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Archive for the ‘Inequality’ Category

I’m sometimes guilty of repeating myself. I write over and over again on topics such as the flat tax and spending caps (and don’t forget my Golden Rule!), though I hope each time I bring something new to the discussion.

Another issue that motivates me is the debate about inequality, redistribution, and growth. I get all agitated and can’t resist trying to debunk statist claims that we should focus on re-slicing the pie rather than expanding the pie.

Here are just a few examples.

The invaluable Scott Winship makes the same argument in the Washington Post, but does it much better.

He starts with some very solid observations about why inequality doesn’t matter.

Changes to the tax code certainly could reduce inequality, but the real question is whether we should try to reduce it. There is little evidence that we should. …Across developed countries, those with higher inequality have slightly higher middle-class incomes and less poverty. …Areas of the United States with more income concentration at the top have no worse mobility than areas with low inequality. The same is true across countries — the best research indicates that low-inequality Sweden is no more mobile than the United States. …studies by experts including Thomas Piketty and Emmanuel Saez indicate that countries with higher inequality growth tend to have higher economic growth too. …Prioritizing inequality betrays indifference to policy outcomes and pure antipathy toward top earners.

And he then pivots and spends some time explaining why the focus should be on growth (assuming, of course, that the goal is actually to improve the lives of poor people rather than merely to punish the rich).

…nothing helps the poor and middle class like economic growth, and that is best pursued by policy reforms that ignore inequality. To promote growth, the next president should abolish corporate taxes and reform individual taxes… She should promote state and local reform of occupational licensing and land-use regulation. She should reform entitlements, including Obamacare, and reorient immigration policy in favor of admitting more higher-skilled and less lower-skilled immigrants. She should pursue a deregulatory agenda… Unfortunately, the distraction of inequality — or nationalism — makes it unlikely the next president will pursue any of these policies, and the poor and middle class will be worse off for it.

At this point, I imagine that some of my statist friends are sputtering and stammering to themselves about the new narrative, very popular on the left, about inequality harming growth.

I’ve already exposed the very shoddy attempts by political types at the OECD and IMF to push this ideologically-based talking point.

But what about the supposedly path-breaking work of Thomas Piketty? Didn’t he somehow produce game-changing data in support of higher taxes and more redistribution?

Nope. He basically showed that rich people are rich, which isn’t a stunning revelation. More controversially, he wanted people to conclude that rich people being rich somehow caused poor people to be poor.

And the theory he concocted to ostensibly “prove” his argument is so outlandish (basically assuming the return on investment is always greater than the underlying rate of growth) that only 2 percent-3 percent of economists are willing to “agree” or “strongly agree” with his premise.

For those who care more about empirical data rather than theory, you may be interested in a new working paper from one of the professional economists at the IMF. Carlos Góes finds that there’s no evidence for Piketty’s hypothesis.

Piketty…argues that all other things constant, whenever the difference between the returns on capital (r) and the output growth rate (g) increases, the share of capital in national income increases. Furthermore, since capital income tends to be more unequally distributed than labor income, an increase of the capital share would likely lead to increased overall income (and, over time, wealth) inequality. …I find no empirical evidence that the dynamics move in the way Piketty suggests. In fact, for at least 75% of the countries examined, inequality responds negatively to r − g shocks, which is in line with previous single-equation estimates by Acemoglu and Robinson (2015). The results also suggest that changes in the savings rate, which Piketty takes as relatively stable over time, are likely to offset most of the impact of r − g shocks on the capital share of the national income. Thus, it provides empirical evidence to the model developed by Krusell and A. Smith (2015), who say Piketty relies on flawed theory of savings. The conclusions are robust to alternative estimates of r − g and to the exclusion or inclusion of tax rates in the calculation of the real return on capital. …Figure 2 plots the contemporaneous correlations between r−g spreads and capital share, and share of the top 1%. Such basic correlations show no evidence of the relationship Piketty poses.

And here is the aforementioned Figure 2, with the capital share shown on the left and the share of the top 1 percent on the right.

For those who don’t like a lot of economic jargon (or don’t like looking at eye-glazing charts), here’s how the study was summarized in a report for the Wall Street Journal.

Mr. Piketty hypothesized that income inequality has risen because returns on capital—such as profits, interest and rent that are more gleanings of the rich than the poor—outpaced economic growth. …But Mr. Piketty’s thesis, posed by the French economist in his controversial 2013 tome “Capital in the Twenty-First Century,” isn’t proved by historical data, says International Monetary Fund economist Carlos Góes. …“While rich in data, the book provides no formal empirical testing for its theoretical causal chain.” Mr. Góes tested the thesis against three decades of data from 19 advanced economies. “I find no empirical evidence that dynamics move in the way Piketty suggests.” In fact, for three-quarters of the countries he studied, inequality actually fell when capital returns accelerated faster than output. Those findings support previous work by Daron Acemoglu of the Massachusetts Institute of Technology and political scientist James Robinson, now of the University of Chicago, suggesting Mr. Piketty’s thesis was far too simplistic… Why does all this matter? Because if policy makers seeking to address inequalities misunderstand the problem, their solutions could be wrong, ineffective and costly. Based on his inequality theory, Mr. Piketty has proposed progressive wealth taxes, a measure some economists argue could harm economic growth.

Amen. You don’t make poor people rich by trying to make rich people poor.

Unfortunately, I suspect (as Margaret Thatcher sagely observed) that a lot of leftists are more motivated by animus against success than they are about genuine concern for the poor.

That being said, some people do benefit from the pursuit of class-warfare policy. The College Fix discusses a new report about how some of the people who advocate higher taxes and more redistribution have figured out how to redistribute big chunks of money from taxpayers to themselves.

Several UC Berkeley economics professors who support “income inequality” research each earn more than $300,000 a year, putting them in the top 2 percent of the public university’s salary distribution, according to a recent report by a nonpartisan California think tank. …Cal’s equitable growth center’s director, economics Professor Emmanuel Saez, earned an annual salary of just under $350,000. The center’s three advisory board members – all economics professors – made similar amounts: Professor David Card made $336,367 in 2014; Professor Gerard Roland took in $304,608; and Professor Alan Auerbach earned $291,782. That’s not even including their pensions — equal to 2.5 percent times their final average salary times the number of years employed. …Another vocal income inequality expert at UC Berkeley, Professor Robert Reich – former secretary of labor under Bill Clinton’s administration who in 2013 helped produce the film “Inequality for All” – earned $263,592 in 2014, the think tank’s report states.

The article closes with a suggestion that I think will fall upon deaf ears.

…the report concluded. “So if UC Berkeley economists are really opposed to income inequality and are concerned about low-paid workers, they might consider sharing some of their compensation with the teaching assistants, graders, readers and administrative staff at the bottom of Cal’s income distribution.”

By the way, I strongly suspect that Thomas Piketty hasn’t given away all the money he earned from the infamous book he produced in defense of class warfare. Shouldn’t he lead by example?

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I don’t know whether it’s because I’m dedicated or masochistic, but I woke up at 3:00 AM in Serbia to live-tweet the Democratic presidential debate.

In retrospect, staying in bed would have been a better choice. This debate was basically the same as the others, with both Hillary Clinton and Bernie Sanders competing on who could turn America into Greece at the fastest rate.

Both candidates argued for higher tax rates on evil rich people, as well as sinister corporations, ostensibly because bigger government will make America more equal.

For those who care about the real world, however, this isn’t such a good idea.

Larry Lindsey, a former Governor at the Federal Reserve, writes in the Wall Street Journal that leftist policies actually cause inequality.

…when you look at performance and not rhetoric, the administrations of political progressives have made the distribution of income more unequal than their adversaries, who supposedly favor the wealthy. …inequality rose more under Bill Clinton than under Ronald Reagan. And it wasn’t even close. While the inequality increase as measured by the Gini index was only slightly more during Clinton’s two terms, the Theil index and mean log deviation increased two and three times as much, respectively. Barack Obama’s administration follows this pattern… The Gini index rose more than three times as much under Mr. Obama than under Mr. Bush. The Theil index increased sharply during the Obama administration, while it fell slightly under Bush 43.

Larry explains what drove these results.

And two big factors are easy-money monetary policies that artificially push up the value of financial assets (thus helping the rich) and redistribution policies that make dependency more attractive than work (thus hurting the poor).

Democratic presidents presided over bubble economies fueled by easy monetary policy. There is no better way to make the rich richer than to run policies that push up the price of financial assets. Cheap money is a boon to those who have access to it. …Transfer payments under Mr. Obama increased by $560 billion. By contrast private-sector wages and salaries grew by $1.1 trillion. So for every $2 in extra wages, about $1 was paid out in extra transfer payments—lowering the relative reward to work. …the effective tax rate on the extra earnings—including lost government benefits such as food stamps, the earned-income tax credit, and medical support payments—is between 50% and 80%. This phaseout of the ever increasing array of benefits has created a “working-class trap” instead of a “poverty trap” that is increasing inequality and keeping the income of these households lower than they might otherwise be.

I especially like Larry’s conclusion.

He points out that statist policies have a long history of failure. The only real beneficiaries are members of the parasite class in Washington.

None of this should really be surprising. If the socialist ideal of “from each according to his ability, to each according to his need” worked in practice, the Berlin Wall might still be standing. …Redistribution through the political process is not costless—even in a perfect world there would be a large bureaucracy to feed. Special-interest elites also emerge when so much money is being moved around. They take their cut, introducing even more inefficiency into the system. …voters who think the progressives running today are going to reduce inequality are falling into the same trap as people entering fifth or sixth marriages—the triumph of hope over experience.

So why do our friends on the left have such an anti-empirical approach to the issue of inequality?

Instead of fixating on inequality, why don’t they focus on policies that will actually help poor people?

Some of them probably don’t care. They simply view class warfare as a way of creating resentment and getting votes.

But many leftists are doubtlessly sincere and genuinely want to help the less fortunate.

The problem is that they suffer from the fixed-pie fallacy.

My Cato Institute colleague Chelsea German explains this fundamentally flawed understanding of the world.

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since. …A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer. Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Amen.

And it’s not just the U.S. data on how all income classes are climbing over time. Check out the “hockey stick” showing how the entire world is becoming richer.

Last but not least, Kyle Smith also addresses the topic of inequality in his New York Post column. He starts by explaining there isn’t a problem.

…there is no inequality crisis. …The US is only 42nd (out of 117 countries measured) in income inequality, according to the World Bank. We’re only 16th when it comes to the wealth held by the top 1%.

He then makes a far more important point, which is that it’s good to have an economy and a society where people can become rich by providing goods and services that the rest of us value.

