I did a debate on income inequality for PBS, but haven’t written much about the issue because I think it is a misguided diversion.
One frustrating aspect of this debate is that folks on the left genuinely seem to think the economy is a fixed pie and that rich people get money by impoverishing others.
This is utter nonsense. Just look at this chart comparing North Korea and South Korea, or this chart comparing Chile, Argentina, and Venezuela. With the right policies, countries can get much richer over time, yielding enormous benefits for the average household.
More rational leftists understand this data, so they change the argument by asserting that the rich are getting richer faster than the poor are getting richer and that politicians should “solve” this alleged problem with class-warfare tax policy and more redistribution.
They even cite numbers from the biased bureaucrats at the Congressional Budget Office to supposedly prove their point.
There are all sorts of methodological problems with this kind of research, including the fact that people move up and down the income ladder over time, so it is very sketchy to compare, say, the top 20 percent in 1990 with the top 20 percent in 2010.
But even if you incorrectly assume that all households are locked into their current income levels, the data used by the left is deeply flawed.
My colleague, Peter van Doren, reviewed two studies for one of Cato’s in-house journals. Here some of what he culled from the scholarly publications.*
Increasing inequality in the distribution of earnings has become one of those stylized facts that everyone “knows.” The nightly news reminds viewers that ordinary workers have not fared well in the labor market over the last 25 years, while corporate executives have. Many professional economists and a recent CBO report have supported this view as well. While it is true that the cash explicitly paid to employees has become more unequal over the last generation, the…more benign explanation for the change in cash compensation over a generation is the dramatic increase in health insurance costs. …inequality in total compensation has not increased because the fixed costs of health insurance are a much larger percentage of the total compensation of lower-earnings workers. Burkhauser and Simon explore this explanation. They add the value of employer-provided health insurance as well as Medicaid and Medicare to the pre-tax, post-cash-transfer household income data and find that the bottom three income deciles actually exhibit higher growth than the top seven deciles from 1995 to 2008. …Warshawsky makes a similar discovery. Using unpublished BLS total compensation data, including employer health insurance expenditures, from 1999 to 2006, he finds that the growth in compensation by earnings decile (from the 30th to the 99th) averages 35 percent, with 41 percent growth at the 30th percentile (workers earning $10–$14 an hour) and only 35.8 percent growth at the 99th percentile (workers earning $59–$80 an hour).
Translating all this into simple English, it turns out that the rich are getting richer slower than the rest of us are getting richer.
By the way, even though I’m glad total compensation is growing more rapidly for the non-rich, these studies should not be interpreted as good news. As noted in the excerpt above, much of the additional money is diverted into a rather inefficient healthcare system.
This is the problem, not inequality. As I’ve explained before, American healthcare suffers from a third-party payer crisis caused by too much government intervention.
And because this distorted system leads to ever-higher costs, the increase in total compensation for lower-income and middle-income people does not translate into an increase in their living standards. Ordinary people feel like they’re on a treadmill.
In other words, while assertions of rising income inequality are dubious, there is a real issue of stagnation.
But as is often the case, the left’s answer is completely wrong. Class warfare and redistributionism are terribly misguided, as illustrated by this Walter Williams column and this Margaret Thatcher video.
If we want to help people live better lives, restoring a free market to health care would be a good first step, as explained in this video.
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*“Can the Rapid growth in the Cost of employer‑Provided Health Benefits explain the Observed increase in earnings inequality?” by Mark J. Warshawsky. september 2011. ssRn #1932381. And “Measuring the impact of Health insurance on Levels and Trends in inequality,” by Richard V. Burkhauser and Kosali i. simon. March 2010. nBeR #15811.
[…] The healthcare exclusion has a negative impact on take-home pay for ordinary […]
[…] quintiles tend to rise and fall together. For what it’s worth, adding other forms of compensation would boost lower quintiles compared to higher […]
[…] tend to rise and fall together. For what it’s worth, adding other forms of compensation would boost lower quintiles compared to higher […]
[…] you want even more, here’s something I wrote on income inequality and here’s a debate I did on income mobility. Even better, here’s what Margaret Thatcher said […]
Your side has been engaging in class warfare for a while. Prepare to get a taste of your own medicine. It’s already begun.
This post is so distorted and inaccurate that I’m not even going to waste my time deconstructing it. It’s just garbage, an ideologue inventing whatever he needs to say to support his dogma.
[…] left think so, but Dan Mitchell of the Cato Institute makes the case that it’s actually government interference in the health care market driving up costs which is damaging the middle […]
[…] if you want even more, here’s something I wrote on income inequality and here’s a debate I did on income mobility. Even better, here’s what Margaret […]
[…] DO your job is another. It’s something that I’ve always suspected. However, Dan Mitchell on his blog points out a couple of studies by CATO that demonstrates the lower earning deciles is growing more rapidly […]
It’s good to see an economist recognize that the main problem is income stagnation in the middle class, not the growing disparity between the income ratios of the prosperous to the poor. But as ever, the call for ‘free market’ solutions clouds the debate.
There has never been a ‘free market,’ and likely never will be, making the phrase the enshrinement of myth. We could have a health care system that was entirely voluntary, yet the very fact that it was a ‘system’ means that it would not be an entirely free market of freely associating free consumers. There will always be calls for some regulation of organized human activities that deal in death and dying, so a minimally-regulated “open market” better describes viable solutions to over-regulated strangulation of individual choices.
Until ‘free market’ economists evolve in their thinking to adopt “open markets” as the description for normative policy choices, they lose the argument with the public who correctly senses that ‘free market’ is just as much ideological myth as is Keynes’s myth-math “multiplier.”
Nicely said. We all should be talking about “total compensation.” I have the same issue, frankly, with those who just talk about how much income tax various people pay, as if these are the only taxes in the world.
Class Warfare is the Nuclear Bomb used by Fabian Socialists to gain and stay in Power. It also results in the Financial Murder of the Middle Class.