February 08, 2006
Wednesday

Tim Kane, one of the top scholars on economic policy issues at the Heritage Foundation think tank, is no ivory-tower intellectual. A former software company entrepreneur and former college economics professor, the U.S. Air Force Academy grad has done government research work for Congress, the CIA and several defense agencies. I talked to him recently by phone from his offices in Washington about what one of his areas of expertise -- the income gap between rich and poor.

Q: We constantly hear complaints in the media about rising inequality. What are they talking about?

A: It's true. Critics say that the poor are falling behind. It's a loaded phrase, because the average American would hear that as "the rich are getting richer, and the poor are getting poorer," the old refrain -- which statistically is not true. The poor are not getting poorer, the poor are getting wealthier. The debate has really transitioned from a disagreement over poverty in America to a conversation about inequality, brought as an indictment that there is rising inequality. Superficially, you can see this in the stories about CEO pay, which can seem awfully outrageous. But the statistical argument is that rising inequality is dangerous and it is not conducive to a democracy; it's an embodiment of class distinction, and there's this dystopia of class warfare on the horizon.

There are two problems with that. One is that it is tangential to poverty issues. And two is, the fears are pretty much make-believe. It's a Chicken Little scenario that someday there will be such great inequality that the rich might become disengaged from the poor and won't want to pay taxes anymore. God forbid that there'd be smaller government, right? It's what I call "income relativism." Income relativism is where there are a group of critics who have decided they can't win the argument over poverty ­ because in fact poverty is declining in America. Instead, they are left with just comparing incomes relative to another.

Q: They make it sound like this is threat to the entire fabric of our republic ­ this widening wealth gap. But are the poorest 20 percent of American households worse off or better off than they were in 1980?

A: In dollar terms, they are wealthier. There are a couple problems with that though. One is, it's not the same 20 percent. This is one of my first complaints about this type of analysis. There's always a bottom quintile. No matter where you are, if everybody's gotten 10 percent wealthier, there's still a group that's the bottom quintile. What's interesting is, it's not the same group of individuals. There's so much mobility that the majority of people in each quintile have moved. They've either moved up or they've moved down. They've moved on to a different job. Maybe they've retired. Maybe they are newborns and weren't around the last time the income survey was taken.

The idea that you can take a snapshot of U.S. incomes and get an accurate perspective on relative incomes is just deeply flawed at the beginning ­ and it's not a flaw that can be really remedied. It's just not the right way to look at the world. The right way to look at the world is, "Are the poor getting poorer or is there a lack of opportunity?" And the answer to that is, "Definitively no." We're still a great nation of opportunity.

Q: Yet there is real poverty in America. Who are they? Where are they?

A: I think the incidence of real poverty is pretty self-evident. It's almost like the homeless issue. It's very hard to get a count, but you see the evidence with your own eyes. I'm not an expert on what the real poverty is, but it's pretty clear that it's not the 12 percent that is used from the Census Department data. What I think happens when the Left tries to dress up the statistics of poverty is, they get people focused on the wrong group. So instead of talking seriously about 2 percent or 1 percent hard-core poverty, we get in a debate about people classified as being in poverty who are retired, who are college seniors, who are working families that maybe don't rise above the poverty threshold but are living well.

Q: They have a house, seven TVs, three cars.
A: The classic story that Robert Rector did here at the Heritage Foundation assessing the assets and finding out that people classified as in poverty ­ I think it's a majority -- own their own home. It's hard to pin down what real poverty is, and yet we can pretty clearly pin down why they become poor. And they are issues driven by social problems ­ like illiteracy, like drug use. That's not to say that it's anybody's fault. It's just saying that this isn't a flaw in capitalism; this is not a flaw of free markets. We have social problems. Let's address them correctly as social problems, not as economic problems.

Q: You talk about "income relativism" - when people worry about the difference between the rich and poor as opposed to worrying about whether poor people are getting richer. What's the danger of that kind of thinking?

A: The biggest danger is that it gets in the way of progress. I believe we have a genuine fight on our hands to provide quality education and skills to every American and that that is the real source of poverty. By focusing on what some people call the politics of envy and I call income relativism, we miss an opportunity.

The rich people are not the enemy in the struggle. There aren't any people that are the enemy. It's sort of these ignorant forces that we've allowed to continue to operate. It's this arrogance on the side of the Left; I call it a glibness that they see themselves as the only champions of the poor, that gets in the way of new thinking.

The other danger is, we do get stuck in class warfare. Let's be honest, that benefits some groups. In particular, labor unions are very happy to engage in class warfare ­ that there is capital versus labor. But in the era where the workers' interests are aligned with business interests, we all want companies to be successful. Nobody wins when GM suffers. Nobody wins when Ford has layoffs or one of the airlines goes under. Labor unions at Northwest don't benefit if that airline goes bankrupt. Workers understand that, and that is one of the reasons unions are declining. But they are stuck in the old mindset of it's either profits or wage gains. The world doesn't work that way.

Q: What about the rapid growth in Social Security and Medicare costs? Are they going to make us all poor together?

A: We do have to have day of reckoning and I think it will be a generational day of reckoning. There's a real question mark over whether the younger generation will accept a constantly increasing tax rate - vastly higher than any retiree has had to pay into the system. My kids are going to be faced with that because I don't think this generation of politicians is willing to meet the challenge.

If there is good news here, it is that our demographic time bomb blows up a decade later than the one in Europe and Japan. So we're going to see how other countries deal with it or in fact don't deal with it. Here's my prediction: The nations that are able to get leaner governments and lower labor protections, ironically, will grow much faster and make wealthier citizens across the board. The nations that continue to go with bloated Nanny States will slow down, they'll lose businesses, they'll lose investment and they are going to get in a much worse situation. We have the data now to do cross-country comparisons and see why governments fail ­ and they fail because they have generous Nanny States. The evidence is there. It's whether the politicians have the courage to admit reality or not.

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