The political left obviously hopes that it can score political points by pitching some Americans against others with a campaign based on income inequality and class warfare taxation.
Is there any merit to this approach? Are the less fortunate suffering because some are succeeding? And would more government alleviate this problem, to the extent it actually exists?
George Will has a must-read column in the Washington Post on the topic of inequality, including a very relevant observation that the rich on Wall Street are the ones who benefit from the easy-money policy embraced by the Washington establishment.
In this sixth year of near-zero interest rates, the government’s monetary policy breeds inequality. Low rates are intended to drive liquidity into the stock market in search of higher yields. The resulting boom in equity markets — up 30 percent last year alone — has primarily benefited the 10 percent who own 80 percent of all directly owned stocks.
But his main point is that the lack of growth in the real economy has been very damaging to ordinary Americans.
And that lack of growth – acknowledged by both the Washington Post and Congressional Budget Office – is because politicians have been increasing the burden of government.
Richard Fisher, president of the Federal Reserve Bank of Dallas, says the total reserves of depository institutions “have ballooned from a pre-crisis level of $43 billion to $2.5 trillion .” And? “The store of bank reserves awaiting discharge into the economy through our banking system is vast, yet it lies fallow.” The result is a scandal of squandered potential: “In fourth quarter 2007, the nation’s gross domestic product (GDP) was $14.7 trillion; at year-end 2013 it was estimated to be $17.1 trillion. Had we continued on the path we were on before the crisis, real GDP would currently be roughly $20 trillion in size. That’s a third larger than it was in 2007. Yet the amount of money lying fallow in the banking system is 60 times greater now than it was at year-end 2007.” …there is abundant money for businesses. But, says Fisher, the federal government’s fiscal and regulatory policies discourage businesses from growing the economy with the mountain of money the Fed has created. This is why “the most vital organ of our nation’s economy — the middle-income worker — is being eviscerated.” And why the loudest complaints about inequality are coming from those whose policies worsen it.
Trillions of dollars sitting on the sidelines because of bad government policy.
Seems like Chuck Asay’s cartoon is right on the mark.
Let’s dig deeper into this topic by looking at what a couple of experts have written on the topic of inequality.
Here are some excerpts from a column by Ronald Bailey for Reason.
Here’s everything you need to know.
Are the poor getting poorer? No. In fact, over the past 35 years most Americans got richer. Has income inequality increased in the United States? Yes. Does it matter? Well, President Barack Obama thinks so. …Is that true? No. …The real defining economic challenge of our time isn’t to end inequality. It’s persistent joblessness and weak economic growth perpetuated by feckless Obama administration policies.
If you want to know the details (and you should), Bailey explains that what matters is growth because that means all groups can enjoy rising incomes. And that’s exactly what you find in the data.
Using the CBO data, the Brookings Institution economist Gary Burtless has shown that from 1979 to 2010, the last year for which data are available, the bottom fifth’s after-tax income in constant dollars rose by 49 percent. The incomes of households in the second lowest, middle, and fourth quintiles increased by 37 percent, 36 percent, and 45 percent, respectively. The poor and the middle class got richer. …The rich got richer too, and they got richer faster. …So inequality in the U.S. has increased. But if most Americans’ incomes are rising, does it matter if some are getting a larger share?
He also makes the key observation that you shouldn’t just compare income groups over time.
This is because there is mobility. A poor household one year may not be part of the “bottom 20 percent” five years later.
Here’s more of what Bailey wrote.
Those worried about rising income inequality also often make the mistake of assuming that each income quintile contains the same households. They don’t. Between 2009 and 2011, for example, 31.6 percent of Americans fell below the official poverty threshold for at least two months, but only 3.5 percent stayed below it over the entire period. …In 2009, two economists from the Office of Tax Analysis in the U.S. Treasury compared income mobility in two periods, 1987 to 1996 and 1996 to 2005. The results, published in the National Tax Journal, revealed that “over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period.” …The Treasury researchers updated their analysis of income mobility trends in a May 2013 study for the American Economic Review, finding that about 75 percent of taxpayers between 35 and 40 years of age in the second, middle and fourth income quintiles in 1987 had moved to a different quintile by 2007. …In January, scholars from Harvard and University of California, Berkeley bolstered the Treasury economists’ conclusions. Parsing data from the 1950s and 1970s, the researchers, who are involved with The Equality of Opportunity Project, reported that “measures of social mobility have remained stable over the second half of the twentieth century in the United States.
Let’s continue with more wonky data.
Writing for National Affairs, Scott Winship delves into the issue, beginning with an explanation of the left’s hypothesis.
To hear many liberals tell it, increasing inequality is holding back growth, crushing the prospects of the poor and middle class, and even undermining American democracy. Such concerns are prominent in President Obama’s rhetoric, and seem also to drive key parts of his policy agenda — especially the relentless pursuit of higher taxes on the wealthy. …Perhaps the most common assertion regarding the ill effects of inequality in our time is that an unequal economy just doesn’t work for most people — that inequality impedes growth and harms standards of living.
