CONTOS AMERICANOS : DESIGUALDADES

Seize the Chance
The politics of inequality have shifted. Now policy must follow.

Sunday, December 24, 2006; Page B06

THIS SERIES opened with the observation that Americans prefer not to discuss inequality. Nine months later, the climate has changed. John W. Snow, who served as Treasury secretary until July, broke ground for this administration by acknowledging that inequality was worth debating -- though he never quite conceded it was a problem. His successor, Henry M. Paulson Jr., forthrightly declared that "amid this country's strong economic expansion, many Americans simply aren't feeling the benefits." Meanwhile, Ben S. Bernanke, installed by President Bush as Federal Reserve chairman, has called for the fruits of globalization to be distributed more evenly. During his 2000 presidential campaign, Mr. Bush quipped that his base consisted of the "haves and the have-mores." We doubt he would make this joke now.

The question is whether the new climate will lead to a policy breakthrough. Some of the Democrats who unseated incumbents in the midterm elections -- notably Sens.-elect James Webb in Virginia and Sherrod Brown in Ohio -- campaigned on the issue of inequality and feel that they have a mandate for action. But the action they emphasize is trade protectionism, which would harm growth without necessarily reducing inequality. Higher tariffs might help workers in struggling manufacturing companies, but they would push up prices for workers in the service sector, which includes janitors, fast-food workers and other low-income employees.

The field is therefore open for leaders in both parties to come up with better ideas. This series has suggested several options and explained their policy merits. But we also believe that our proposals are politically marketable.
Take our suggested tax increase: A 5-percentage-point increase in the rate paid by the top 1 percent of households. Members of Congress appear to believe that calling for a tax increase -- any tax increase -- is political suicide. But can it really be true that voters are wedded to all of the tax cuts enacted this decade, even though the richest 1 percent stand to pocket more than a third of the windfall? By definition, the tax increase we suggest would not affect 99 percent of households, and it would not damage growth either. It would merely restore the top rate that existed in the 1990s -- a period when the U.S. economy performed excellently.
The same goes for tax reform, another policy endorsed in this series. Members of Congress may think they'll be skinned alive for messing with mortgage-interest deductions or tax shelters for savings. But what if they explained that half the benefits of these schemes flow to the richest tenth of households? What if they promised that the majority of voters would keep their tax breaks, and only those with mortgages of $500,000 or more would suffer the indignity of reduced subsidies? If voters understood that these tax deductions are unfair, inefficient and condemned by policy experts of all stripes, they would applaud the politician who tamed them.

This series has also proposed a boost to education spending, including an increase of $2 billion annually to upgrade the quality of the Head Start preschool program. Of all the policies we offer, this is perhaps the easiest sell. Mr. Bush has demonstrated that it's possible to generate a bipartisan coalition on education, and this month a commission headed by former education and labor secretaries from both parties endorsed the idea of starting school for most children at 3 years old. The chief obstacle to action is the fear that education reform seldom yields real improvement. But experiments with high-quality preschool have shown dramatic reductions in later dropout and arrest rates for students, proving that education investments are effective and save money for society in the long run.

Then there is the dysfunctional health system, which national politicians often shy away from in the belief that it is impossibly complex. But the pressure for reform is stronger now than it was when President Bill Clinton's proposal crashed spectacularly: The nation has suffered another decade of galloping health costs that eat into take-home wages, damage the bottom lines of companies and leave a shamefully large number uninsured. Besides, the idea that ambitious health-care proposals will explode in the face of their sponsors is belied by recent experience. Gov. Mitt Romney of Massachusetts signed a plan for universal health coverage and is now running for president. A dozen other states are pushing health-reform experiments; California's governor, assembly speaker and Senate president are coming out with rival ways to expand coverage. This month Sen. Ron Wyden, Democrat of Oregon, unveiled a voluminous bill that promises to extend coverage to all Americans without costing taxpayers a cent more.

Inequality has increased in most rich countries over the past quarter-century. We do not claim that eliminating it is possible, nor even desirable: Unequal rewards help motivate people to work and innovate. But excessively unequal rewards can backfire. They can allow a successful elite to insulate itself from the rest of society, actually dulling competition and incentives, which is why economists find no evidence that more unequal societies grow faster -- and some evidence of the opposite. The level of inequality in the United States is bad for the social fabric without being good for economic dynamism. There are win-win opportunities to reduce inequality and at the same time boost efficiency. When the new Congress convenes in January, it should seize them.

This is the 10th and final editorial in a series on inequality. Previous editorials in this series can be found athttp://www.washingtonpost.com/inequality.