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Expect Obama’s answer to inequality to be raising the minimum wage

Look for economic inequality to be a major theme in President Obama's State of the Union address next Tuesday. Debated in boardrooms, church basements, and around cabinet tables, the 'tale of two cities' helped elect New York Mayor Bill de Blasio, a progressive.

Economic inequality promises to be a rallying cry for Democrats in this November's midterm elections. Its populist resonance transcends borders.

Pope Francis cautions that an "economy of exclusion" is a "new tyranny." Alex Himelfarb, Canada's former top public servant, warns that "when things are unfair, we opt out or act out." Ahead of Davos this week, the IMF's Christiane Lagarde highlighted the threat posed to stability by inequality.

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In a speech last month President Obama called inequality the "defining challenge of our time". He warned of Americans' "nagging sense" that "no matter how hard they work, the deck is stacked against them" and of their fear that "their kids won't be better off than they were."

The President let the numbers tell the story.

  • The top 10 per cent in the USA takes half the national income. The top 1 per cent has a net worth 288 times higher than the typical family. Today’s CEO makes 273 times more than the average worker.
  • A child born into a low-income home hears 30 million fewer words than a child from a well-off family. Their problems are compounded by mental health, obesity, absent fathers, and isolation from church and community.
  • A child born in the top 20 per cent has about a two-in-three chance of staying at or near the top. A child born into the bottom 20 per cent has a less than one-in-20 shot at making it to the top.

If the divide is not as pronounced in Canada, it is still a problem. A recent survey says a decade ago, two thirds of Canadians described themselves as middle class. Today, the figure is 47 per cent. Only 16 per cent think that their children will inherit a better world.

Prescriptions for fixing inequality fall roughly into two camps: redistribution by government versus letting market forces prevail.

Writing in Democracy journal, Nick Hanauer and Eric Beinhocker argue that "as an evolutionary problem-solving system", capitalism "is the most effective social technology ever devised for creating rising standards of living."

Perhaps, but many believe that deregulation and greed created the Great Recession. This attitude is reinforced through popular culture and Hollywood films Wolf of Wall Street. For now, redistributionists have an edge.

Mayor de Blasio was elected on a promise to raise taxes on those making half a million dollars. At this spring's Munk Debates in Toronto, the motion to raise taxes on the rich won by a margin of 70-30 per cent. Economist Paul Krugman, who was one of the debaters, argued that: "simple analytics say that we should soak the rich, hard."

But in a global world, money moves quickly. The top one per cent in the US currently pays 30 per cent of federal tax. While the comparison is not exact, in Canada, the top 1 per cent takes home 10.6 per cent of national income but pays 20 per cent of tax.

Experience suggests that solutions should blend redistribution with market forces.

President Obama's State of the Union address will urge lawmakers to raise the federal minimum wage, currently $7.25. In a letter last week, the Economic Policy Institute argue that a three-step annual increase of 95 cents would raise the income for 17 million workers, especially women working part-time. The state minimum wage in the United States ranges from $5.25 to $8; in Canada from $9.95 to $11.

Redistributionists and marketers both agree on the value of education.

The recent PISA scores give neither Americans nor Canadians much comfort. Canada is down three spots from 2009 and six spots from 2006. Calling it a "national emergency" John Manley pressed for more linkage between jobs, skills and training.

An initial remedy is early childhood education, through innovative home-instruction programs like HIPPY that target the family. Get the basics right: reading, writing, arithmetic, with knowledge of history and civics.

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In this technological age we need to restore dignity to the trades and respect for good teachers. Universities should take note of the practical-mindedness of community and technical colleges. President Obama has set a U.S. goal of having the highest proportion of college graduates, with community colleges producing an additional five million graduates. Canada needs to make a similar commitment.

Good public policy takes time and perseverance. But it's less painful than pitchforks.

A former diplomat, Colin Robertson is vice president of the Canadian Defence and Foreign Affairs Institute and a senior adviser to McKenna, Long and Aldridge.

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