He then unloads a bunch of data and evidence to show why the statists are wrong, including reliance on bad methodology.
…does it in fact reduce growth? There is no clear evidence that it does. …one of the most widely cited papers in the inequality debates — a 2011 study by IMF economists Andrew Berg and Jonathan Ostry showing that inequality hurts growth — suffers from this very problem of focusing primarily on developing countries.
But if the research looks at industrialized nations, it becomes apparent that it is not bad for growth when some people become rich.
Recent work by Harvard’s Christopher Jencks (with Dan Andrews and Andrew Leigh) shows that, over the course of the 20th century, within the United States and across developed countries, there was no relationship between changes in inequality and economic growth. In fact, between 1960 and 2000, rising inequality coincided with higher growth across these countries. In forthcoming work, University of Arizona sociologist Lane Kenworthy also finds that, since 1979, higher growth in the share of income held by the top 1% of earners has been associated with stronger economic growth across several countries.
There’s a lot more in the article, but this already is a long post. I encourage you to read both articles in their entirety.
The bottom line is that you don’t help poor people by savaging rich people (though it is very appropriate to target rich people who have undeserved wealth because of crony policies such as TARP and Ex-Im Bank).
The left mistakenly acts as if the economy is a fixed pie and one person’s success necessarily means the rest of us are worse off. So in an effort to increase the relative amounts received by the poor, they pursue policies that cause the pie to shrink.
As Margaret Thatcher famously said, it seems they’re willing to hurt the poor if they can hurt the rich even more.
That’s not the way the economy works when people are liberated from the heavy yoke of statism.
Simply stated, you’re not going to be doing much to help the poor unless you focus on policies that generate faster long-run growth.
P.S. It’s not related to the issue of inequality, but George Will also included this delicious sentence in his column. It’s too good not to share.
We spend $1 trillion annually on federal welfare programs, decades after Daniel Patrick Moynihan said that if one-third of the money for poverty programs was given directly to the poor, there would be no poor. But there also would be no unionized poverty bureaucrats prospering and paying dues that fund the campaigns of Democratic politicians theatrically heartsick about inequality.
P.P.S. I also can’t resist sharing this video showing a European Parliamentarian denouncing the politicians and bureaucrats of the European Commission for hypocritically trying to squeeze more tax from the private sector while simultaneously benefiting from special tax breaks only available to themselves.
Gotta love any politician who is willing to quote Murray Rothbard and also state that government is a racket. And Dan Hannan has made similar points.
I can only wonder, by the way, what Mr. Bloom would say if he knew about the bureaucrats at the Organization for Economic Cooperation. They are totally exempt from income tax, yet they spend a lot of their time trying to impose higher taxes on other nations (including the United States).
You can also see him wax poetic in these two videos. And his better-known fellow MEP, Dan Hannan, also has weighed in on the same topics.
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[…] The bottom line is that market-driven growth is good for everyone, especially the poor. […]
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[…] that the economy is a fixed pie, and proponents of this view fixate on inequality because they mistakenly believe that additional income for the rich means less income for the […]
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[…] Help the Poor by Focusing on Growth rather than Inequality […]
This is so true. Economic growth and expansion is the best way to help the poor and middle income families.
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[…] expand the focus by explaining why this is yet another piece of evidence for the proposition that policy makers should focus on growth rather than […]
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[…] Instead of fixating on inequality, why don’t they focus on policies that will actually help poor people? […]
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[…] P.S. Our leftist friends fail to appreciate that the real goal should be more economic growth, which is what’s really necessary to make life better for the less fortunate. […]
[…] P.S. Our leftist friends fail to appreciate that the real goal should be more economic growth, which is what’s really necessary to make life better for the less fortunate. […]
[…] And here’s some of Ronald Bailey’s analysis, which I cited last year. […]
[…] And here’s some of Ronald Bailey’s analysis, which I cited last year. […]
Reblogged this on Uncommon Sense.
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“Taxpayer Funded College to Pay Paul Krugman $225K to Promote Income Inequality”
http://www.frontpagemag.com/2014/dgreenfield/taxpayer-funded-college-to-pay-paul-krugman-225k-to-promote-income-inequality/
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[…] View Original: Help the Poor by Focusing on Growth rather than Inequality […]
[…] Scheer’s antidote to the so-called inequality “crisis” either, as only stable economic growth in the private economy can enhance prosperity for all (though of course not uniformly; thus even […]
“Equality” is ALWAYS a downward race to mediocrity. Let’s pretend we are applying this to basketball. You can’t make someone taller, or faster, or more talented. You CAN, however, hobble the better players if you really wanted to. Equal basketball will always be worse basketball overall. The short story “Harrison Bergeron” by, of all people, Kurt Vonnegut, captures our future perfectly.
