Income inequality is the wrong focus for government policy. After all, if we doubled the income of every American tomorrow, inequality would actually increase — but we would also lift a lot of Americans out of poverty.
In the context of deficit reduction, that means we should keep this goal in mind: not punishing the rich, but reducing poverty. And we know that in the long run, the best way to reduce poverty is to create more jobs and opportunity. Too many think of the economy as a fixed pie, and the role of government is to divide up the slices of that pie. If one person gets a bigger portion of pie, others of necessity get smaller pieces.
But in reality the size of the pie is not fixed. We can pursue policies that grow a bigger pie, allowing a bigger slice for everyone. Conversely, we can shrink the pie, meaning everyone gets less. And unfortunately, if the pie shrinks, those without skills and connections in society — the poor — are likely to end up with little more than crumbs.
And history also shows that government programs and redistribution do a surprisingly poor job of reducing poverty, especially when compared to economic growth. For instance, at the start of the 20th century more than three-quarters of Americans were poor by most definitions. By 1965, that had been reduced to less than 20 percent. That happened not because of government redistribution but because of the phenomenal growth of the American economy. More than $15 trillion in social welfare spending since then has done little to further reduce poverty.
As we look for ways to reduce the deficit, we should avoid policies like raising taxes that will discourage economic growth and job creation. Instead, we should recognize that an ever-growing and more expensive government is a burden that will ultimately reduce growth and make it harder for the poor to move up the income ladder.