Inequality is to some extent a residual effect of success: If there weren’t any billionaires or millionaires, inequality would be vastly diminished. America attracts and breeds success so brilliantly that we nearly beat the rest of the world combined in some respects: 42% of the world’s millionaires are Americans, and 49% of those with $50 million or more in assets. The American tendency to respect, and expect, success runs counter to the progressive plan to tax it away.

He basically reaches the same conclusion as Larry Lindsey.

In other words the left’s favorite policies help Washington insiders and hurt poor people.

A cap on incomes above, say, $100,000 would massively increase both equality and poverty as millions of middle-class people whose jobs depend on the rich in one way or another found themselves unemployed. …People tend to suspect, rightly, that government intervention in the name of fighting inequality will lead to exactly what’s happened in the Obama era: more inequality, with bureaucrats and their cronies standing to gain.

By the way, here’s a satirical Jonathan Swift version of what happens when you get rid of “rich” people.

P.S. Here’s my video on class warfare, featuring the clip of then-candidate Obama saying he favored a tax hike even if it imposed so much economic damage that the government collected no tax revenue.

P.P.S. The President isn’t the only leftist to have this spite-driven mentality.

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Folks on the left tell us that they want to help the less fortunate.

I sometimes wonder if their real motive is to penalize success and punish the “rich,” but let’s be charitable and assume that many of them truly wish to help the poor.

Leftist FairnessThat’s a noble sentiment, to be sure, but this is why it’s also important to look at the consequences of policy, not just the intentions.

I explained last year that certain left-wing fiscal, regulatory, and monetary policies actually harm the poor and help the rich, and I augmented that analysis earlier this year by showing how farm policies line the pockets of upper-income people.

Let’s now add to this research by looking at a new study (h/t: Tyler Cowen) from Mario Alloza of University College London. Here are some of the key findings from the study’s abstract.

Household panel…between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. …higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. …the effect of taxes on income mobility…is particularly significant when considering mobility at the bottom of the distribution.

And here are some of the findings from the study.

…to the extent that income mobility is a desirable feature of an economy, it is then relevant to consider how fiscal policy may affect it. …The results obtained suggest that higher marginal tax rates reduce income mobility. Particularly, I find that an increase of one percentage point in the marginal rate is associated with declines of about 0.5-1.3% in the probability of changing deciles of income. …The economic mechanism that induces this impact seems to be related to the labour market incentives created by changes in the tax schedule. …While some studies have pointed out to the importance of progressive taxation in addressing inequality, the results from this paper suggest that such changes may have a detrimental impact on income mobility.

Not surprisingly, it turns out that marginal tax rates are the most important variable, as we learned in our discussion of Cam Newton’s (fiscally) disastrous Super Bowl.

The effect of a percentage point reduction in marginal tax rates fosters relative income mobility across deciles…by about 1%. Similarly, households are about 6% more likely to stay in the same quintile of income when the marginal tax rates goes up by one percentage point… This evidence suggests that the economic mechanism that determines the effect of taxes on income mobility is based on incentives.

And here are more details on how higher tax rates appear to disproportionately harm the less skilled, while lower tax rates are more likely to help.

…non-college are, on average, more likely to move down in the income distribution, while college households are likely to move up (or, at least, less likely to move down) as a result of an increase in the marginal tax rates. …Fiscal reforms that homogeneously reduce marginal tax rates seem to contribute to income mobility by making households with non-college education more likely to occupy relatively higher positions within the income distribution (and vice versa for college-graduated households).

The bottom line is that some of our friends on the left want to shoot at the rich, but they wind up wounding the poor instead by greasing the rungs on the ladder of economic opportunity.

Which is why, for the umpteenth time, I’ll emphasize that market-driven growth is the moral and practical way to help the less fortunate.

P.S. Here’s an update on my travels. I’m in Beijing for a couple of speeches and I probably should say something substantive about how genuine federalism is an ideal long-run outcome for China, Hong Kong, Macau, and Taiwan. They can all be one country, if that’s what everyone wants (and that’s already the case for China, Hong Kong, and Macau), but that doesn’t mean there’s a need for a one-size–fits-all approach to domestic policy. In other words, a version of the advice I offered on Ukraine,Scotland, and Belgium basically applies in this part of the world as well. Call it one nation with three or four systems.

But the most memorable part of the trip (in a bad way) is that my communication lines with the world have been severed. The problem started when I left my phone in an airport security scanner on my way from Cambodia to Hong Kong.

Then I get to China and I learn that my laptop can’t access either the Cato remote desktop or my Gmail account. Or Twitter. Or Facebook.

This is a not a trivial problem since I got to Beijing in the evening, had a speech in the morning, but couldn’t access any of the information (and I’m not organized enough to print things out ahead of time). I eventually figure out a solution for my morning event by asking the front desk to connect me with the person who made the room reservation, which eventually leads to me getting in contact with someone else in the hotel who is there for the same event.

But that’s only part of the story. I still haven’t had email for several days. And I obviously don’t have a phone, either. So while I’m able to access a lot of stuff on the Internet using my laptop, I’m in the dark about what’s happening at Cato or what’s happening in the rest of my life. By the way, if you’re asking why I don’t create a new email address, that’s not as easy as it sounds since the widely-used email sites have security features such as asking to send you a text to confirm your new account, something that obviously wouldn’t work for me.

Oh, and I’m not able to access my blog while in China. So to maintain my pattern of producing a column every single day for however many years, I had to create a word document and then randomly approach someone in the hotel restaurant to ask if he could upload my column from a thumb drive and email it to friends back in Washington.

Oh well, nobody said the fight for liberty was easy.

P.P.S. Now that I’m done whining, let’s return to our original topic and look at a cartoon showing what Obama wants.

obama-economy-jobs-debt-deficit-political-cartoon-class-warfare-mathBut then let’s look at what Obama has actually delivered, which sort of confirms the research discussed above.

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The quality of economic analysis from politicians is never good, but it becomes even worse during election season.

The class-warfare rhetoric being spewed by Bernie Sanders and Hillary Clinton is profoundly anti-empirical. Our leftist friends genuinely seem to think the economy is a fixed pie and that it’s their job to use coercive government power to reallocate the slices.

The only real quandary is whether Bernie’s sincere demagoguery is more disturbing or less disturbing than Hillary’s hypocritical attacks on the top 1 percent.

Since I mentioned that the left’s rhetoric is anti-empirical, let’s look at the evidence.

I’ve previously shared very detailed IRS data showing that the so-called rich pay a hugely disproportionate share of the tax burden.

Let’s augment that analysis by perusing some data on income mobility.

Writing for Money, Chris Taylor explains that America is not a land of dynastic wealth.

…70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy. …When I asked financial planners why…second- and third-generation heirs turn out to be so ham-handed, the answers were surprisingly frank. A sampling: “Most of them have no clue as to the value of money or how to handle it.” “Generation Threes are usually doomed.” “It takes the average recipient of an inheritance 19 days until they buy a new car.”

But you don’t have to examine several generations to recognize that American society still has a lot of income mobility.

Tami Luhby looks at how people move up and down the income ladder during their lives.

The Top 1% is often considered an exclusive, monolithic group, but folks actually rise up into it and fall out of it quite often. …Some 11% of Americans will join the Top 1% for at least one year during their prime working lives (age 25 to 60), according to research done by Thomas Hirschl, a sociology professor at Cornell University. But only 5.8% will be in it for two years or more. As for holding onto this status for at least 10 years? Only a miniscule 1.1% of Americans are this fortunate. “Affluence is dynamic, said Hirschl… “The 1% really isn’t the 1%. People move around a lot.”

The same is true for the super-rich, the upper-middle class, and the poor.

The IRS looked at how frequently the same Top 400 taxpayers appeared on the list over a 22-year period ending in 2013. Some 72% ranked that high for just one year. Only 3% were listed for a decade or more. …While just over half of Americans reach the Top 10% at least once in their careers, only 14% stay in it for a decade or more, Hirschl found. …On the flip side, it’s not uncommon for Americans to spend some time at the bottom of the heap. Some 54% of Americans will be in or near poverty for at least one year by their 60th birthday, Hirschl said.

Here’s a table of numbers for those who like digging into the data.

Now let’s shift back toward public policy.

The good news (relatively speaking) is that the politics of envy don’t seem to work very well. This polling data finds that most Americans do not support higher taxes (presumably from the rich) to impose more equality.

And when you combine these numbers with the polling data I shared back in 2012, I’m somewhat comforted that the American people aren’t too susceptible to the poison of class warfare.

Let’s close with some ideological bridge building.

I certainly don’t share the same perspective on public policy as Cass Sunstein since the well-known Harvard law professor leans to the left.

But I think he makes an excellent observation in his column for Bloomberg. Smart leftists should focus on how to help the poor, not demonize the rich.

Bernie Sanders and Hillary Clinton have been operating within the terms set by Top 1 Percent progressivism. …For Top 1 Percent progressives, the accumulation of riches at the very top is what gets the juices flowing. They prioritize much higher taxes on top-earners, more aggressive regulation of Wall Street, restrictions on the compensation of chief executives, and criminal prosecution of those responsible for the financial crisis. Top 1 Percent progressivism emphasizes the idea of fairness — but it’s nevertheless a politics of outrage, animated by at least a trace of envy.  It’s as if “millionaires and billionaires” were the principal problem facing America today.

Sunstein correctly says the focus should be helping the less fortunate.

Bottom 10 Percent progressives  are not  enthusiastic about concentrations of wealth. But that’s not what keeps them up at night. Their focus is on deprivation and lack of opportunity. They’re motivated by empathy for people who are suffering, rather than outrage over unjustified wealth. They want higher floors for living standards, and do not much care about lower ceilings.

So far, so good.

I’ve also argued that our goal should be reducing poverty, not punishing success.

This is why I want pro-growth tax reform, a smaller government, and less suffocating red tape.

Unfortunately, Prof. Sunstein then wanders into very strange territory when it comes to actual policy. He actually endorses the utterly awful economic “bill of rights” proposed by one of America’s worst presidents.

Their defining document is one of the 20th century’s greatest speeches, delivered by Franklin Delano Roosevelt in 1944, in which he called for a Second Bill of Rights, including the right to a decent education, the right to adequate medical care and food, and the right to “adequate protection from the economic fears of old age, sickness, accident, and unemployment.”

If you think I’m exaggerating about FDR being an awful President, click here.

And if you want more information about FDR’s terrible “bill of rights,” click here.

So I like his diagnosis of why the left is wrong to fixate on hating success.

But he needs to look at real-world evidence so he can understand that free markets and small government are the right prescription for prosperity.

P.S. Here’s my video listing five arguments against class-warfare taxation.

