In his January State of the Union address, President Barack Obama declared that the American dream was under siege. The president promised to shrink the income gap between rich and poor, calling it “the defining issue of our time … No challenge is more urgent. No debate is more important.” The president continued, “We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules.”

The “debate” has already been framed by the liberal community, the “poverty industry,” and most of the media. They all agree that there is a growing gap between rich and poor. This “inequality” is the fundamental problem in our society and inherently unjust. The gap is the basis for a redistributionist policy to equalize prosperity. Requiring the “rich” to pay more is only fair, because they are inhibiting the poor from moving up the ladder of economic success, the argument goes.

Mr. President, I agree that we need a debate on the issue. So let me start by saying that the premise is wrong on three counts.

First, the statistical basis for the “gap” is derived from U.S. Census Bureau figures that only measure pre-tax, money income. The definition of money income includes earnings from salary, commissions, and bonuses; interest; dividends; Social Security benefits; pensions; alimony; workers’ compensation; and rents. Based on the Census Bureau numbers, the top quintile in America receives $15 in income for every dollar of income received by those in the bottom quintile.

Missing from the Census Bureau definition of income are items such as employee health-insurance benefits, the earned-income tax credit, food stamps, school-lunch programs, public housing, Medicare, and Medicaid. The Census Bureau figures also fail to account for taxes paid by the top quintile, which substantially reduces the differential between the highest and lowest earners. Add to this that the unit of measurement is households rather than individuals, which distorts the fact that the top quintile includes 24.6 percent of the population while the bottom quintile only includes 14.3 percent.

The gap is further aggravated by the use of the Consumer Price Index for All Urban Consumers (CPI-U). The CPI-U regularly overstates inflation, thus understating the purchasing power of those classified as poor. Over 30 years, an annual misstatement of just one percent leads to a 33-percent difference in determining median incomes. Back in 1996, the Boskin Commission concluded that the annual CPI-U bias was, in fact, above one percent.

If you adjust the Census Bureau numbers with the above considerations, the disparity drops from $15-to-$1 in the highest quintile versus the lowest quintile to just $4-to-$1. If the adults in each of the two quintiles actually worked the same number of hours, the ratio falls to $2.91 in the highest quintile against $1 in the lowest.

Second, even if we adjust for money-income figures, is that still the best indicator of an individual’s well being? Or, is consumption a better indicator of how well those under the poverty line are faring? If consumption is your guide, there is a notable rise in the material comforts of the poor over the last three decades, reflected in substantially larger percentages of the poor owning items such as homes, cars, central air-conditioners, washers, and driers. While the official rates of poverty show an absolute increase, calculations based on net income plus transfers-and-benefits plus consumption show a three-point drop in poverty.

Third, the obsession with a gap between rich and poor is based on the moral argument that inequality is unfair and poverty is the direct result of a capitalist system that inhibits mobility. The wealthy are not the reason that the poor are poor nor is the economic pie fixed so that one group inevitably takes from another. To the nation’s founders, equality meant the same right to life, liberty, and the pursuit of happiness. No one, by virtue of birth, has the right to dominate another. We all must be treated equally before the law. Finally, every life has equal value or worth, and everyone should have an opportunity to live freely and to contribute to society.

The founders also recognized that not every citizen has equal faculties nor requires equal material circumstances. They also were skeptical of government being other than a last resort to prevent its citizens from falling below a threshold of material living, preferring to rely on family, church, private charities, and civic organizations.

The focus on inequality may garner votes among the electorate by promoting a status of victimhood, but it doesn’t address the real problems of poverty such as trapping students in failing schools, excusing personal responsibility, and de-emphasizing the importance of a strong family.

We need to reframe the debate on poverty to develop policies that actually solve the problem. We need to shift our attention from redistributing the fruits of those who earned them to redistributing our moral attention. Only then will we truly help the poor.        
Norman Poltenson is the publisher of The Central New York Business Journal. Contact him at npoltenson@cnybj.com

Bravo! As I write this editorial, the pundits are 99 percent certain that our elected officials will present us with another on-time budget for New York State.

Kudos to Gov. Andrew Cuomo for encouraging the state legislature to complete its work in a timely fashion. Of course, the governor made it clear that he would use the political cudgel — euphemistically called the “extender” — unearthed during the David Paterson administration. The extender gives him the executive authority to implement his executive budget if the legislature fails to act in a timely fashion.

The new budget is filled with positive achievements. First, total spending (federal and state revenue combined) remains flat at around $132.5 billion for the second year in a row, with state-funds spending up only 1.9 percent. Second, Medicaid growth is capped at around 4 percent, well below double-digit figures experienced in recent years. Third, school aid, now tied to the growth of New York’s personal income, increases $800 million in the 2012-2013 budget or around 4 percent.

Fourth, the budget deficits for last year’s and this year’s budgets, projected at $25 billion, are now only $2 billion, a 92-percent reduction. Most importantly, the reduction was achieved without the usual fiscal gimmicks or any borrowing for operating expenses. Fifth, property taxes continue to be capped at 2 percent, unless 60 percent of a locality votes to override the restriction.

