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Five Reasons Every Deficit Hawk Should Worry About Inequality

David Callahan

You don't hear deficit hawks talking much about inequality, which is no surprise, since many solutions to inequality involve more federal spending. In truth, though, deficit hawks should be deeply worried about the big gaps in income and wealth for at least five reasons. 

First, inequality undermines growth by over-concentrating spending power in too few hands -- and slow growth is the single biggest threat to America's fiscal future. Projections of future deficits vary substantially based on growth assumptions. Stronger growth equals more income to tax and lower deficits. Weaker growth means lower revenues and higher deficits. So if you buy the argument that siphoning so much national income into the nest eggs of rich people who don't spend this money is bad for growth, you also have to buy the argument that inequality helps drive our fiscal problems. 
 
Second, low wages mean that workers have to rely on public assistance programs to survive, as we have noted here often and as researchers have documented in increasing detail. If business profits were distributed more equally, with a bigger share going into labor's pockets, fewer households would qualify for things like the EITC, SNAP, and Medicaid, and spending for those programs would be lower over the long term. In proposing a $12 minimum wage in California, the conservative businessman Ron Unz has made exactly this point. 
 
Third, a more equal distribution of national income would strengthen Social Security's long-term solvency. That's because a good chunk of national income goes to high-earners who only pay Social Security taxes on their first $113,700 in income (in 2013), with the rest untaxed. If some of that untaxed national income instead went to workers earning under the payroll cap, Social Security would pull in more revenues and be in better long term fiscal shape. 
 
Fourth, and related, the low earnings of many workers -- amid near-record corporate profits -- will translate into big spending needs in coming decades because those workers aren't saving enough for retirement and will need lots of public assistance to survive in old age. As I have written here repeatedly, it's a fantasy to imagine that we can cut entitlement benefits to seniors down the line when a bigger share of that population will be poor than is now the case. We're going to have spend more, not less, on these folks -- and today's stratified economy is a main reason why. 
 
Fifth, and more broadly, our deeply unequal society is also a very unhealthy society -- with lower income Americans more likely to be obese and at risk for diabetes and other ailments for reasons directly correlated with their socioeconomic status. Chronic health problems are a key driver of rising healthcare costs and will become even more so in the future. Those low-income seniors of tomorrow I just mentioned are going to face some of the highest out-of-pocket health costs of any generation of seniors because of their diabetes and other problems. We all know that rising public health spending is the biggest driver of long-term deficits. If you want to tackle deficits, you have to tackle those costs -- and that means reducing the broad disparities of education and income that are so closely tied to our health problems. 
 
So message to Pete Peterson and company: Widen your field of vision to include inequality if you're truly worried about this country's fiscal future.