New Treasury head eyes rising inequality

In his first major speech Monday, Henry Paulson pushed America's wide income gap onto the agenda.

The wide gap between the richest and poorest Americans has not often been the topic of choice for the Bush administration's two previous Treasury secretaries.

So it was notable this week that Henry Paulson, the president's latest Treasury head, chose to put that issue on his short list – as one of the nation's four prominent, long-term economic challenges. Mr. Paulson's head-on approach during one of his first public appearances as secretary differs from his predecessors' strategies, some analysts say.

The wealth gap is hardly new, but income inequality has been growing in America over the past quarter century. Even as average worker productivity has surged, average hourly earnings have stagnated. Meanwhile, the nation's economic elites have prospered.

"Amid this country's strong economic expansion, many Americans simply aren't feeling the benefits," Paulson said during his first major speech as Treasury secretary, at Columbia University's business school in New York on Monday. "Their increases in wages are being eaten up by high energy prices and rising healthcare costs, among others."

Paulson's comments were not merely a blunt acknowledgement of the problem but also a call for solutions – a sign that the income inequality may rise higher on the US policy agenda in the years ahead.

"There's nothing in this problem that suggests a quick fix," says Douglas Holtz-Eakin, a former Chief Economist on President Bush's Council of Economic Advisers, who is now at the Council on Foreign Relations in Washington. "What is interesting is he chose to include it in his first address, as a way to set the priorities that he sees as important."

A major challenge for the Bush administration – and especially its two previous Treasury chiefs – has been to win credit for the economy's performance. Despite rising oil prices, the 9/11 attacks, and weakness in the European and Japanese economies, the nation's economic output has grown solidly in recent years.

America's gross domestic product is now $13.2 trillion as of this summer, up from $10.4 trillion four years earlier. But a widespread perception – one born out by other statistics – is that workers aren't commensurately better off.

The other three issues Paulson highlighted as long-term challenges were energy policy, maintaining global trade and investment, and – his first priority – reforming entitlement programs such as Medicare and Social Security.

Those are all longstanding administration goals. Focusing on the income gap, in addition, may reflect several practical concerns.

First, with this election year revealing sharp political divisions, a unifying strategy may be the only hope of reviving serious discussion of entitlement reforms before Bush's term ends. Wage inequality is an issue of rising concern to many Democrats, so putting the issue on his A-list represents some reaching out across party lines.

Second, the move may help Paulson signal that he wants to be Treasury secretary for all Americans, not just the wealthy who were his clients during his recent tenure as chief executive of the investment bank Goldman Sachs.

Third, the issue may be growing in importance for America's long-term economic health. A sharp rich-poor divide augurs poorly for achieving the political unity needed to keep the nation on solid economic footing. Thorny issues like entitlement reform and trade policy won't get easier in a nation of haves and have-nots.

"There are clear questions about maintaining the standard of living" for many Americans, says Dr. Holtz-Eakin, who also served recently as director of the Congressional Budget Office.

Indeed, it is not merely the poorest Americans, or the least educated, whose income growth is in question.

Between 2001 and 2004, the median income of Americans with college degrees barely budged, rising from $72,300 to $73,000 (after adjusting for inflation), according to a Federal Reserve survey of consumer finances.

Narrowing the income gap won't be easy, experts say. Paulson didn't offer a full gameplan, but he mentioned "helping people of all ages pursue first-rate education and retraining opportunities." He called for continued strong productivity growth and integration with the world economy.

The US has done well at keeping a high percentage of its work force employed, compared with other advanced nations. But many economists say government programs have not helped dislocated workers transition into new careers, while maintaining or boosting their incomes.

John Schmitt, of the Center for Economic and Policy Research in Washington, says steps beyond job training are needed. His top remedies include: Raising the minimum wage (something now under review in Congress), creating a workplace climate friendlier to labor unions' organizing efforts, and making Medicare available to all employers. Given uncertainties about how globalization is affecting US workers, he also urges a "strategic pause" in new free-trade agreements.

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