Financial Times Editorial - Tackling America's growing inequality

Tackling America's growing inequality
Published: April 6 2006 03:00 | Last updated: April 6 2006 03:00. Copyright by The Financial Times

That George W. Bush has so far had difficulty persuading any prominent Wall Street Republican to replace John Snow as treasury secretary speaks volumes about the low priority his administration has accorded to economic decision-making.

Given the continued absence of credible economic leadership in Washington, it is unsurprising - but troubling - that both Republican and Democratic lawmakers have recently been tempted to fill the gap with populism. In that context, we welcome the launch yesterday by the Brookings Institution of a new platform - the Hamilton Project, named after America's first Treasury Secretary - to address America's looming economic challenges. Although composed mostly of Democrats, the group states a clear preference for market-based solutions to America's problems. It rejects the latent signs of protectionism recently visible on Capitol Hill. But it makes a strong case for the state to play a more constructive role both in improving the efficiency of America's market economy, but also in addressing the growing inequity of market outcomes.

Most important, it addresses the potentially dangerous impact that America's virtually stagnant median wage could have on the country's political mood and on the workings of the economy. Since 1973, the income of the top 10 per cent of American earners has grown by 111 per cent, while the income of the middle fifth has grown by only 15 per cent. That trend has become more pronounced in the last few years. Between 1998 and 2004, the median income of American households fell by 3.8 per cent. This coincided with annual productivity growth in excess of 3 per cent in most of those years. You do not need to take a definitive stance on why America's high productivity growth has been so disproportionately captured by a small percentage of Americans to agree that it makes for a potentially volatile political scenario. Alan Greenspan, the former chairman of the Federal Reserve and a Republican, has made the same point in public.

There is room for more scepticism about the group's argument that growing income inequality harms economic growth. There is some evidence that the growing volatility of American incomes feeds into a culture of risk aversion, which in turn reduces the creation of small businesses. There are also grounds for believing that a stronger personal bankruptcy law would enhance risk-taking, which would lift America's economic growth. But the jury is still out on the question of whether growing inequity necessarily leads to lower growth.

Yet it would be hard to dispute the recommendation that America should boost investment in the skills of its workforce, both through better technical training and improving the underperforming public school system. Likewise, we strongly agree with the view that the US needs to return to the path of fiscal discipline from which Mr Bush has strayed, even if the group ducked the question of how it would reform America's entitlement system. Reducing the cost of Medicare and Medicaid is America's most important long-term fiscal challenge. It is also critical to reverse Mr Bush's tax cuts.

At a time of economic demagoguery on Capitol Hill and a vacuum of leadership in the White House it is refreshing that rational voices are addressing America's core economic challenges. Many of the policy details are awaited. But the diagnosis is persuasive.