There’s a lot of material in a short period of time, though I think the most disturbing part occurs at about 4:30. What sort of person would actually want to impose tax policy that is so punitively destructive that the government doesn’t collect any additional revenue?!?

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I’ve written about how statist policies help the rich and hurt the poor.

And I’ve also pontificated on the destructive and foolish subsidies dispensed by the execrable Department of Agriculture.

Now let’s mix those two issues (though I hasten to add that this isn’t like math…two negatives don’t make a positive.

Here’s an infographic from the American Enterprise Institute showing how farm programs are a (yet another) perverse example of poor-to-rich redistribution.

I particularly like the part about 42 cents of administrative cost to give away 90 cents of other people’s money.

Actually, let me rephrase. I’m horrified and upset that we have this horrible system, so I only “like” that part of the infographic in the sense that it’s an effective way of showing the inefficiency, venality, and stupidity of government redistribution programs.

And don’t forget that if it’s bad to redistribute from rich to poor, it’s downright evil and despicable to redistribute from poor to rich.

P.S. On a different topic, I can’t resist sharing a few excerpts from a story out of Missouri.

Lobbyists who have sex with a Missouri lawmaker or a member of a lawmaker’s staff would have to disclose it to the Missouri Ethics Commission under a bill introduced Wednesday in the Missouri House. …sexual relations would have to be included on monthly lobbyist gift disclosure forms.

And you thought this cartoon was merely satirical.

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Whenever I pontificate about the health of the American economy, I feel like Goldilocks. Instead of arguing that the economic porridge is too hot or too cold, or that the economic bed is too hard or too soft, I conclude that we’re stuck in the middle.

We generally outperform Europe’s high-tax welfare states, but we usually lag behind the small-government tiger economies of Asia.

But while Goldilocks always liked the middle option, I obviously think we should be more like Hong Kong and Singapore.

With this bit a background, let’s look at some supposedly really bad news that actually is modestly good news.

The folks at the Pew Research Center just issued a major report on income trends over the past 40-plus years. Based on their headline, you would think it’s filled with horrible news. Sort of like saying the economic porridge is way too cold.

So is it true that the middle class is “losing ground” and “falling behind”?

Michael Fletcher, writing for the Washington Post, seems to accept that spin. He opened his column by portraying the report’s findings as a sign of dystopian inequality.

After more than four decades of economic realignment and creeping inequality, the U.S. middle class is no longer the nation’s majority.

Yet even he was forced to acknowledge that this supposed “tipping point” is primarily the result of more households earning more money.

The nation has arrived at this tipping point in part because more Americans are moving up the income ladder. In 1971, just 14 percent of Americans were in the upper income tier, which Pew defined as more than double the nation’s median income. Now, 21 percent of American households are in that upper earning category — at least $126,000 a year for a three-person household.

Though he does his best to find a dark lining to this silver cloud, using loaded language to imply that those with modest incomes are disadvantaged because income is being “captured” by the rich.

…at the same time, many Americans are falling behind…. In 1971, a quarter of American households fell into the bottom earning tier, which Pew defined as less than two-thirds of the nation’s median income. By 2015, 29 percent of American households fell into that category. …The decline of the middle class has been accompanied by growing inequality, as a growing share of the nation’s income has been captured by those at the top.

But the Pew Report confirmed that the economy is not a fixed pie. Yes, the rich have become richer, but even Mr. Fletcher concedes that their income gains are not at the expense of the less fortunate. This is because the rest of us are becoming richer as well.

…Americans of all income levels have grown more prosperous, Pew found. Middle class families have seen their income grow by 34 percent in inflation-adjusted dollars since 1970, while lower-income Americans have experienced income growth of 28 percent.

He also reports that African-Americans have enjoyed above-average income growth.

…black Americans have made more economic gains than others in recent decades. Between 1971 and 2015, for example, the share of black Americans in the upper income tier more than doubled to 12 percent.

Here’s a chart from the Pew report. Note that these numbers are not based on changes in actual income, but instead measure how each group is faring relative to other slices of the population.

Maybe I’m just a naive Pollyanna, but the numbers in the Pew Report, even as characterized by the Washington Post, don’t seem like a damning indictment of American society.

Indeed, they sort of validate my view that things are getting better over time, albeit not as quickly as they would be improving if we followed the right recipe and had smaller government and less intervention.

In other words, we may not have hot, Hong Kong-style porridge, but it’s at least room temperature.

But Scott Winship of the Manhattan Institute is the real expert on these issues, so I was happy to see that he wrote an article on the Pew study for National Review.

Here are some of his key observations, starting with the essential insight that it’s much better to focus on income trends rather than income distribution.

Pew’s definition of “middle income” isn’t anchored to any fixed standard of living. In fact, it represents a rising standard of living over time. Imagine that the incomes of the poor, middle, and rich all increase by 50 percent over time. The Pew measure would indicate that the share of adults who are “middle income” would be no higher than it was initially. It is not obvious why we should care that the middle class, in this example, is no larger over time.

Amen. This is the same point I make when criticizing dishonest poverty analysis.

We should care about whether living standards for ordinary people are increasing, not whether rich people are getting richer.

Scott then looks at those income trends and finds good news.

…between 1969 and 2007, the household income of the median adult rose by 52 percent. …the 25th percentile (the income of the person poorer than 75 percent of adults) rose by 40 percent from 1969 to 2007. …While middle-income adults, by Pew’s definition, have shrunk by 11 percentage points as a share of the population since 1970, 7 points of that decline is due to more Americans’ being in the upper-income group. …Using the Pew measure of household income, the middle fifth grew richer by 53 percent from 1969 to 2007. My preferred measures showed a rise between 54 percent and 64 percent, depending on whether one adjusts for declining household size. …poor and middle-class Americans are both substantially better off than 45 years ago.

Now let’s shift to what really matters.

The left very much wants to focus on the distribution of income as part of their “inequality” campaign.

If they can convince people that the economy is a fixed pie, and combine that falsehood with rhetoric about higher incomes earned by the rich, that bolsters their case for ostensibly saving the middle class with soak-the-rich tax policies and greater levels of redistribution.

And that probably explains why the folks at Pew (along with certain journalists) decided to imply that the glass is 90 percent empty when it’s actually 60 percent full.

Winship hits the nail on the head in his conclusion.

A policy agenda designed with a crumbling middle class in mind is not only inappropriate, but it could actually hurt the living standards of the middle class in the process.

He’s exactly right.

Nations such as Greece and France have pursued the policies favored by American leftists and the net result – at best – is anemic growth and stagnant living standards.

To conclude, here’s a video that I saw on Ted Frank’s Twitter feed. I couldn’t figure out how to embed it, but was able to download it and put it on YouTube.

You’ll notice a big jump over time in the amount of households earning above $200,000 per year. Call me crazy, but I want there to be more rich people, so this is a good development.

But if you play close attention, the other big takeaway from this data (and the one that merits some celebration) is that more and more people are earning higher and higher levels of income over time. And remember, these are inflation-adjusted dollars.

So let’s be happy that ordinary people in America are climbing the economic ladder. But let’s recommit ourselves to fight harder for pro-growth policies such as tax reform and entitlement reform so their ascent up the ladder will be faster.

P.S. Here are some examples of how statist policies increase inequality.

P.P.S. The comparative data on income trends and inequality in the United States and Scandinavia is worth perusing.

P.P.P.S. And I never get tired of sharing this Margaret Thatcher video because she succinctly explains that many leftists would rather hurt the rich than help the poor.

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I don’t like the inequality debate because it’s a distraction from the far more important issue of how to generate more growth.

Nonetheless, I feel compelled to once again address the topic. Let’s start with a moral observation: There’s nothing wrong with the kind of inequality that results from honest exchange.

Bill Gates earns far more money than me, but his earnings and wealth are the result of voluntary exchange (at least as far as I know). Consumers voluntarily give him money because they value the goods and services produced by Microsoft.

So it would be nothing but self-destructive envy for me to grouse and complain. And it would be immoral for me to steal his money, either acting on my own or using the coercive power of government.

Dennis Prager elaborated on this principle in National Review.

…what most matters…is whether the wealthiest class has attained its wealth honestly or corruptly. If the wealthy have attained their wealth morally and legally, then the income gap is not a moral problem. In a free society, wealth is not a pie — meaning that when a slice of pie is removed, there is less of the pie remaining.

For what it’s worth, I don’t even think it’s wrong that leftists like Michael Bloomberg and Barbara Streisand earn more money in a year than I could earn in 10 lifetimes. So long as they earn their money honestly (i.e., not via government favoritism like some statists), their financial success is admirable.

But I do have the right to complain about the way some leftists spend their money. That’s because they promote and support policies that make it hard for lower-income people to climb the economic ladder.

But I’m not just talking about left-wing support for statist policies that dampen growth and hurt all income classes. In some cases their preferred policies result in the transfer of income and wealth from the poor to the rich.

And that creates the wrong kind of inequality. Not just wrong. Grotesquely unethical.

Let’s look at some examples.

Andrew Lundeen of the Tax Foundation found that the poor are hurt and some rich folks benefit when reviewing the impact of class-warfare taxes.

When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages. Second, because there is less capital available the available capital is more valuable, which causes the return to capital to rise. The effect of this over time is that wage earners make less and capital owners make more. Our current tax code exacerbates this problem significantly through its non-neutral bias towards consumption over future consumption (i.e. saving).

Amen. This is why I keep sharing this chart showing that double taxation hurts workers.

Now let’s look at what Professor Jeffrey Dorfman wrote about the Federal Reserve’s easy-money policy for Forbes.

…the Fed’s low interest rates have been responsible for inflating stock market values. By reducing the returns to savings accounts, certificates of deposit and bonds, the Fed has intentionally driven ordinary investors to increase their investment allocation to the stock market, thereby boosting stock returns. Because people with more wealth tend to own more stock, those higher stock prices have led the rich to gain much more than the poor and middle class. Low interest rates have meant low borrowing costs for large corporations with direct access to capital markets. This low-cost borrowing has boosted corporate profits which also flow mostly to the wealthy.

He’s right. The rich disproportionately benefit from rising asset values, while the rest of us suffer because of low interest rates on our savings accounts (though the rich may regret such policies if the result is a bubble that eventually bursts).

Dorfman also points out that statist policies, broadly speaking, penalize labor relative to capital. And this is not good for workers in general, but it’s especially harmful for low-income workers.

…the low interest rates set by the Fed combined with the additional labor costs thanks to the Obama Administration (Obamacare and its associated taxes) are changing the relative prices of labor and capital. …This also increases economic inequality because the poor and middle class earn most (or all) of their money from labor income, while the rich collect a significant share of their income in various forms of returns to capital (dividends, interest, capital gains and business profits). Purposely tilting the economy in favor of capital and against labor is pretty close to taking from the poor and giving to the rich, the exact reverse of normal government attempts to redistribute income.

