I just finished reading Robert Reich’s latest book, After-Shock: The Next Economy and America’s Future. Reich argues that increased inequality in the United States has had high costs. These include costs for macroeconomic stability and costs for the democratic representativeness of American governmental institutions. Other authors, such as Larry Bartels, and Jacob Hacker and Paul Pierson, have also argued that increased inequality has large costs for the proper functioning of American political institutions.
I agree that increased American inequality has large costs. (I don’t think a blog post is adequate to “prove” that proposition, so let’s just accept that inequality is bad as a proposition.) But the usual conventional wisdom is that significantly reducing inequality has large economic and political costs. The economic costs are that most proposals to address inequality reduce the overall efficiency of the economy. The political costs are that most proposals to address inequality have costs for the majority of the population.
What is unusual about some high-quality early childhood programs, such as universal pre-k, is that these programs simultaneously; (1) reduce inequality, (2) increase the overall efficiency of the economy, and (3) have net benefits for the middle-class.
Very few other public policies help both the poor and the middle-class while increasing the productive capacity of the economy. Broad measures that increase the skills of the poor and the middle class are one of the few ways to help both these groups while increasing measured GDP.
Helping the poor through income transfers such as welfare has costs in increased taxes for the rest of the population. Furthermore, such programs tend to have some negative effects on labor supply, reducing the size of the economy. So, transferring income to the poor has some tradeoffs: it reduces the social and economic costs of inequality, but at a cost to the middle class and overall economic growth.
Subsidizing the work of the poor through wage subsidies to the poor, wage subsidies to their employers, or public employment, may help the poor while also boosting the size of the economy. However, such work subsidies increase the taxes of the middle class.
Training programs targeted on the poor, if effective, may help the poor while increasing the economy’s productivity. However, such programs probably have net costs for the middle class.
Health care reform programs potentially can provide broad benefits for various income groups. If run well, such programs may increase the efficiency of the health care sector, and in that sense increase the productive capacity of the economy. However, this increase in economic productivity is somewhat more subtle and harder to measure than policies that increase the quantity and quality of labor supply.
The point is that universal pre-k is a very unusual program in the mix of benefits it offers for society. Increased American inequality is an important issue. Making significant progress in reducing inequality requires that policies have broad support. Such broad support is much easier to obtain if the policies also help the middle class and provide obvious benefits for the overall economy.