Romney Shouldn’t Avoid the Income-Inequality Debate

June 28 (Bloomberg) -- As he challenges Barack Obama for the presidency, Mitt Romney may be inclined to leave the issue of income inequality to his opponent. That would be a mistake.

The reason isn’t just that the country’s widening income gap over the past few decades is an issue any president should address. Romney should also talk about inequality because he could benefit in the November election by convincing voters that there is more than one way to increase incomes for low-earning households.

He isn’t supposed to venture into this area. As a Republican and successful capitalist, Romney is assumed to be the candidate who favors private initiative to unleash growth, without fretting over how its fruits are distributed.

In addition, Obama has argued that the natural response to inequality is steep taxes on high earners and investment income. Since Romney opposes this remedy, it may seem wise for him to ignore the disease, especially when other issues -- a feeble economic recovery and huge fiscal deficits prominent among them -- offer a clearer advantage to the challenger.

Yet Romney shouldn’t shy away from the debate. First, he should talk about its causes, and point out that the most credible explanations for the widening income gap emphasize the role of powerful technological forces, rather than the bogeymen -- outsourcing, immigration and Wall Street -- that anti-capitalist activists tend to rail against.

Innovation’s Role

One of the clearest explanations of how these forces have driven earnings in the U.S. can be found in a 2008 book by Claudia Goldin and Lawrence Katz of Harvard University, “The Race Between Education and Technology.” They showed how “skill-biased technological change” -- the tendency of innovations such as computers and related technologies to boost the productivity of workers who were educated enough to make the most use of them -- has greatly increased the relative demand for high-skilled workers since the 1950s.

Over the past three decades or so, the supply of well-educated workers hasn’t kept pace with this demand. So those with the most skills, such as college graduates and especially people with postgraduate degrees, have seen their earnings rise sharply compared with those with less education.

In a new paper, Daron Acemoglu and David Autor of the Massachusetts Institute of Technology show how this process can also explain why the wages of many low-skilled workers fell in the U.S., and why many people with middling levels of skill and education have lost ground during the past 20 years -- the so-called middle-class squeeze.

Romney, whom Obama has begun calling the “outsourcer in chief,” should make it his mission to clear up public confusion about these underlying forces. Americans can either try to resist innovation or they can use it to their advantage. The debate in this election should be about how to harness it while sharing the benefits more broadly.

One way to “spread the wealth” is through the tax code, as Obama has advocated. Romney and his party, by contrast, are much more concerned about the effect of tax rates on growth. Romney needs to explain convincingly why dealing with the earnings gap directly -- by enabling low- and medium-skilled workers to boost their pretax earnings -- is better than combating it through steep taxes either on investment or highly productive workers.

Human Capital

Education reform is obviously a crucial part of this challenge, but it is hardly the only one. Romney has correctly pointed out, for example, that workers can gain valuable human capital on the job, as well as in the classroom. This insight is especially relevant to Americans who are already in the workforce and beyond school age. Even a sudden and effective reform of schools wouldn’t help these workers. But a better approach to skills training could.

A promising, though little-noticed, proposal is Romney’s own plan to overhaul the government’s approach to aid for retraining workers. The current mishmash of programs -- more than 40 separate ones, driven by bureaucratic rules -- makes little sense. The idea should be to enable workers and employers to find each other and invest in the skills that the workers will need to be successful. To help accomplish this, Romney wants to convert much of the federal government’s aid into block grants that the states could use to experiment, an approach that resembles the successful, bipartisan welfare reform of the 1990s.

Romney has also shown that he grasps the role employers could play in making these retraining programs effective. Instead of treating companies as monolithic providers of jobs, as policy makers often do, the government should build on what business does best: finding, training and organizing people in ways that make them more productive, and steering that productive energy in valuable directions. A program aimed at helping workers retool needs to be designed so that it encourages companies and workers to make their own decisions about what works best for them.

On education, too, Romney prefers an approach that involves more choice and competition than Obama is willing to advocate. This is a crucial debate for many reasons, but the question of income inequality is at its heart.

The issue isn’t going to go away. So while Romney works to convince voters that he is the candidate to get the U.S. economy growing again, he should also explain why he’s the one who will help more Americans lift themselves on that rising tide.

(Brian Barry is an economics professor and executive director of the Initiative on Global Markets at the University of Chicago Booth School of Business, and a contributor to Business Class. The opinions expressed are his own.)

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Today’s highlights: the editors on Europe’s banking union and restoring U.S. fisheries; Caroline Baum on why Washington can’t fix the economy; Ezra Klein on the tectonic shift in the Republican approach to health care; Amity Shlaes on women who can have it all; Richard J. Carroll on why some tax cuts work and others don’t; Jane S. Shaw on how Mitch Daniels can shake up higher education.

To contact the writer of this article: Brian Barry at

To contact the editor responsible for this article: Max Berley at

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