President Obama has said that rising income inequality and a lack of economic mobility is “the defining challenge of our time.” He is advocating raising the minimum wage, extending unemployment benefits and making sure workers get paid for overtime. Those measures may provide some relief, but in my view they do not come close to dealing with the fundamental problem. Enhancing the Earned Income Tax Credit may be a better approach.

Inequality is likely to become a more important political issue. A Pew Research poll in January showed that 65 per cent of the respondents believe the gap between rich and poor has increased in the last decade. A February poll by CNN revealed that almost 70 per cent of Americans believe the government should do more to narrow the gap, and 60 per cent believe taxes paid by wealthy people should be raised to reduce poverty. More than half of the people polled think that the rich had special advantages not available to the general population and about half thought a person is poor because of conditions beyond his or her control. Former New York Mayor Mike Bloomberg thinks poverty is an important issue, but points out that the disadvantaged in the United States mostly live in dwellings with flush toilets, colour television and refrigerators. They also have cell phones. These conditions are much better than in many other countries. Much of this data was reported in a New York Times op-ed by Charles Blow.

Key to success

Almost everyone in politics has a plan for dealing with inequality, (and nearly everyone agrees that getting a good education is an important key to success). G. W. Bush had “No Child Left Behind” and New York’s new mayor Bill de Blasio wants to expand pre-kindergarten education in the public schools.

Every three years the Organisation for Economic Co-operation and Development (OECD) conducts a study of 510,000 15-year-olds in 65 participating countries. The last survey was in 2012; 5,000 US students were tested. The United States ranked 17th in reading, 21st in science and 26th in mathematics out of the 34 OECD member countries. Reading the Programme for International Student Assessment (PISA) commentary on the results may provide some useful insights. “Students in the United States have particular weaknesses in performing mathematics tasks with higher cognitive demands, such as taking real-world situations, translating them into mathematical terms, and interpreting mathematical aspects in real-world problems.”

The Centre for American Progress has done a study which shows that for the first time in history, the current generation will be less well-educated that its parents. These results are particularly disturbing when you consider how much the United States spends on education. Only Austria, Luxembourg, Norway and Switzerland spend more per student. Other factors do not explain the underperformance of the US. Parents in America are better educated than in most other countries, ranking sixth. The share of students from disadvantaged backgrounds is about the OECD average. We do have a higher percentage of immigrants (our rank is sixth), but so does Canada which performs above the OECD average. The study shows that students with pre-primary education tend to perform better at the age of 15 than those without it.

Good education

The data on inequality show a major change since 1980. I believe it is unproductive to attack the rich continuously as though they deliberately exploited others as they built their net worth. Most people in the top 10 per cent worked hard in school, got a good education, put in their 10,000 hours developing a skill and benefited from the growth that took place in America after the 1980-82 recession. Good luck also played a role in every one of their lives. Capitalism has always rewarded risk-taking, entrepreneurship and innovation. This process creates growth and jobs, and the initiators of successful projects often benefit handsomely just as the unsuccessful suffer.

The real problem is that we have to improve prosperity for those in the lower part of the income stream. When Russia, China and India entered the global economy, having abandoned many of the commercial aspects of Communism (Russia, China) and becoming less insular (India), the world got three billion new customers as Tom Friedman has observed, but it also got three billion new competitors, some of whom could produce quality products at a low cost. This has kept inflation low, but it has eliminated jobs in high labour cost countries like the United States. Technology has also had an impact on the size and quality of the workforce as companies have spent money on capital equipment to get the goods and services out the door with fewer workers. The impact of these factors has been heavy on middle-class manufacturing and service workers. I believe this is a structural change in the economy that is not likely to be reversed.

Better environment

There has been another change since 1980 that may have had an even greater impact on inequality. According to census data the percentage of births to unmarried women has risen from 18 per cent in 1980 to 41 per cent in 2012. That is a remarkable increase. If you assume that a two-parent family is more likely to provide a better environment for a child to grow up and become educated, then this change may have an important bearing on the inequality issue. Many believe that teen-age pregnancies are primarily responsible for this change, but teenagers only account for 17 percentage points of the 41 per cent of births to unmarried women. A single parent trying to hold a job, maintain a household and raise one or more children faces many challenges.

Arthur Brooks of the American Enterprise Institute has written a thoughtful essay in Commentary that explores many aspects of the inequality issue. He also sees it as a societal problem and recommends that we try to reestablish the fundamental values of faith, family, community and work. I support his prescription, but I think it is hard to implement.

A growing economy which would produce a greater number of better-paying jobs would also help. More vocational training in high school would also prepare people for good jobs. I think that government programmes like job-creating infrastructure improvement and job retraining would be positive, and we can afford them now that we have reduced the deficit to 3 per cent of GDP. Any important shift in inequality is likely to be uneven, experience setbacks and take a long time to produce visible change. Hopefully the fact that there is so much focus on the issue may mean that steps will be taken to bring on a shift in the balance.

Byron Wien is the vice chairman of Blackstone Advisory Partners LP