Sixth, the governor and legislature have committed to relieve county and municipal governments from rising Medicaid costs. While the change doesn’t begin until next year’s budget, local governments can now plan that future Medicaid growth will be borne by the state. Seventh, Gov. Cuomo continues to push a redesign of how state government functions by consolidating programs and streamlining operations, even while controlling any growth in the number of state employees.

Eighth, the governor is focused on building a public-private, $15 billion infrastructure fund to maintain and develop the state’s bridges, highways, parks, wastewater treatment plants, and flood-control projects. And ninth, he has also wisely set up regional councils to compete with innovative projects for state funds that are tailored to the needs of each region.

In summary, Gov. Cuomo gets high marks for reining in the historic spendthrift mentality and substantially slowing the growth of state-government spending, without the usual legerdemain. He expended some political capital by taking on the state’s public-employee unions to freeze their pay and reduce the size of government, which translates into fewer union members and reduced dues. When compared to his predecessors over the last three decades, except for a few years of the Pataki administration, the governor has acted forcefully to put the state on a sustainable, financial footing.

But has the governor put the Empire State on a competitive path “… to remind the world that New York is ‘Open for Business,’” as promised in his executive budget presented on Jan. 17? Of this, I’m less optimistic.

First, Medicaid and school-aid together represent more than 56 percent of the all-government-funds budget. Total federal, state, and local Medicaid spending represents an expenditure of $54 billion, with the state committing $15.5 billion. New York spends more than twice the national average ($2,604 per-capita) on Medicaid and more than California and Texas combined. The cost is tied to the generosity of the program benefits and to the fact that New York has enrolled 5 million residents, up 84 percent just since 2000 while the population has remained static. The governor has given no consideration either to limiting the benefits or to restricting Medicaid enrollment.

Second, school-aid represents an expenditure of nearly $21 billion, the largest single item in the state-funds budget, representing 30 percent of all state funds expended. While some will applaud the slower growth of the program, New York public schools spend on average $18,126 annually per student, 73 percent above the national average. No one claims that New York students are brighter because of the higher cost; still, higher-education is looked upon as a sacred cow whose funding can’t be reduced. To his credit, Gov. Cuomo had budgeted $250 million in grants to improve performance in the public schools based on achievement, but settled for $50 million, while the remainder was simply sprinkled by the legislature among all of the school districts.

Third, I find no effort in the new budget to reduce the ballooning state debt, which now consumes $6.362 billion in annual interest payments, an increase of 7.2 percent over last year. The interest payments only represent debt incurred directly by the state, with at least twice as much debt incurred by state agencies and carried off the state’s books. Perhaps a repayment program is buried somewhere in the budget, but I see no program to tackle the state’s debt over time.

Fourth, the governor campaigned for office on a pledge not to impose new taxes to fix New York’s budget problems. This promise lasted until December of last year when Gov. Cuomo signed-on to the millionaire’s tax. His new budget anticipates $2 billion in additional revenue, much of which is transferred to the “middle class” as a tax credit. The governor is fully aware that higher taxes on millionaires tends to drive them out of the state and never produces the anticipated revenue. In this case, politics trumped logic.

Fifth, what happened to transparency? Gov. Cuomo campaigned against government conducted by three men in a room. The 2012-2013 budget still emanates from three men in a room negotiating behind closed doors. The minorities in the Senate and Assembly only find out what’s in the budget when they read about it in the media. So much for openness in government.

Sixth, the governor punted when it came to pension reform. He boldly proposed a Tier-6 level for new state employees that would increase employee contributions, offer a defined-contribution option, raise the retirement age from 62 to 65, prohibit early retirement, decrease the final average salary from 60 percent to 50 percent, and exclude overtime and other payments from the formula used to calculate final average salaries for pension allowances. Gov. Cuomo projected a savings of $80 billion over 30 years.

Despite the fact that New Yorkers will spend $13 billion this year to fund state pensions, nearly 10 percent of the entire budget, Gov. Cuomo agreed to raise the retirement age by only one year, limited the defined-contribution plan to a few non-union employees, and gave up on cutting the workers’ annuities by up to 16 percent. In short, the governor rolled over for the unions on pension reform, knowing full well that as soon as the economy recovers, organized labor will pressure its legislature allies to raise the pension benefits.

Final grade: B-.

To raise his grade, Gov. Cuomo needs to take on pension reform. His model should be Gina Raimondo, the state treasurer of Rhode Island, who spent months convincing her fellow Democrats that serious reform was needed now for the present work force, not for some time in the future. The new Rhode Island law shifts all workers from a defined-benefit plan to a hybrid plan consisting of a modest annuity and a defined-contribution plan. The plan also raises the retirement age from 62 to 67.

Gov. Cuomo also needs to attack the basic problems of Medicaid enrollment and its overly generous benefits along with the extraordinarily high cost of public education, not tied to performance improvement. Slowing the rate of state funding in New York is not enough; we need to lower the total cost now by spending less.

And finally, until Cuomo institutes a plan to reduce the state’s debt obligations, the Empire State is not set on a path to prosperity. If we want the world to know that New York is truly open for business, there is still much for the governor to do and more political capital he needs to expend.

Norman Poltenson is publisher of The Central New York Business Journal. Contact him at npoltenson@cnybj.com