US inequality in the OECD context and the need to invest more in young kids

January 29th, 2016 at 9:40 am

Here’s is a great deck by Mark Pearson from the OECD from the National Academy of Social Insurance conference yesterday. Pearson compares inequality across various countries, as well as the extent and impact of taxes and transfers on market-based income dispersion. He covers a ton of great stuff here but misses a chance to make a really important point (though I missed his presentation, so maybe he made it in pearson person.). I’ll get to that at the end of this post.

Comparative OECD work has shown that the US has higher levels of inequality than other advanced economies and generally does less through taxes and transfers to push back on it.

A few things that caught my eye:

–Slide #5: Income is the US is somewhat more concentrated than in the OECD, but wealth is a lot more concentrated here. (Measurement issues: these comparisons would appear more stark if you compared the US to the OECD avg, sans the US.)

–Slide #9: We do a lot less than other countries to reduce market-driven inequality among the working-age population. And there’s no trend in the US either. Some of the other countries are doing less here than they used to, though we can’t tell from this if they’ve cut back on redistribution or there’s more work for the tax/transfer system to do because inequality is higher, or both. (You also have to know your flags for this one!)

–Slide #10: In percentage terms, our tax and transfer system actually reduces only slightly less inequality than the other countries in the figure. EG, we’re at 23%; Sweden’s at 27%. But we’ve got higher inequality to start with and thus we have higher inequality post-tax and transfer. Note that we do a lot more through taxes than direct cash transfers. If you were of a neo-classical bent, you might think that this implies much more in the way of labor supply distortions in other countries than here, especially since a big part of our redistribution through the tax code is the pro-work EITC. But other data shows that not to be the case. If anything, employment rates in the OECD are higher than ours, especially for men.

–Slide #16: This one is really striking (pasted in below). Compared to the OECD, our publicĀ investments in kids doesn’t look all that different (what you don’t see here is that inequality has led to increasing disparities in private investment in kids; Sheldon Danziger’s slides do a excellent job with that point). But look closely at the left end of these figures. Where we drop the ball big-time is in early childhood, pre-K, early child care, etc.

That’s really bad public policy. Really…bad…public…policy. Why? Because in a country with growing inequality, the path toward upward mobility will become steeper as the rungs of the economic ladder grow further apart. A crucial antidote to that dynamic is early investment in children, which, btw, has been shown to pay for itself many times over in terms of reduced costs to society later in life.

Source: Pearson, OECD

Source: Pearson, OECD

The point I don’t see made here–one I’d definitely lean on–is that there is no correlation across OECD countries between social welfare spending, redistribution, investment in kids, public pensions, etc. and macroeconomic growth. There are those who would go through Pearson’s chart and make the case that OK, we in the US do less redistribution. But we therefore get more growth. Not so. Here’s a picture, but there’s a lot more to be said about this. (BTW, economic historian Peter Lindert’s stuff is important on this point, but I don’t have time to look for it.)

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2 comments in reply to "US inequality in the OECD context and the need to invest more in young kids"

  1. Smith says:

    Ok, U.S. shortchanges issues of childcare, which should be a universal benefit. The gaps in care are threefold, hurting the most those in need the most, the less well off, or single parents:
    1) 0-5 years old
    2) 3pm to 5pm (hours after school)
    3) June, July, August (when studies show children fall most behind, especially from disadvantaged environments)

    Another issue raised is the inadvisability of relying on taxes as a way to redress inequality vs services. Better to offer free public education than a voucher system which is what we have for college and medical care.

    Also, anyone think we get our money’s worth for pubic education, it’s $20,000 per student per year (New York, New Jersey). Even allowing for special needs students requiring individualized attention, there seems something wrong. Public colleges are only $5,000 to $15,000/year.


  2. Tom in MN says:

    While it looks like the education spending is on par, I think it’s misleading because much of it is wasted due to the lack of spending on children earlier so they are prepared for school. And we also don’t support parents much (funding not shown here), so US kids are less likely to have a parent at home helping them with homework, etc. For both reasons we end up with students with behavior and other problems (being hungry!) that use a lot of school resources and, as you say, cost us money over the whole life of the child. There are no bad kids, just kids that are never given a chance.


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