Even the left-leaning Urban Institute recognizes the big government sometimes helps the rich at the expense of the poor. Here’s some of what Leigh Franke wrote about land-use restrictions.

Restrictive land-use regulations, including zoning laws, are partially to blame for the stagnant growth… Land-use regulations may be intended to protect the environment or people’s health and safety, and even to enhance the supply of affordable housing, but in excess, they restrict housing supply, drive up home prices, and limit mobility. …More and more zoning restrictions meant less construction, fewer permits, and a restricted housing supply that drove up prices even further. …cities often have stringent zoning laws, a restricted housing supply, and high prices, making it nearly impossible for lower-income residents and newcomers, who would likely benefit most from the opportunities available, to find affordable housing.

The minimum wage is another example of a left-wing policy that causes the wrong type of inequality, as explained by Robert Graboyes of the Mercatus Center.

The $15-an-hour minimum wage is a superb tool if your goal is increasing inequality. To the least-advantaged Americans, its logic is simple: “You lose your jobs and access to jobs so your wealthier neighbors might enjoy small wage increases and greater protection from competitors like you.” …Other than wealthier employees, who benefits from a $15 minimum wage? Income is likely to soar for a CEO whose company builds robots to replace low-wage workers. …instigators and beneficiaries of minimum wages are often labor unions who benefit from eliminating potential competitors…harsh restrictions on job-seekers can do damage that lasts a lifetime. A teenager shut out of employment by an exorbitant minimum wage will fail to learn job skills and establish a track record that impresses future prospective employers. And the effects will not fall evenly: Children of wealth and privilege have many routes to circumvent such restrictions. The inner-city teen, striving for a better life, has no such good fortune.

Spot on. Here’s a must-watch video on the topic.

In the interest of space, that’s enough examples, though I’ll at least mention that the Export-Import Bank is another example of a government policy that transfer money from the poor to the rich, as are agriculture subsidies.

The left’s support for a government monopoly instead of school choice also should be on this list, since the main result is to hurt kids from poor families in order to provide undeserved goodies for unionized teachers.

And don’t forget bailouts. And favors in the tax code. As well as licensing. And the green energy scam.

I could keep adding to that list, but let’s got to today’s lesson: Our friends on the left say they want to help the poor and reduce inequality. But their policies often target the kind of inequality that we shouldn’t worry about while exacerbating the form or inequality that is a problem.

John Goodman explained the consequences in a recent column.

The worst housing shortages, the most homelessness and the worst inequality exist in the cities that are the most Democratic and the most liberal.

The same relationship exists at the state level. Bigger government is correlated with more inequality.

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.

Actually, to be fair, they want economic growth. They just don’t support the recipe that produces that outcome. I’m not sure why, but maybe Margaret Thatcher was right and they want bad outcomes for the rich (other than their cronies) more than they want good outcomes for the poor.

December 17 Addendum: Let’s add regulation to our list of statist policies that cause inequality by unjustly lining the pockets of higher-income people.

A. Barton Hinkle explains for Reason. Here are a few excerpts from his column.

…doctors, who make up a good part of America’s richest 1 percent, extract rents from the public through other government policies. One of those is licensure: “The law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them.” …Health care is an extreme example, but upward redistribution of wealth through government action affects nearly every sector of the economy. In most states, direct sales of new automobiles to consumers are forbidden–you have to buy through a dealership. Roughly a third of all occupations now require a government license–up from only 5 percent of all occupations a few decades ago.

We already knew that regulation hurts poor people, so the fact that some regulations help rich people is a very perverse form of symmetry.

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I’ve admitted before that I have no idea whether global warming is a real problem, but I can say with considerable certainty that there are two reasons why I’m very skeptical of the environmental policy agenda.

First, the serious environmentalists believe in central planning and other forms of statism.

Second, radical environmentalists are nutjobs.

In case you think I’m exaggerating on the second point, consider these examples.

Then there’s the super-nutty category.

Now let’s look at a new development in the field of global warming (or climate change, or whatever term is now being used).

The Washington Examiner opines on the bizarre tendency on the left to say that weather causes terrorism (I’ll let readers judge whether this belongs in the “serious” category or “nutjob” category).

President Obama said ahead of the event that began this week. “What a powerful rebuke to the terrorists it will be, when the world stands as one and shows that we will not be deterred from building a better future for our children.” One could hardly blame the leadership of the Islamic State if they had a hearty laugh at this peculiar response to its attacks on Paris last month. The same could be said about the multiple instances in which Obama and high-ranking members of his administration have asserted that climate change poses a greater national security threat than terrorism… The new fad of blaming climate change for terrorism, or treating the two as comparable security issues, is troubling. …Bernie Sanders’ recent assertion in a presidential debate, that “climate change is directly related to the growth of terrorism,” was not an aberration, but increasingly a part of left-wing orthodoxy in the U.S.

The Examiner then points out the obvious. Or at least something that should be obvious.

Terrorism is not caused by the weather. …terrorism is caused mostly by radical Islamist ideology. There are appropriate law enforcement, intelligence, propaganda and occasionally military responses to it. But when you hear politicians talk about global warming as the cause of terrorism, take it as an indication that they aren’t serious people, and should not be trusted with complex affairs of state.

By the way, our friends on the left can’t even get their stories straight. While President Obama and others are asserting or implying that terrorism is related to climate change, other prominent statists say terrorism is caused by inequality.

Thomas Piketty, the French economist who is infamous for a theory rejected by the vast majority of economists and a tax plan that would cripple the economy and impose harsh misery on poor people, has now decided to pontificate on inequality and terrorism. Here’s some of what’s being reported by Business Insider.

The new argument, which Piketty spelled out recently in the French newspaper Le Monde, is this: Inequality is a major driver of Middle Eastern terrorism, including the Islamic State attacks on Paris earlier this month — and Western nations have themselves largely to blame for that inequality. …concentration of so much wealth in countries with so small a share of the population, he says, makes the region “the most unequal on the planet.” …Those economic conditions, he says, have become justifications for jihadists… Terrorism that is rooted in inequality, Piketty continues, is best combated economically.

To be fair, there probably is a bit of truth to the notion that young men in the Middle East are susceptible to radical ideologies in part because of economic reasons. They may live in oil-rich countries, but there is very little opportunity because of corrupt statism.

And it’s never good for a society to have young men with lots of free time and very little hope.

But the problem in these nations (above and beyond radical strains of Islam) is that bad government policy cripples opportunity. The resulting inequality (remember, the people connected to government are rich) is largely a consequence of the statism.

So the notion bigger government will make things better is rather naive, to say the least.

Though statist policies will mean less growth, and a smaller economy means a smaller carbon footprint, so maybe our friends on the left actually do have a coherent strategy. Simply make everyone poor. That ways there’s less carbon and less inequality!

Though don’t think for even a nanosecond that Obama, Piketty, and the rest of the elite will suffer. After all, leftists are grotesque hypocrites on environmental issues, as you can see here and here.

And don’t delude yourself into thinking that any of the left’s policies will reduce terrorism either.

P.S. But to close on an upbeat note, we have some decent environmentalist humor here, here, here, and here.

P.P.S. And if you prefer terrorism humor, click here, herehere, and (at the end of the posts) here and here.

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In conversations with statists, I’ve learned that many of them actually believe the economy is a fixed pie. This misconception leads them to think that rich people get rich only by somehow making others poor.

In this simplistic worldview, a bigger slice for one person means less for everyone else.

In reality, though, their fixation on the distribution of income leads them to support policies that hinder growth.

And here’s the ironic part. When you have statist policies such as high taxes and lots of redistribution, the economy weakens and the result is a stagnant pie.

In other words, the zero-sum society they fear only occurs when their policies are in effect!

To improve their understanding (and hopefully to make my leftist friends more amenable to good policy ideas), I oftentimes share two incontestable facts based on very hard data.

1. Per-capita economic output has increased in the world (and in the United States), which obviously means that the vast majority of people are far better off than their ancestors.

2. There are many real-world examples of how nations with sensible public policy enjoy very strong growth, leading to huge increases in living standards in relatively short periods of time.

I think this is all the evidence one needs to conclude that free markets and small government are the right recipe for a just and prosperous society.

But lots of statists are still reluctant to change their minds, even if you get them to admit that it’s possible to make the economic pie bigger.

I suspect in many cases their resistance is because (at least subconsciously) they resent the rich more than they want to help the poor. That’s certainly the conclusion that Margaret Thatcher reached after her years in public life.

So, in hopes of dealing with this mindset, let’s augment the two points listed above.

3. There is considerable income mobility in the United States, which means today’s rich and today’s poor won’t necessarily be tomorrow’s rich and tomorrow’s poor.

Let’s look at some evidence for this assertion.

And we’ll start with businesses. Here’s what Mark Perry of the American Enterprise Institute found when he investigated changes in the Fortune 500.

Comparing the 1955 Fortune 500 companies to the 2015 Fortune 500, there are only 61 companies that appear in both lists… In other words, only 12.2% of the Fortune 500 companies in 1955 were still on the list 60 years later in 2015… The fact that nearly 9 of every ten Fortune 500 companies in 1955 are gone, merged, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction… The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy, and that dynamic turnover is speeding up in today’s hyper-competitive global economy.

Here’s the list of the companies that have managed to stay at the top over the past six decades.

Now let’s shift from companies to people.

The most famous ranking of personal wealth is put together by Forbes.

Is this a closed club, with the same people dominating the list year after year?

Well, there’s considerable turnover in the short run, as noted by Professor Don Boudreaux.

…21 of the still-living 100 richest Americans of only five years ago are no longer in that group today.  That’s a greater than 20 percent turnover in a mere half-decade.

There’s a lot of turnover – more than 50 percent – in the medium run, as revealed by Mark Sperry.

Of the 400 people in the 2001 Forbes list of the wealthiest Americans, 230 were not in the 1989 list.

And there’s almost wholesale turnover in the long run, as discovered by Will McBride of the Tax Foundation.

Of the original Forbes 400 from the first edition in 1982, only 35 remain on the list. …Of those on the 1987 Forbes 400 list, only 73 remain there in 2013.

In other words, it’s not easy to stay at the top. New entrepreneurs and investors constantly take the place of those who don’t manage to grow their wealth.

So far, we’ve focused on the biggest companies and the richest people.

But what about ordinary people? Is there also churning for the rest of us?

The answer is yes.

Here are some remarkable findings from a New York Times column by Professor Mark Rank of Washington University.

I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking. It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution. …This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60…this information casts serious doubt on the notion of a rigid class structure in the United States based upon income.

A thoroughly footnoted study from the National Center for Policy Analysis has more evidence.

…83 percent of adults born into the lowest income bracket exceed their parents’ income as adults. About 40 percent of people in the lowest fifth of income earners in 1986 moved to a higher income bracket by 1996, and roughly half of the people in the lowest income quintile in 1996 moved to a higher income bracket by 2005. …In both the 1970s and 1980s, 8 percent of children born in the bottom fifth of the income distribution rose to the top fifth. About 20 percent of children born in the middle fifth of the income distribution later rose to the top fifth.

And here’s some of Ronald Bailey’s analysis, which I cited last year.

Those worried about rising income inequality also often make the mistake of assuming that each income quintile contains the same households. They don’t. …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.

Last but not least, let’s look at some of Scott Winship’s recent work.

…for today’s forty-somethings who grew up in the middle fifth around 1970…19 percent ended up in the top fifth, 23 percent in the middle fifth, and 14 percent in the bottom fifth… Among those raised in the bottom fifth, 43 percent remain there as adults. …30 percent made it to the top three-fifths… Mobility among today’s adults raised in the top fifth displays the mirror image: 40 percent remain at the top, 37 percent fall to the bottom three-fifths.

The bottom line is that there is considerable income mobility in the United States.

To be sure, different people can look at these numbers and decide that there needs to be even more churning.

My view, for what it’s worth, is that the correct distribution of income is whatever naturally results from voluntary exchange in an unfettered market economy.

I’m far more concerned with another economic variable. Indeed, it’s so important that we’ll close by adding to the three points above.

4. For those who genuinely care about the living standards of the less fortunate, the only factor that really matters in the long run is economic growth.

This is why, like Sisyphus pushing the rock up a hill, I keep trying to convince my leftist friends that growth is the best way to help the poor. I routinely share new evidence and provide real-world data in hopes that they will realize that good results are more important than good intentions.

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I repeatedly try to convince people that the welfare state is bad for both taxpayers and poor people.

Sometimes I’ll add some more detailed economic analysis and explain that redistribution programs undermine growth by reducing labor supply (with Obamacare being the latest example).

And I’ve even explained that the welfare state has a negative impact on savings and wealth accumulation (these dramatic charts show Social Security debt in America compared to ever-growing nest eggs in Australia’s private pension system).

But if new research from the European Central Bank (ECB) is any indication, I should be giving more emphasis to this final point.

Culling from the abstract, here’s the key finding from the working paper by Pirmin Fessler and Martin Schürz.

…multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries.

Here are details from the study.

We regress net wealth on income…and add welfare state country level variables. …The main result of these hierarchical linear models is that pension and social security expenditure measured as shares of GDP show significant and negative correlation with household net wealth levels. …We regard this as evidence that welfare state expenditures indeed act as substitutes for private wealth accumulation and explain partly observed differences in household net wealth among euro area countries. A larger and more active welfare state leads to less need for private households to accumulate private wealth.

Here’s a pair of graphs from the study, showing the negative relationship between government-provided pensions and private wealth.

Now here’s the part that should make honest leftists more open to entitlement reform.

The data show that the welfare state increases inequality!

The effect of a 1 percentage point increase in state pension expenditure as a share of GDP on net wealth is a decrease about 20% less wealth for households around the 10th net wealth percentile. The size of the negative impact is smaller for wealthier households, but remains at above 10% of net wealth. Social security expenditure shows a similar but somewhat weaker effect, ranging at around 10% at the 10th net wealth percentile and coming close to zero for the wealthiest. …we see a decrease in net wealth of 47% for the low wealth household, of 16% for the middle wealth household, and 8% for the high wealth household. These numbers are roughly in line with our results… Additional welfare state spending is negatively associated with all wealth levels but decreasing in size relative to wealth across the full net wealth distribution. …this mechanism would lead to increased observed inequality of private net wealth given an increase of welfare state activity.

Those are some damning results.

And the numbers might be even worse in the United States since many minorities already are screwed by Social Security because they have shorter lifespans.

P.S. Since we’re on the topic of inequality, regular readers know that I think the issue as a complete red herring. Simply stated, the goal should be faster growth and it doesn’t matter if some people get richer faster than others get richer (assuming, of course, that the rich are earning their money and not getting subsidies, bailouts, and other forms of unearned wealth).

That being said, if somebody had asked me whether there had been a significant increase in inequality over the past couple of decades, I would have guessed – based on all the feverish rhetoric from our statist friends – that the answer is yes. So I was very surprised to see this chart from Mark Perry at the American Enterprise Institute.

In other words, the politicians who are talking about a supposed crisis of growing inequality are spouting nonsense. And I’m ashamed I didn’t know their rhetoric is a bunch of you-know-what.

That being said, if their concern about inequality is legitimate and not just for purposes of demagoguery, I expect them to read the ECB working paper discussed above and add their voice in support of a smaller welfare state and in favor of Social Security reform.

P.P.S. If the New York Times can support private retirement savings (albeit by accident), then other leftists should be able to do the same thing.

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When I wrote the other day that the Organization for Economic Cooperation and Development was the worst international bureaucracy, I must have caused some envy at the International Monetary Fund.

One can imagine the tax-free bureaucrats from the IMF, lounging at their lavish headquarters, muttering “Mitchell obviously hasn’t paid enough attention to our work.”

And they may be right. The IMF has published some new research on inequality and growth that merits our attention. I hoped it would be a good contribution to the discussion, but I was disappointed (albeit not overly surprised) to see that the authors put ideology over analysis.

Widening income inequality is the defining challenge of our time. …Equality, like fairness, is an important value.

Needless to say, they never explain why inequality is a more important challenge than anemic growth.

Moreover, they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.

And they certainly don’t define “fairness” in an adequate fashion.

But let’s not get hung up on the rhetoric. The most newsworthy part of the study is that these IMF bureaucrats produced numbers ostensibly showing that growth improves if more income goes to those at the bottom 20 percent.

…we find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

And this correlation leads them to make a very bold assertion.

…there does not need to be a stark efficiency-equity tradeoff. Redistribution through the tax and transfer system is found to be positively related to growth for most countries.

Followed by some policy suggestions for more class-warfare tax policy to finance additional redistribution.

…the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation… In addition, reducing tax expenditures that benefit high-income groups most and removing tax relief—such as reduced taxation of capital gains, stock options, and carried interest—would increase equity.

Those are some bold leaps in logic that the authors make. And we’ll look at some new, high-quality research on the efficiency-equity tradeoff below, but first let’s consider the IMF’s supposed empirical findings on growth and income.

Several questions spring to mind:

  • Did they cherry pick the data? Why look at the relationship between growth and income gains in the previous five years rather than one year, three years, or ten years?
  • Why do they assume the correlation they found in the five-year data somehow implies causation for future growth? Roosters crow before the sun comes up, after all, but they don’t cause sunrises.
  • Was there any attempt to look at other hypotheses? One thing that instantly came to my mind was the possibility that recessions often are preceded by easy-money policies that create asset bubbles. And since those asset bubbles tend to artificially enrich savers and investors with higher incomes, perhaps that explains the correlation in the IMF’s data.
  • Perhaps most important, why assume that faster income growth for the bottom 20 percent automatically means there should be more redistribution through the tax and transfer system? Maybe that income growth is the natural – and desirable – outcome of good Hong Kong-type policies?

There are all sorts of other questions that could and should be asked, but let’s now shift to the IMF’s bold assertion that their ostensible correlation somehow proves that there’s no tradeoff between growth (efficiency) and redistribution (equity).

Kevin Hassett of the American Enterprise Institute investigated the degree to which Arthur Okun was right about a tradeoff between growth and redistribution.

Forty years ago, the economist Arthur Okun wrote a seminal book with a self-explanatory title: Equality and Efficiency: The Big Tradeoff.  …Okun’s tradeoff seems to be forgotten by many on the left, who advocate expanded government spending at every turn… What is needed is some kind of controlled experiment.. When the financial crisis began, countries varied tremendously in the extent to which they redistributed income. Some, such as Ireland and Sweden, redistributed a lot; others, such as the U.S. and Switzerland, not so much. Now, seven years later, some countries have recovered smartly. Others have not. If we go back and sort countries by how much they redistributed before the crisis, how does the growth experience compare? …The vertical axis plots how much redistribution there was in each country in 2008. The horizontal axis plots the rate of per capita national-income growth that each country averaged during the four years between 2008 and 2012. In some sense, then, the chart asks the question, “To what extent does variation in the size of the welfare state in 2008 explain variation in how economies recovered from the crisis between 2008 and 2012?” …As one can see in the chart, …the data show a clear pattern: the heavy redistributors have done much worse.

And here’s Kevin’s chart, and it clearly shows the redistribution-oriented nations had relatively slow growth (the top left of the chart).

The bottom line is that Kevin’s hypothesis and data are much more compelling that the junky analysis from the IMF.

But you don’t need to be an expert in economic jargon or statistical analysis to reach that conclusion.

Just look around the globe. The real-world evidence is so strong that only an international bureaucrat could miss it. The nations that follow the IMF’s advice, with lots of redistribution and class-warfare taxation, are the ones that languish.

After all, Greece, Italy, and France are not exactly role models.

While jurisdictions such as Hong Kong and Singapore routinely set the standard for growth.

And nations with medium-sized welfare states, such as Switzerland, Australia, and the United States, tend to fall in the middle. We out-perform Europe’s big-government economies, but we lag behind the small-government economies.

Let’s close by looking at some additional findings from the IMF study.

I was actually surprised to see that the bureaucrats admitted that inequality (more properly defined as some people getting richer faster than others get richer) was the natural result of positive economic developments.

We find that less-regulated labor markets, financial deepening, and technological progress largely explain the rise in market income inequality in our full sample over the last 30 years.

So why, then, is “inequality” a “defining challenge”?

Needless to say, the IMF never gives us a good answer.

I also was struck by this passage from the IMF study.

Figure 18 indicates that rising pre-tax income concentration at the top of the distribution in many advanced economies has also coincided with declining top marginal tax rates (from 59 percent in 1980 to 30 percent in 2009).

And here is the chart, which the IMF would like you to believe is evidence that lower tax rates have contributed to inequality (even though the bureaucrats already admitted that natural forces have led some to get richer faster than others).

Yet this chart simply shows that supply-siders were right. Reagan, Kemp, and other tax cutters argued that lower tax rates would lead rich people to earn – and declare – more taxable income.

And that’s exactly what happened!

Heck, I’ve already shared incredibly powerful data from the IRS on this occurring during the 1980s in the United States, so it’s no surprise it happened in other nations as well.

But I don’t want to be reflexively critical of the IMF. The study did have some useful data.

And there was even one very good recommendation for helping the poor by cutting back on misguided anti-money laundering laws.

Country experiences also suggest that policies such as granting exemptions from onerous documentation requirements, requiring banks to offer basic accounts, and allowing correspondent banking are useful in fostering inclusion.

Since I’ve written that anti-money laundering laws are ineffective at fighting crime while putting costly burdens on those with low incomes, I’m glad to see the IMF has reached the same conclusion.

And here’s a chart from the IMF study showing how poor people are less likely to have accounts at financial institutions.

By the way, the World Bank has produced some very good research on how the poor are hurt by inane anti-money laundering rules.

So kudos to some international bureaucracies for at least being sensible on that issue.

But speaking of international bureaucracies, I started this column by joking about the contest to see which one produced the worst research with the worst recommendations.

And while the IMF’s new inequality study definitely deserves to be mocked, I must say that it’s not nearly as bad as the drivel that was published by the OECD.

So our friends in Paris can rest on their laurels, confident that they do the best job of squandering American tax dollars.

P.S. Since I pointed out that the IMF inadvertently ratified one of the key tenets of supply-side economics, let’s remember that the IMF also confirmed one of the key reasons to oppose a value-added tax.

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What’s the worst international bureaucracy?

But I think the Paris-based Organization for Economic Cooperation and Development has them all beat, particularly if we grade on a per-dollar-spent basis.

Just consider the OECD’s work on inequality. The bureaucrats recently published a study that claimed inequality somehow undermined growth.

In a column for the Wall Street Journal, Matthew Schoenfeld of Dreihaus Capital Management explains why the study is deeply flawed. He starts with a summary of what the OECD would like folks to believe.

The Organization for Economic Cooperation and Development recently published a report, “In It Together: Why Less Inequality Benefits All,” that claimed rising income inequality from 1990-2010 depressed cumulative growth across its member countries by 4.7%. The OECD’s suggested solution: government-led redistribution, funded via tax increases on “wealthier individuals” and “multinational corporations.”

But Schoenfeld explains the OECD’s research is riddled with misleading use of statistics.

From 2011-13, according to the World Bank, the five most unequal countries grew nearly five times faster (3.9% cumulative annual average) than the others (0.84%). By using a 2010 cutoff, the OECD has skewed its findings. Consider Greece. From 1999-2012, its Gini coefficient “improved” by 6% to .34 from .36—more than any other OECD country. …Greece’s redistributive social transfer spending also grew most quickly among OECD peers from 2000-12. But Greece’s economy has shrunk by more than 20% since 2010.

Here’s another example.

…the income-tax rate is a subpar proxy for redistribution policy. …A more representative proxy for redistribution is government expenditure as a percentage of GDP, which encompasses all government spending on the provision of goods, services, subsidies, and social benefits. From 1995-2012, OECD member countries that increased government expenditures as a percentage of GDP grew 30% slower than member countries that trimmed government expenditure as a percentage of the economy over that span—average annual growth of 1.9% compared with 2.5%.

Gee, who would have guessed that bigger government leads to less growth? I’m shocked, shocked.

And who would have guessed that the OECD produces research with dodgy numbers? Knock me over with a feather!

Though I must say that the sloppiness in this inequality study is trivial compared to the junk-riddled methodology of the OECD’s poverty study, which actually purported to show that there’s more deprivation in America than there is in poor nations such as Greece, Turkey, and Portugal.

Which gives me an opening to highlight what I wrote about this OECD study. I suggested that “the bureaucracy’s ‘research’ now is more akin to talking points from the Obama White House” and highlighted some utterly preposterous conclusions of the study.

We’re supposed to believe that Spain, France, and Ireland have enjoyed better growth. I guess France’s stagnation is just a figment of our collective imaginations. And those bailouts for Spain and Ireland must have been a bad dream or something like that.

Some folks may question whether the OECD is really a leftist bureaucracy. Or at least they may wonder whether I go overboard in my criticisms.

For what it’s worth, I do give the crowd in Paris some praise when good research is produced.

But imagine that the OECD is a student who gets a B on one test and fails every other exam. At some point, isn’t it safe to assume we have a remedial pupil?

And here’s some very strong proof. It turns out that the OECD is even further to the left than the Obama Administration.

I’m not joking. Check out these excerpts from an item in Politico’s Morning Tax.

…the U.S. is definitely not on the same page as its allies. The split was apparent at last week’s OECD conference in Washington to discuss the Base Erosion and Profit Shifting (BEPS) plan… Robert Stack, deputy assistant secretary for international affairs at Treasury, suggested that the OECD’s Base Erosion and Profit Shifting (BEPS) project was being driven less by a desire for sound policy than by foreign countries’ domestic politics and a desire for more revenue.

I wrote just last week that the BEPS plan is a naked revenue grab by high-tax nations and I find it remarkable that a senior official at the Obama Treasury Department agrees with me.

P.S. This isn’t the first time the Obama Administration has been to the right of the OECD.

P.P.S. Speaking of remedial students, I wrote back in 2011 that ending the flow of American tax dollars to the OECD (the biggest share of the bureaucracy’s budget comes from the United States) should be a test of whether Republicans are serious about cutting back on wasteful government spending.

At what point do I change the GOP grade from “incomplete” to “F”?

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The proper view on inequality is that it doesn’t matter.

That assumes, of course, that people are earning their income honestly rather than via government-enabled cronyism.

To elaborate, some people will become rich in a system of honest and competitive markets, but that’s not at the expense of the poor. Indeed, the talents and skills of top investors and entrepreneurs generally make life better for the rest of us.

So if we want to help the poor, we shouldn’t attack the rich. Instead, we should pursue policies that will allow faster growth. That benefits everyone, particularly those on the bottom of the economic ladder (though there also are some specific policies that are disproportionately helpful to the less fortunate, such as school choice).

Unfortunately, there are many leftists who genuinely seem to think the economy is a fixed pie. And they seem impervious to all the evidence that free markets and small government are the way to achieve broadly shared growth.

In hopes of reaching these folks, let’s look at some recent academic evidence on inequality. We’ll start with some new research from scholars at Harvard, University of Pennsylvania, Bank of France, University College London, and the Center for Economic Policy and Research.

They found that top incomes rose because of innovation, which is noteworthy since every rational person should welcome the prosperity fueled by innovation.

In this paper we use cross-state panel data to show a positive and significant correlation between various measures of innovativeness and top income inequality in the United States over the past decades. …this correlation (partly) reflects a causality from innovativeness to top income inequality, and the effect is significant: for example, when measured by the number of patent per capita, innovativeness accounts on average across US states for around 17% of the total increase in the top 1% income share between 1975 and 2010. …from cross-section regressions performed at the commuting zone (CZ) level, we find that: (i) innovativeness is positively correlated with upward social mobility; (ii) the positive correlation between innovativeness and social mobility, is driven mainly by entrant innovators and less so by incumbent innovators, and it is dampened in states with higher lobbying intensity. Overall, our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction.

I particularly like that these scholars found that lobbying leads to less innovation, which presumably is a proxy for the degree of government intervention (there’s no need to lobby – on the good side or bad side of an issue – if government doesn’t have power to interfere with market outcomes).

Sticking with the main issue of inequality, we also have a recent study from a couple of German academics.

Here are the key results.

This paper offers a comprehensive econometric investigation of the impact of income inequality… Using survey data from all thirty-four OECD countries over a period of almost thirty years, …there is evidence that a more unequal income distribution strengthens the work ethic of the population. Thus, income inequality seems to generate work incentives not only via the pecuniary reward of work but also through the symbolic reward it receives.

Gee, what a shocker. If people are allowed to enjoy the rewards that accrue from serving the needs of others in the marketplace, they’ll have more incentive to be productive.

That sounds like a good system, particularly compared to places where success is penalized.

Now let’s consider some caveats. While these studies have results that I like, I confess that a certain skepticism is warranted with this kind of research.

Measures of inequality don’t really tell us anything unless we know why there are differences in income.

In jurisdictions such as Hong Kong and Singapore, there may be a significant amount of income inequality simply because some people are getting richer faster than other people are getting richer.

That’s a nice problem to have, though it’s important to understand that inequality doesn’t drive growth. It’s simply an outcome of growth.

But in cronyist jurisdictions such as Argentina or Greece, there may be lots of inequality because corrupt insiders are using their connections to obtain unearned and undeserved wealth. And that means labor and capital are being misallocated, which is bad for ordinary people.

Once again, inequality is a result of policy, but in these cases, the inequality is bad because it’s the consequence of misguided intervention.

The bottom line is that policy makers should focus on growth rather than inequality. At least if their goal is to help poor people enjoy higher living standards.

P.S. Fans of Jonathan Swift will enjoy this “modest proposal” to reduce inequality.

P.P.S. Fans of honest research will be horrified by the OECD’s tortured attempt to show that inequality is associated with weaker performance.

P.P.P.S. If Margaret Thatcher is right, leftists are motivated more by hatred for the rich than by love for the poor.

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Every so often, I’ll assert that some statists are so consumed by envy and spite that they favor high tax rates on the “rich” even if the net effect (because of diminished economic output) is less revenue for government.

In other words, they deliberately and openly want to be on the right side (which is definitely the wrong side) of the Laffer Curve.

Critics sometimes accuse me of misrepresenting the left’s ideology, to which I respond by pointing to a poll of left-wing voters who strongly favored soak-the-rich tax hikes even if there was no extra tax collected.

But now I have an even better example.

Writing for Vox, Matthew Yglesias openly argues that we should be on the downward-sloping portion of the Laffer Curve. Just in case you think I’m exaggerating, “the case for confiscatory taxation” is part of the title for his article.

Here’s some of what he wrote.

Maybe at least some taxes should be really high. Maybe even really really high. So high as to useless for revenue-raising purposes — but powerful for achieving other ends. We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. …But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.

The tobacco tax analogy is very appropriate.

Indeed, one of my favorite arguments is to point out that we have high taxes on cigarettes precisely because politicians want to discourage smoking.

As a good libertarian, I then point out that government shouldn’t be trying to control our private lives, but my bigger point is that the economic arguments about taxes and smoking are the same as those involving taxes on work, saving, investment.

Needless to say, I want people to understand that high tax rates are a penalty, and it’s particularly foolish to impose penalties on productive behavior.

But not according to Matt. He specifically argues for ultra-high tax rates as a “deterrence” to high levels of income.

If we take seriously the idea that endlessly growing inequality can have a cancerous effect on our democracy, we should consider it for top incomes as well. …apply the same principle of taxation-as-deterrence to very high levels of income. …Imagine a world in which we…imposed a 90 percent marginal tax rate on salaries above $10 million. This seems unlikely to raise substantial amounts of revenue.

I suppose we should give him credit for admitting that high tax rates won’t generate revenue. Which means he’s more honest than some of his fellow statists who want us to believe confiscatory tax rates will produce more money.

But honesty isn’t the same as wisdom.

Let’s look at the economic consequences. Yglesias does admit that there might be some behavioral effects because upper-income taxpayers will be discouraged from earning and reporting income.

Maybe…we really would see a reduction of effort, or at least a relaxation of the intensity with which the performers pursue money. But would that be so bad? Imagine the very best hedge fund managers and law firm partners became inclined to quit the field a bit sooner and devote their time to hobbies. What would we lose, as a society? …some would presumably just move to Switzerland or the Cayman Islands to avoid taxes. That would be a real hit to local economies, but hardly a disaster. …Very high taxation of labor income would mean fewer huge compensation packages, not more revenue. Precisely as Laffer pointed out decades ago, imposing a 90 percent tax rate on something is not really a way to tax it at all — it’s a way to make sure it doesn’t happen.

While I suppose it’s good that Yglesias admits that high tax rates have behavioral effects, he clearly underestimates the damaging impact of such a policy.

He presumably doesn’t understand that rich people earn very large shares of their income from business and investment sources. As such, they have considerable ability to alter the timing, level, and composition of their earnings.

But my biggest problem with Yglesias’ proposals is that he seems to believe in the fixed-pie fallacy that public policy doesn’t have any meaningful impact of economic performance. This leads him to conclude that it’s okay to rape and pillage the “rich” since that will simply mean more income and wealth is available for the rest of us.

That’s utter nonsense. The economy is not a fixed pie and there is overwhelming evidence that nations with better policy grow faster and create more prosperity.

In other words, confiscatory taxation will have a negative effect on everyone, not just upper-income taxpayers.

There will be less saving and investment, which translates into lower wages and salaries for ordinary workers.

And as we saw in France, high tax rates drive out highly productive people, and we have good evidence that “super-entrepreneurs” and inventors are quite sensitive to tax policy.

To be fair, I imagine that Yglesias would try to argue that these negative effects are somehow offset by benefits that somehow materialize when there’s more equality of income.

But the only study I’ve seen that tries to make a connection between growth and equality was from the OECD and that report was justly ridiculed for horrible methodology (not to mention that it’s hard to take serious a study that lists France, Spain, and Ireland as success stories).

P.S. This is my favorite bit of real-world evidence showing why there should be low tax rates on the rich (in addition, of course, to low tax rates on the rest of us).

P.P.S. And don’t forget that leftists generally view higher taxes on the rich as a precursor to higher taxes on the rest of the population.

P.P.P.S. In the interests of full disclosure, Yglesias says I’m insane and irrational.

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I don’t understand the left’s myopic fixation on income inequality. If they genuinely care about the less fortunate, they should be focused on policies that produce higher incomes.

But instead, they agitate for class warfare and redistribution, which leads me to believe that many of them hate the rich more than they love the poor.

And while it’s surely true that governments can harm (or worse!) the financial status of folks like Bill Gates, that doesn’t help the poor.

Indeed, the poor could be worse off since statist policies are linked to weaker economic performance.

So relative inequality may decline, but only because the rich suffer even more than the poor (as Margaret Thatcher brilliantly explained).

That’s a bad outcome by any reasonable interpretation.

But let’s set aside the economic issues and contemplate the political potency of so-called income inequality.

Writing for the Wall Street Journal, William Galston of the Brookings Institution (and a former adviser to Bill Clinton) opines that income inequality isn’t a powerful issue in America.

Hillary Clinton was reportedly struck that no one had asked her about inequality. She shouldn’t have been surprised… Recent opinion surveys show inequality well down the list of public concerns. In a February CBS News poll, for example, only 4% of Americans named income disparities as the most important problem facing the country. In March only 2% told Gallup that the income gap was at the top of their list.

Galston cites a couple of studies of public opinion trends.

In…Public Opinion Quarterly in 2013, Matthew Luttig also found that rising inequality has failed to boost support for redistribution and may actually have the opposite effect. What is going on? The authors of the Brookings paper found that the principal beneficiaries of government programs—especially the elderly—have become increasingly resistant in recent decades to additional redistributive policies. During that period, just about every new cohort entering the ranks of the elderly has been less supportive of redistribution than its predecessor.

He doesn’t think voters necessarily are becoming libertarian or conservative.

But he does think leftists are deluding themselves if they think more propaganda will sway voters in favor of redistribution.

Many Democratic activists believe that the weakness of public support for redistribution rests on ignorance: Give them more information about what is really happening, and their policy preferences will be transformed. But a recent paper for the Washington Center for Equitable Growth reported that while survey respondents “who view information about inequality are more likely to believe that inequality is a serious problem, they show no more appetite for many interventions to reduce inequality.” The best explanation for this apparent anomaly: rising mistrust of government, especially the federal government. Many people who think inequality is an important problem don’t believe that Washington’s political institutions can be trusted to fix it.

Gee, I wonder why people think the federal government is incompetent in helping the poor?

Could it be that voters are slowly but surely realizing that P.J. O’Rourke was right?

In any event, Galston concludes with some very sound recommendations.

What matters most is growth that includes everyone. To get that kind of growth, we will have to act on a broad front to expand opportunity for those who now lack it—and ensure that workers earn enough to provide opportunity for their children. These measures will reduce inequality, all the more so if they are financed by linking real wages to productivity gains and terminating tax preferences that don’t promote growth while benefiting mainly the wealthiest Americans.

To be sure, Galston’s embrace of growth instead of redistribution doesn’t mean he has good ideas on what causes growth.

But at least he understands that the goal should be to make the pie bigger.

And that’s the point I made in this CNN interview, which took place via Skype since I was at a conference in Brussels.

Though you may notice that I mangle my metaphor at the end of the interview, switching from pie to cake.

But setting aside that one glitch, I hopefully got across my main point that the focus should be growth rather than inequality.

P.S. It’s worth noting that states with the most support for class warfare and redistribution also are the states with the most inequality. Maybe they should experiment with bad policy inside their own borders before trying to foist such policies on the entire nation.

P.P.S. I wrote last year about six remarkable examples of leftist hypocrisy. Make that seven.

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In 1729, Jonathan Swift authored a satirical essay with the unwieldy title of A Modest Proposal for Preventing the Children of Poor People From Being a Burthen to Their Parents or Country, and for Making Them Beneficial to the Publick. He suggested that the destitute Irish could improve their lot in life by selling their children as food for the rich.

I’m personally glad this was merely a tongue-in-cheek proposal since some of my ancestors immigrated to America from Ireland in the 1800s.

But maybe it’s time for a new “modest proposal” to make our leftist friends happy.

They’re constantly griping about the rich, asserting that the “top 1 percent” or “top 10 percent” are making too much money. Indeed, folks on the left want us to believe that “income inequality” is a big issue and a threat to the country.

So why not update Jonathan Swift’s idea and simply consume all the rich people? Indeed, P.J. O’Rourke actually wrote a book entitled Eat the Rich.

But we don’t really need to feed them to anyone. Just dump their bodies in a mass grave or bury them at sea.

In one fell swoop, income inequality could be dramatically reduced. Sure, those of us left would wind up being equally poor, like in Cuba or North Korea, but you can’t make an omelet without breaking a few eggs!

But some of you probably think arbitrary executions of rich people is a step too far. After all, it would be unseemly to mimic France’s Reign of Terror or Stalin’s extermination of the Kulaks.

That’s why we should instead look at a watered-down “modest proposal” put forward by David Azerrad of the Heritage Foundation. Here’s some of what he wrote for Real Clear Politics.

…consider the following bold proposal to solve our inequality problem once and for all: exile the top 0.1% of income earners. Round up all 136,080 taxpayers who make more than $2.16 million a year and ship ’em off to whatever country will accept them. Presto. Problem solved. …The 0.1 percenters, whose growing incomes have been fueling the rise in inequality over the past several decades, will have vanished overnight.

Though Azerrad does point out that exile has many of the same economic downsides as execution.

..it will put a serious dent in the government’s finances. Almost one in every five tax dollars that the government collects comes from the 0.1 percent. To make up for the shortfall, we should probably also confiscate all their assets before exiling them. What about the jobs the 0.1 percenters create and the value they add to the economy? …we’d be losing all but twelve of the CEOs from the 300 largest companies in the country. The show business industry would collapse overnight with all the star talent in exile. Gone too would be the best investment bankers, financial consultants, surgeons and lawyers. One third of the NFL’s roster and well over half of the NBA’s roster would also be culled.

Heck, we’re already confiscating some of the assets of rich people who emigrate, so part of Azerrad’s satire is disturbingly close to reality.

But let’s stick with the more farcical parts of his column. To deal with potential loss of tax revenue, Azerrad proposes to have the government sell America’s rich people to other countries.

…we will need to generate more revenue. That could be done rather easily by auctioning off the top-earning Americans to the highest foreign bidder.

That makes sense. There are still a few places in the world – such as Switzerland, Cayman, Hong Kong, Bermuda, etc – where the political class actually understands it is good to have wealth creators.

By the way, Azerrad points out that there will be a tiny little downside to this proposal. Contrary to the fevered assertions of Elizabeth Warren and Paul Krugman, penalizing the rich won’t do anything to help the less fortunate.

Mind you, life prospects will not have improved for a single poor child born into a broken community with failing schools. Or for a single recent college grad crushed by debt and facing dim job prospects. Or for a single family struggling to make ends meet. …It won’t be any easier to start a business or to find a job. Four in 10 children will still be born out of wedlock. Our entitlements will still face unfunded liabilities of almost $50 trillion. …We will however be able to boldly proclaim that we have addressed “the defining challenge of our time.” Our country will in no way be better off. But we will have satiated our lust for equality.

Actually, our country will be far worse off. Jobs, investment, and growth will all collapse.

So while the poor may wind up with a larger share of the pie, the overall size of the pie will be much smaller.

And this is perhaps the moment to stop with the satire and take a more serious look at the issue of income inequality.

I’ve repeatedly argued that the focus should be growth, not redistribution. To cite just one example, it’s better to be a poor person in Singapore than in Jamaica.

But let’s look at what others are saying. Professor Don Boudreaux of George Mason University addresses the issue (or non issue, as he argues) in a column for the Pittsburgh Tribune-Review.

I’ve never worried about income inequality. …Income inequality — like the color of my neighbor’s car or the question of the number of pigeons in Central Park — just never dawns on me as an issue worthy of a moment’s attention.

