7 reasons why income inequality is not killing the American Dream

From James Pethokoukis of AEI.

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Less income inequality is self recommending, according to the left. Full stop. Reducing the income gap as much as possible — while still, of course, leaving some incentive for wealth creation — should be a top priority of government. Maybe the top priority. As President Obama said late last year: “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American dream, our way of life and what we stand for around the globe.”
We know now, however, that mobility has not been decreasing. Economic research also suggests that income inequality — at least so far — is not a fundamental threat to the American way of life. The Manhattan Institute’s Scott Winship draws the following conclusions from his review of the literature:

1.)  Across the developed world, countries with more inequality tend to have, if anything, higher living standards. The exception is that countries with higher income concentration tend to have poorer low-income populations.
2.)  However, when changes in income concentration and living standards are considered across countries—a more rigorous approach to assessing causality—larger increases in inequality correspond with sharper rises in living standards for the middle class and the poor alike.
3.)  In developed nations, greater inequality tends to accompany stronger economic growth. This stronger growth may explain how it is that when the top gets a bigger share of the economic pie, the amount of pie received by  the middle class and the poor is nevertheless greater than it otherwise would have been. Greater inequality can increase the size of the pie.
4.) Below the top 1 percent of households—and prior to government redistribution—developed nations display levels of inequality squarely in the middle ranks of nations globally. American income inequality below the top 1 percent is of the same magnitude as that of our rich-country peers in continental Europe and the Anglosphere.
5.) In the English-speaking world, income concentration at the top is higher than in most of continental Europe; in the U.S., income concentration is higher than in the rest of the Anglosphere.
6.) Yet—with the exception of small countries that are oil-rich, international financial centers, or vacation destinations for the affluent—America’s middle class enjoys living standards as high as, or higher than, any other nation.
7.)  America’s poor have higher living standards than their counterparts across much of Europe and the Anglosphere, while faring worse than poor residents of Scandinavia, Germany, Austria, Switzerland, the Low Countries, and Canada.

So income inequality doesn’t seem to correlate with lower living standards in advanced economies, particularly America’s. And income inequality doesn’t seem to be reducing upward mobility. These would seem to be an important conclusions to acknowledge before beginning  an all-out  War on Inequality.

Likewise, it’s important to have a deep understanding of the American economy — an economy that is the most innovative in the world and created 50 million jobs over the past three decades —  before government implements policies that might alter its essential, unique nature.  Example: Before raising investment taxes “on the rich,” consideration should be given to the impact on venture capital investment. Do we want fewer billionaires, even ones that get rich by creating wonderful new products or services rather than, say, inheriting their wealth or benefiting from government favor? A less dynamic  and entrepreneurial economy may be one with less inequality and less opportunity. And more opportunity is what we want even if some folks get really wealthy as a result."