The current political crowd uses “helping the poor” to stay in power and accumulate wealth. It doesn’t actually help the poor – but it does enrich armies of talentless bureaucratic drones who would be unemployable if they had to work in the private sector. That is what it is really about, and why arguing “what is best for the poor” will fall on deaf ears
The irresistible hope of top worldwide wealth through redistribution. The wellsprings of big government, and inexhaustible societal recycle into decline.
Pitchfork style democracy may be better than dictatorship, better than Russia. But it is nonetheless grossly inadequate to maintain the competitiveness that enables societies to maintain a top worldwide prosperity ranking in a fast, mobile, and globally competitive 21st century world. But many counties will fall into pitchfork style democracy. It is the natural human tendency, way back from the times when The People made Socrates drink hemlock and Jesus carry his cross. Most democracies will drive themselves into decline. It is the natural cycle.
As the malaise of flatter effort-reward curves and slower growth sets in, no voters will be in the mood to let go of other people’s wallets. Redistribution and pitchforks will intensify, as they are now intensifying after a lackluster recovery from recession. The lower growth trendline is already here, for those who can distinguish it from the inherently fractal behavior of the economy and ignore a few spurious future good quarters of ephemeral false hope. The vicious cycle will intensify. The democracies further along in this pitchfork process, like Greece, Spain, Italy are all visibly into decline. The remainder of the EU stepped in to save them, in an effort to postpone for a little longer every European’s illusion that their redistributive pitchfork democracies can provide the incentives needed to keep up with worldwide growth and thus avoid decline.
For those of you Americans who still think that the new world can turn back, welcome to Europe. Welcome to Pitchfork Democracy.
2008 was the year the irreversible road to decline was taken. It was the year that Americans, reacting to a crisis caused by accumulated statism, finally chose Pitchfork democracy. There is no exit from that path.
As an average American, at 50k yearly income, I’m in the world’s top 5%, and indeed rather highly motivated and productive by world standards, because if I’m not motivated to support myself, there are fewer safety nets.
But I’m not happy. I want more! I want an additional 10K in redistribution money. That will change everything. It will especially change that one SOB at the corner house who earns 300k. He makes me feel average and all my friends and family contrast my mediocrity with him. I don’t care if my society becomes less prosperous, slow-growth, and the rest of the world catches up with me, sinking me into worldwide averagedom. What I want to get rid of, what bugs me most, is the local street inequality of that SOB in the cul-de-sac house. I see that inequality every day. I don’t see how much wealthier than 95% of the people of this planet I am in selfish America.
In 2014, we, middle class Americans, were on the verge of losing top worldwide per capita prosperity. Our society, our effort-reward curves, and our competitiveness were finally Europeanizing.
So, finally, they first came for the 1%. And I rejoiced. We nailed them. We increased their taxes by 50% and we collected an additional 150 billion.
But that decreased incentives as the competent pulled back a bit at the margin and the mediocre found mediocrity a little more comfortable at their margin. More importantly, when the 150 billion were redistributed and diluted amongst the remaining 297 million Americans, there was not much for each person. A mere $500 per capita. Not much changed for the 99%.
So they came for the 5%, and again I rejoiced in the new hope. We nailed them too. We increased their taxes by 50% too and we collected, say, another 150 billion (not sure about the numbers but in the ballpark). Again, that did some more damage to incentives, as the competent pulled back a bit at the margin and the mediocre found mediocrity a little more comfortable at their margin. More importantly, when the 150 billion were redistributed and diluted amongst the remaining 285 million Americans, there was not much for each person. A mere additional $525 per person. Again, not much changed for the 95%
So they came for the 49% and I was skeptical, but rejoiced nonetheless. This will finally do it, I thought. We forced the 49% into patriotic altruism, collected another 150 billion and we were on our way to maintaining top worldwide prosperity, now earning an additional $1000 per capita in redistribution. By now, societal incentives to produce had equaled France. And by then, it was clear to everyone that France was headed for the toilet as it was much further down in worldwide per capita income ranking compared to 2014. French standard of living had approached the world average, which by then had risen to 30k per person worldwide, sinking the slow-growth French into averagedom.
Oh, wait a second. Someone’s at the door…
While it does seem odd that there are people who think the economy would grow faster if you take money from those busy creating and give it to those who can’t support themselves; the argument against redistribution is easier to make if you attempt to distribute their actual assets.
For example, Bill Gates is worth $76 billion. That is not stacks of cash. If you distributed his actual wealth, some homeless guy might get a couple hundred lines of code or part ownership of a server.
Taken to the extreme, even cash would be worthless to those receiving a distribution, since anyone with stuff would be better off than those holding paper with no transaction value.
class warfare… wealth confiscation… are not new concepts… they were all the rage in Germany in the 1930’s…
http://www.politico.com/story/2014/03/the-rich-strike-back-104753.html#ixzz2wK3ueXpD