PRESIDENT OBAMA’S economic plan is supposedly dead on arrival, drowned in the bathtub by an opposition wielding its most damning indictment. “Another income redistribution scheme,’’ said Senate majority leader Mitch McConnell after Obama’s State of the Union speech. The president is “trying to advance his goal of wealth redistribution,” fumed Senator James Inhofe, Republican of Oklahoma. “His income redistribution policies have stifled the economy,” said Bill O’Reilly, even as he admitted to the economy’s recovery. “Please don’t muck it up with the social justice stuff.”
For once, let’s agree with Obama’s critics on this point: The economic proposal he outlined Tuesday would shift some of the burden from the middle class to the wealthy. It would increase taxes on capital in exchange for lower taxes on labor. It would boost wages, low-income tax credits, and social benefits that have lagged behind economic growth, and pay for it with fees on billion-dollar banks, large inheritances, and investment income. In other words, it would take some overdue steps toward correcting the economic policies of the past three decades, which have been redistributing wealth like there’s no tomorrow — just in the opposite direction.
The numbers are fairly staggering. In October, Federal Reserve Bank chairwoman Janet Yellen gave an address on income distribution, accompanied by what the Washington Post described as “jaw-dropping’’ charts showing the country’s widening inequality. Using fresh data from the Fed’s triennial Survey of Consumer Finances, Yellen showed that between 1989 (the first year of the survey) and 2013, the average income of the top 5 percent of US households grew by 38 percent, while the rest of the country’s income grew less than 10 percent.
Even more striking was the shift in wealth. In 1989 the top 5 percent of American households held 54 percent of the nation’s assets, which grew to 63 percent by 2013. The entire bottom half of the country — 62 million households — holds only 1 percent of the wealth. The average net worth of these households was a mere $11,000 in 2013, less than half what it was in 1989. Meanwhile, the net worth of families in the top 5 percent nearly doubled over that period, from $3.6 million in 1989 to $6.8 million in 2013. If that isn’t redistribution, what is?
These things don’t happen by an act of God. The causes of growing inequality are layered and complex: Globalization, the collapse of unions, and increasing consumer debt all play a role. But a major cause has been government policies that favor wealth over work. Low tax rates on capital gains and other investment income, deregulation of financial markets, and erosion in the value of the minimum wage all tilt the board dramatically, with the average worker on the losing end.
To keep taxes low on interest, capital gains, and the super-rich, the government has pulled back on other spending. Federal investment in higher education is down, especially compared to other developed countries. The resulting skills gap only makes the prospect of moving up the income ranks more remote for working Americans.
Obama’s proposal would apply the brakes to these galloping trends. It would increase the capital gains tax rate to the 28 percent level it stood at when Ronald Reagan was president. It would make it harder to avoid inheritance taxes. More important to those millions of households in the 95 percent, Obama would use the new revenue to enhance tax credits for two-worker families, college tuitions, and child care. He would make community college tuitions free — as President Clinton first proposed in 1996 — and make it easier for ordinary workers to participate in 401(k) and other tax-deferred savings plans enjoyed mostly by wealthier individuals.
These are popular solutions that Obama’s opponents, for all their bluster, will find it hard to push off the table. Even the Masters of the Universe convening at the World Economic Forum in Davos this week are talking inequality, concerned about depressed demand, instability, and social unrest.
When it comes to income redistribution, Robin Hood has been more like Rip van Winkle— asleep for decades. While he’s been snoozing, the financial lives of too many Americans have gotten demonstrably worse. What will it take to rouse him — and the rest of us?
Renée Loth’s column appears regularly in the Globe.