Don then speculates about why some people are fixated on inequality.

I wonder: What makes someone worry about income inequality? One personal characteristic that plausibly sparks obsession with inequality is envy. …Another characteristic…that likely gives rise to concerns over income inequality is a mistaken conviction that the amount of wealth in the world is fixed. …A third personal characteristic that prompts anxiety over income inequality is fear that the “have-nots” will rape and pillage society until and unless they get more from the “haves.” …This third characteristic is widespread today. The risk that the “have-nots” in modern First World economies will organize themselves using social media and then grab their electric carving knives to storm the wine bars and day spas of the “haves”.

I think all three hypotheses are correct, though people in the public policy world rarely admit that they’re motivated by envy.

But, for what it’s worth, I think many leftists genuinely think the economy is a fixed pie. And if you have that inaccurate mindset, then extra income or wealth for a rich person – by definition – means less income and wealth for the rest of us. This is why they support class-warfare tax policy.

The challenge, for those of us who believe in economic liberty, is to educate these people about how even small differences in growth can yield remarkable benefits to everyone in society within relatively short periods.

A lot of establishment Republicans, meanwhile, seem to implicitly believe that redistribution is desirable as a tactic to “buy off” the masses. They’ll privately admit the policies are destructive (both to the economy and to poor people), but they think there’s no choice.

When dealing with these people, our challenge is to educate them that big government undermines social capital and makes it far more likely to produce the kind of chaos and social disarray we’ve seen in Europe’s deteriorating welfare states.

P.S. For a humorous explanation of why the redistribution/class-warfare agenda is so destructive, here’s the politically correct version of the fable of the Little Red Hen.

And the socialism-in-the-classroom example, which may or may not be an urban legend, makes a similar point. As does the famous parable about taxes and beer.

P.P.S. I still think Margaret Thatcher has the best explanation of why the left is wrong on inequality. And if you want to see a truly disturbing video of a politician with a different perspective, click here.

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While there are plenty of reasons to dislike the World Bank, United Nations, and (especially) the International Monetary Fund, the worst international bureaucracy on a per-dollar spent basis has to be the Paris-based Organization for Economic Cooperation and Development.

The OECD used to be relatively benign by the standards of international bureaucracies, but it has veered sharply to the left in recent years and some of the bureaucracy’s “research” now is more akin to talking points from the Obama White House.

And it getting worse. I wasn’t even aware that the OECD had a Directorate for Employment, Labour, and Social Affairs, but the bureaucrats in this division are – if this is even possible – pushing the Paris-based bureaucracy even further to the left.

At least that’s my conclusion after reading a new study from that Directorate on inequality and growth. You can read the entire 64-page paper if you’re a masochist, but you’ll get the full flavor by perusing the OECD’s three-page summary.

Here are the headline results.

New OECD analysis suggests that income inequality has a negative and statistically significant impact on medium-term growth. Rising inequality by 3 Gini points, that is the average increase recorded in the OECD over the past two decades, would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5 per cent. …Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand, nearly 9 points in the United Kingdom, Finland and Norway and between 6 and 7 points in the United States, Italy and Sweden. On the other hand, greater equality prior to the crisis helped increase GDP per capita in Spain, France and Ireland.

Yes, you read correctly. We’re supposed to believe that Spain, France, and Ireland have enjoyed better growth.

I guess France’s stagnation is just a figment of our collective imaginations. And those bailouts for Spain and Ireland must have been a bad dream or something like that.

By the way, I’m not arguing inequality is good for growth. Indeed, it can even be bad for growth if the rich are using government to line their pockets with growth-stifling bailouts, handouts, subsidies, protectionism, and other forms of cronyism.

So is that what this study is arguing?

Hardly. Let’s move from absurdity to ideology by reviewing the OECD’s supposed solutions, which sound like something you would get if you created some sort of statist Frankenstein by mixing DNA from Francois Hollande and Elizabeth Warren in a blender.

The most direct policy tool to reduce inequality is redistribution through taxes and benefits. The analysis shows that redistribution per se does not lower economic growth. …previous work by the OECD has clearly shown that the benefits of growth do not automatically trickle down across society… Policies that help to limit or reverse inequality may not only make societies less unfair, but also wealthier. …Anti-poverty programmes will not be enough. Not only cash transfers but also increasing access to public services, such as high-quality education, training and healthcare, constitute long-term social investment to create greater equality of opportunities in the long run.

I’m almost at a loss for words.

Part of me wants to make snarky comments about the absence of credible evidence. After all, if Spain, Ireland, and France are the success stories, the opportunities for satire are limitless.

But perhaps I should be more mature and simply note the real world contradicts this supposed research. Why is it, after all, that the countries that are most fixated on coercive redistribution tend to have the weakest economies?

Though the most remarkable thing about this study is that it is contradicted by other OECD research from the Economics Department, which is home to a more sensible crowd that periodically finds that larger governments and redistributive tax policies undermine economic performance.

A 1997 study by the Economics Department found that “a cut in the tax-to-GDP ratio by 10 percentage points of GDP (accompanied by a deficit-neutral cut in transfers) may increase annual growth by ½ to 1 percentage points.”

A 2001 study by the Economics Department found that “An increase of about one percentage point in the tax pressure (or, equivalently one half of a percentage point in government consumption, taken as a proxy for government size) – e.g. two-thirds of what was observed over the past two decades in the OECD sample – could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent.”

Another 2001 study by the Economics Department found that “The overall tax burden is found to have a negative impact on output per capita.24 Furthermore, controlling for the overall tax burden, there is an additional negative effect coming from an extensive reliance of direct taxes.”

A 2008 study by the Economics Department found that “…relying less on corporate income relative to personal income taxes could increase efficiency. …Focusing on personal income taxation, there is also evidence that flattening the tax schedule could be beneficial for GDP per capita, notably by favouring entrepreneurship. …Estimates in this study point to adverse effects of highly progressive income tax schedules on GDP per capita through both lower labour utilisation and lower productivity… a reduction in the top marginal tax rate is found to raise productivity in industries with potentially high rates of enterprise creation. …Corporate income taxes appear to have a particularly negative impact on GDP per capita.”

A 2013 study by the Economics Department found that “personal income tax also discourages entrepreneurial activity and investment… tax autonomy may lead to a smaller and more efficient public sector, helping to limit the tax burden and improve tax compliance. …Progressive corporate income taxes harm incentives for businesses to grow.”

Let’s return to the study from the Employment, Labour, and Social Affairs Directorate. Like most logical people, you may be wondering what sort of rationale the OECD offers for this agenda of bigger government and higher taxes.

Apparently it’s all based on the notion that poor people won’t acquire skills (human capital accumulation) if rich people have a lot of money. I’m not joking.

The evidence is strongly in favour of one particular theory for how inequality affects growth: by hindering human capital accumulation income inequality undermines education opportunities for disadvantaged individuals, lowering social mobility and hampering skills development.

We’re not given any plausible reason for why this happens. Nor are we given any explanation of why poor people will want to acquire skills if the government makes dependency more attractive with expanded redistribution.

In other words, it appears this is yet another example of the OECD engaging in statistical and analytical gymnastics in order to produce something that will justify the bad policies of member nations.

But you have to give the bureaucrats credit. This new “research” is having the desired effect, leading to news reports that will be very pleasing to advocates of bigger government. Consider these excerpts from a story in the EU Observer.

The report, published on Tuesday (9 December) by the Paris-based OECD, refutes the concept of ‘trickle-down economics’… “Income inequality has a sizeable and statistically significant negative impact on growth,” the report says, adding that “redistributive policies achieving greater equality in disposable income has no adverse growth consequences.” …In response, the OECD urges governments to hike property taxes on property and wealth and scrap tax breaks that disproportionately benefit higher earners, alongside greater support for the bottom 40 percent of earners to make sure that they are not left further behind. “As top earners now have a greater capacity to pay taxes than ever before, governments may consider re jigging their tax systems,” argues the report, adding that governments should also increase access to education, healthcare and training. “Anti poverty programmes will not be enough,” it states.

Writing for Forbes, Tim Worstall also notes that this sloppy OECD report is being used by statists to advance an ideological agenda.

We’re not surprised that The Guardian has leapt on this little report out from the OECD concerning inequality and GDP growth over the past 30 years. It conforms to every prejudice that that newspaper is every going to have about the subject. However, it should be pointed out that this report from the OECD is in fact howlingly bad. It manages to entirely ignore the OECD’s own research on exactly the same subject: the impact of inequality and attempts to reduce it on GDP growth.

The bottom line is that the OECD is working to advance the interests of the political class, not the interests of poor people. If the bureaucrats genuinely wanted to help the less fortunate, they would be pushing pro-growth policies.

Instead, they promote a bigger burden of government.

If you want to know more about the OECD’s economic malpractice, here’s the video I narrated for the Center for Freedom and Prosperity.

But if you don’t want to listen to me, here are some examples of statist policies that are directly contrary to American interests.

The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes in the United States.

The bureaucrats are advocating higher business tax burdens, which would aggravate America’s competitive disadvantage.

The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.

It supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.

It even concocts dishonest poverty numbers to advocate more redistribution in the United States.

And don’t forget that you’re paying for this nonsense. American taxpayers finance the biggest share of the OECD’s budget.

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Our leftist friends have decided that income inequality is a scourge that must be addressed.

That might be a noble goal if they were motivated by a desire to improve the lives of the less fortunate.

Based on their policy proposals, though, it appears that the main goal is to punish the so-called rich. And they’re so fixated on that objective, Margaret Thatcher pointed out, that they’re willing to make the poor worse off.

And what’s especially bizarre is that rich leftists are among the biggest cheerleaders for these policies. Heck, I’ve even debated some of these limousine liberals, as you can see here and here.

But maybe their feelings of self-loathing and guilt are justified. After all, it seems that statist policies are actually associated with higher degrees of income inequality.

Let’s see what Steve Moore and Rich Vedder discovered when they looked at evidence from the states. Here are excerpts from their column in the Wall Street Journal.

Our state-by-state analysis finds that the more liberal states whose policies are supposed to promote fairness have a bigger gap between higher and lower incomes than do states that have more conservative, pro-growth policies. …According to 2012 Census Bureau data (the latest available figures), the District of Columbia, New York, Connecticut, Mississippi and Louisiana have the highest measure of income inequality of all the states; Wyoming, Alaska, Utah, Hawaii and New Hampshire have the lowest Gini coefficients. The three places that are most unequal—Washington, D.C., New York and Connecticut—are dominated by liberal policies and politicians. Four of the five states with the lowest Gini coefficients—Wyoming, Alaska, