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An Agenda to Help the Poor Up the Economic Ladder

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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The American left is casting around for a new economic paradigm. Everyone knows that neoliberalism -- the program of tax cuts, deregulation and privatization -- is looking pretty shopworn, but it’s not clear what the left can offer to replace it.  

One possibility is a “new industrialist” approach of building infrastructure, supporting research and encouraging companies to invest more. But another idea that I see slowly emerging in the U.S. is to increase economic mobility.

The most reputable studies show mobility in the nation, measured as the probability of moving up or down the income ladder compared to your parents, is probably about the same as it used to be. The U.S. has not become a more ossified society. But this is a measure of mobility after the fact -- it only tells you your statistical probability of moving up in the world, not how much control you have over your movement. People probably don’t want to live in a world where income changes are governed by chance -- we’d rather believe that hard work, risk-taking and perseverance get rewarded.

That’s where the real cause for worry lies. Several pieces of evidence show that Americans are less in control of their economic destiny than they used to be. First, there’s falling geographic mobility -- in the past, Americans who lost their jobs would move to new places with more opportunity, but this is less common nowadays. Business dynamism has declined as well -- a smaller fraction of Americans start businesses than they used to, and these businesses are less likely to grow. And workers move between jobs less than they did two decades ago.

This puts the U.S. in danger of developing a permanent underclass. Even if redistribution of wealth through government programs could allow such an underclass to avoid material deprivation, it’s not the kind of society that most Americans would want. So far, tax cuts, financial deregulation and privatization of industries like the prison system haven’t done much to empower the average American to better his or her lot in life. Can the left do a better job?

Maybe. One idea is to use the tax system to discourage the concentration of wealth over generations. Wealth taxes -- especially estate taxes and land taxes -- are one way of doing this. An increasing number of influential economists, such as Thomas Piketty, Emmanuel Saez and Gabriel Zucman, have suggested shifting toward more taxation of wealth. And I recently wrote about a new theory showing that wealth taxes could actually help boost growth, by shifting money out of the hands of heirs and heiresses and putting more in the hands of competent investors.

A related idea is to have the government act as an angel investor or venture capitalist, providing money for people to start and expand their own businesses. So far, results from this type of policy have been encouraging.

Another piece of a mobility agenda, surprisingly, might just be the social safety net itself. One of the biggest factors stopping people from starting businesses is risk. Poor people are naturally risk-averse -- if a rich person gambles half of his income and loses, he’s still rich, but if a poor person experiences that type of loss, he’s devastated. So a social safety net can, in theory, help poor people take on the kinds of risks that on average will better their lot in life. France and Canada have experimented with safety net programs targeted toward low-income entrepreneurs, with good results.

One common thread in these ideas is a belief in the potential of working-class and poor people. One view of income differences is that they’re caused either by low natural ability or a culture that discourages hard work. But another view is that many poor people have plenty of potential and are simply overlooked by society. Policies aimed at helping low-income Americans start businesses are based on the second view.

Of course, not everyone can start a business. Fortunately, there are other ways to encourage greater mobility that don’t involve entrepreneurship. One is based on the Department of Housing and Urban Development's Moving to Opportunity program, which provided rental-assistance vouchers to poor people who relocated in the 1990s. The experiment was found to have many beneficial effects, especially on kids. Given this success, liberals should consider a wider program aimed at helping people move to where the jobs are.

Another idea is to curb the spread of occupational licensing. More and more jobs in the U.S. require a license to perform. This shuts lots of qualified people out of a job, since the number of licenses is often limited. It also forces low-income people to spend lots of time and money -- which they can ill afford to pay -- getting licensed. The Obama administration released a major report in 2015 about the ill-effects of this overregulation.

So a pro-mobility agenda is emerging on the U.S. political left -- one that combines traditional American values of ambition, hard work and risk-taking with redistribution and a belief in the innate potential of the working class and poor. Instead of viewing these approaches as a scattering of technocratic policy tweaks, liberals should embrace them as a single, unified economic vision.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
Tobin Harshaw at tharshaw@bloomberg.net