree wasover $29,000 in 2005.Those with a highschool degree earnconsiderablymorethandropouts byapproximately $10,000asof2005. Whilebothadultchildrenwithandwithout college degreesweremore likely to exceed their parents’ income,those with college degrees were far likelier to exceed parental income asshown inFigure3.15 In addition, recalling from the secondcommentary inthe series, children of parents in the lowest quintile have a 45 percentchanceofremaininginthesamequintile(albeitmorethanlikelybetteroffin absolute terms than their parents in the same quintile), if they earn acollege degree, the odds of remaining in the bottom quintile are cut bynearlytwo‐thirdsandthechancesofearningmorethan$100,000annuallyquadruple.16In a recent article examining the effects of education and occupationalchoice on job security, a Federal Reserve ofMinneapolis article finds thatsomejobsfilledbyworkerswithlessformaleducationpayhighwages,butin a recession, a college degree typically offers better job security than alarger paycheck. During the Great Recession, those with a high schooldegreeorlessexperiencedhigherunemploymentrateincreasesthanthosewithabachelor’sdegreeorhigher;thisrelationshipbetweeneducationandrisk of unemployment holds for previous recessions. According to theMinneapolisFed,in2006about20percentofcollegegraduateswereinthebottom two income quintiles, earning less than $14.50 per hour.Alternatively,25percentofworkerswithonlyahighschooldiplomawereinthetoptwoincomegroupsearningmorethan$20perhour.Thus,itisnotthehighwageearners thataremostprotected from job loss inrecessions,but rather workers who continued their education beyond high school,irrespectiveofahighorlowwageincome,addingtoawidebandofresearchthatacollegedegreenotonlyprovidesawagepremium,butajobsecuritypremiumaswell.17TheFutureofEducationPremiumsAs economist Bryan Caplan points out, the oft‐cited story that highereducationattainmenthasplateauedfordecadesisbasedondataforthe25through 29 years old demographic, which only shows the educationattainmentforthatagegroup,nottheentirestockofeducatedworkers. Ifthe focus is shifted to the entire population 25 years and older, then the
Figure 3 – In all quintiles, the percent of children thatwill achieve higher family income than their parents issignificantly higher if the children receive a collegedegree.
percent of persons with high school completion or higher is noticeablyimproved, from the low20s in 1940 towell above80percent as of 2010.For thosewith abachelor’s degree orhigher, there is an improved inclinefromroughly5percent in1940tonearly25percent in2010. Whilethesenumbersmaystillseemlow,Caplannotesthattheelderlygrewupinaneraof low levels of formal education, and younger generations have achievedhigher levels of higher education as time has passed. Caplan argues thateducationalstagnationmaybeonthehorizon,butthatithasnotarrivedyetasmanyhaveassumed.18Anadditionalconcernisthatthecostoftuitionandfeesforpost‐secondaryeducation has notably increased as a proportion of median householdincome, rising from 9.6 percent in 1976‐77 to 25.0 percent in 2009‐10.Manyrecentstudieshavepointedtofederalaidaseffectivelyincreasingtheprice of tuition proportionally to the amount of aid offered. According todatafrom1996to2008,PellGrantrecipientsonaveragesawanincreaseintuition price of $17 to every $100 of Pell Grant aid offered. For selectivenonprofit colleges, this ratiowasobserved tobeashighas$66 inaveragetuitionpriceincreasesforevery$100ofPellGrantaidofferedtostudents.19InformationTechnology,TradeandGlobalizationEffectsIntheUnitedStates,theshiftingdemandfromlow‐skillproductiontohighlyskilledlaborproductionhasbeendramatic.AsformerSenatorPhilGrammandformerOMBdeputydirectorSteveMcMillinpointoutinTheWallStreetJournal,“Inrelativeterms,thereturntounskilledlaborhasfallen.Shortofacripplingreversalinworldtrade,whichwouldreducethevalueoflaborandcapital, thiseffectwilldominateworldmarkets for the foreseeable future.”The authors alsomention that the increased participation of China, India,Brazil, and Russia in the world economy has affected income inequalitybecausesuchanexpansionoflaborengagedinglobalmarketshasincreasedthe return on capital (both in the traditional sense and human capitalinclusive of education and training) while reducing the relative return tolabor.20A recent report from the International Labor Organization and theWorldTrade Organization found that while globalizationmay lead to higher jobturnover in the short run, there is no indication that trade or offshoringleadstohigherunemployment(oralowerlevelofemployment)overall,butthatthedemandforlow‐skilledlabormayfallasthedemandforhigh‐skilledlaborexpands.21Itshouldbenotedthatglobalcompetitionwillhelptospurinnovation and lower theprices of everyday goods. As economistNourielRoubini notes, in spite of the short‐term global risks, long‐term globalburgeoning of information technology means more trade in services andcapital, new industries in energy technology and biotechnology, andmoreexchangeinnewsandtechnology,inadditiontomorelabormobility.22AssessingExistingProgramsWhile social safety netsmay lift the impoverished out of destitution, theycan simultaneously discourage upward mobility resulting from, as ScottWinship puts it, “inefficient incentives related to work, marriage, andsaving.”23 This is a resultofpoorlydesignedphaseoutsbuilt into currentsocial safety nets. For example, on the tax expenditure side, if a couple
earning similar income decides to get married next year, the tax codepenalizesthesedualearnerswhenchangingtaxstatus fromsingleto filingjointly.24An alternative example of disincentives resulting from the governmenttransfer side includes thephaseout levelsofwelfareprograms,whichcantriggeragreaterthan100percenteffectivetaxrateonanearnerthatisnolongereligibleforthebenefitsofaparticularprogram,essentiallymeaningthat the reward forworking is zero or even negative. This interaction isknownasthepovertytrap.25 Forexample,thelossoftaxcodepreferencesmentioned above can be compounded when interacting with Section 8(“tenant‐based” or “project‐based” rental assistance) phase out levels ofincomethresholdeligibility.IfaSection8recipienthouseholdisgoingfromone to two income earners, or alternatively, if one earner is getting apromotion, this may make the household no longer eligible for theaffordableSection8rent,andthiscansignificantlydiscourageacceptanceofhigher wages or higher overall household income that would otherwisecontributetotheireconomicmobility.Thisnotonlydiscouragesindividualsfrom earning additional income, but also weakens the incentive toaccumulatesavingsforpurposessuchaseducationandretirement.A recent joint study from the Corporation for Enterprise Development(CFED) and the Annie E. Casey Foundation reported that federal policyadministered through the tax code are poorly targeted because they arefrequentlyusedtosubsidizewealthbuildingforthosetaxpayersthatdonotneed assistance.26 In addition, the EconomicMobility Project reports thatverylittle,0.2percent,ofthebenefitsfromfederalgovernmenttaxpoliciesmeanttopromotesavingsgotowardslow‐incomehouseholds.Notablyasof2003, those earning under $20,000 per year had only a 20 percentparticipation rate in a tax‐favored savingsvehicle compared to52percentandupforthoseinhigherincomegroups.Byage,only32percentofthoseunder 30 years old were participating compared with 56 percent and 63percentforthoseaged30‐44and45‐59,respectively.27Asofthefirstquarterof2011,49.1percent,nearlyhalfofU.S.households,werereceivingsometypeofgovernmentbenefit,upfrom30percentintheearly1980s;16percentofthepopulationliveswithatleastonepersonthatreceivesSocial Security, and15percent receiveor livewith someonewhoreceivesMedicarebenefits.28Asmentionedintheinitialcommentaryoftheseries,eventhoughoveralltransferspendinghasremainedconsistentwithoverall income growth, total government transfers to the lowest quintiledeclinedfrom54percentto36percentbetween1979and2007asaresultofrapidgrowthinnon‐means‐testedprograms.Furthermore,itisimportanttoconsiderthatattemptingtoequalizewealthwould discourage saving, because it would require confiscation ofwealth,which for retireeshas takena lifetimeofwork toaccumulate, togive it toyounger generations with little to no savings built up yet. As Reynoldsstates, “Political allocation of goods and services not only leans towardinefficient, one‐size‐fits‐all solutions, but also toward favoritism for thosewith the most political clout (which does not include the poor).”29 Thus,Reynolds cautions that how incentives change must be very carefullyconsidered before policymakers attempt to collectmore tax revenue fromindividualswithhigher incomesortrytoprovidelargertransferpayments
tothosewithrelativelylowincomes.Itisthereforeexpectedthatifworkistaxedandnon‐workissubsidized,thenlessworkwilloccur.30PotentialSolutionsPotentialpolicysolutionsincludepromotingupwardmobilityforthosewhoare at risk of remaining immobile from the bottom income group throughinvestmentsineducation. Thisgoeshand‐in‐handwitheducationalreformand incentives for improved, accountable education environments. Otherpossible policy solutions could include reform of current “safety net”programs towards thepromotionof independence,employment,marriage,andsavings.Government shouldprioritize transfer spending by ceasing to give help tothose who need it least. Given that market distortions hinder economicopportunities, corporate subsidies, burdensome regulations, and otherobstacles stack the deck against newmarket entrants and have likely hadnegative effects on the current conditions of economic mobility andinequality.31Broadeningthetaxbasetoreducetheincentivetoletloopholesproliferate, thus reducing the progressivity of the tax system enables theeconomy to grow into a bigger pie from which all levels of income andwealthcanbenefit.ConclusionAsScottWinship states, oneof the central problemswithmost discussionaboutincomeinequalityisthatitfailstodistinguishbetweengoodandbadinequality andmobility. Winship reasons, “the issue of economic growthpoints to the central importance of absolute mobility—of ensuring thatchildren do at least as well as their parents, and ideally much better.Economicgrowthisthebestantipovertypolicywehaveandthebestpathtoa prosperous middle class.”32 As for relative mobility, low economicmobility is inefficient; and when many people remain immobile from aparticular income group, it likely represents a very costlymisallocation ofhumancapital.33As timehaspassed, theperceptionsofeconomic inequalityandwell‐beinghaveskewedthefocusfromaddressingtheneedsofthoseatthelowestendof the scale towards the perceived injustice of how much the wealthiestearn. This has derailed the discussion in policy from successful solutionsaddressing economic immobility in favor of ensuring everyone receives a“fair” share. A refocus requires (1) critical consideration of how policiesaffectincentives;(2)identifyingpoliciesthatincreasewell‐beingovertime;and (3) education reform, which is the best long‐term solution to ensuresustainableimprovementofwell‐beingandeconomicmobility.Measurementmatters.Income, particularly money income, is only one dimension of well‐being.Income, earnings, and wealth are all important components whenaccounting for well‐being. Thus, the use of money income to determinewell‐beingmeasurementssuchasthepovertyrateandincomeinequalityisflawed and can especially distort perceptions of well‐being and misguidepolicydecisions.
Multidimensionaldatabetterinformpolicydecisions.The need for a more comprehensive, multidimensional measurement ofwell‐beingthatconsidersall formsofwell‐beingandaddressesdifferencesin the definitions of income and its dimensions, such as householddemographics, policy changes, price indices, and consumption patterns, iscritical to providing a more accurate picture of America by whichpolicymakerscanidentifybettermethodstoaddresswell‐being.Economicmobilityhasnotdiminished.Recentclaimsthateconomicmobilityhasdiminishedhavebeenundercutbythe evidencewhen considering amultidimensional viewofwell‐being andaccounting for age, education, household structure, absolute and relativemobility,intergenerationalandintragenerationalmobility,andconsumptiondisparitiesamongdifferentincomegroups.TheU.S.experiencefitstheinternationaltrend.Skill‐biased technological change is productivity enhancing for certain jobtypes and negatively affects others. The effects of SBTC and educationpremiums on economic inequality are not particular to the United Statesalone.Instead,theUnitedStatesisontrendwiththerestoftheworld,bothinadvancedeconomiesandindevelopingones.Notably,theseSBTCtrendsinlaborhavecontinuedregardlessofgovernmentstructure,businesscycles,political leadership, and government policies on revenue, outlays, andregulations.Redistributiveprogramsarenotlong‐termsolutions.Over the long term, policies that aim to address economic inequality bymaking the tax code more progressive and expanding social welfareprogramsareunlikelytosignificantlyreduceincomeinequality.Inaddition,the recent safety net expansions have further increased labor marketinefficiency and expose a greater number of people to the uncertaintyresulting from the political process about how “safe” safety net structuresareintermsofcontinuedbenefits.Accesstoqualityeducationisthelong‐termsolution.Thebestwaygovernmentcanaddresseconomicinequalityandbarrierstoeconomic mobility is to improve access and opportunity for qualityeducation—a solutionwhich requiresmassive reform in order to increaseaccountability for education outcomes, enhance student performance, andpromote teachers that excel inhelping students learn. And for thosewhodon’tpursueformalhighereducation,resourceswhichaidinidentifyingandacquiringtransferableskillsarecriticaltoremainingeconomicallyviable.Policydesigniscriticaltoasolution’ssuccess—incentivesmatter.Because current policy solutions to address economic inequality andimmobility employ certain elements in the tax code and social welfareprograms, there is significant danger of creating poverty traps that createdisincentivestoworkbecausethecombinationoftaxesandlossofbenefitscreate high effective marginal tax rates. Thus, serious consideration ofpolicydesignwithregardtobehavioraleffectsismostcriticalwhenitcomestodecisionsmadeaboutprogramphaseoutsandtaxpolicy.Governmentprogramstoeconomicinequalitymustbegearedtowardslong‐term solutions; government cannot afford and ultimately fails to help
everyone in the current framework. Economic growth, internationalcompetitiveness, and long‐awaited critical reforms in education willengenderabsoluteandrelativeeconomicmobility. Asaforementionedinaprior JECcommentaryexaminingeducationand skills‐biased technologicalchange,34themostpromisingapproachpolicy‐wiseistotakeontruereformto improve thequality of education inAmerica so that allAmericanshavetheopportunitytoenhancetheirskills,increasetheirlifetimeearnings,andachieveupwardmobilityinthesensethatitisearned,notgiven. 1 AlanReynolds,IncomeandWealth,GreenwoodPress:Westport,CT,(2006).
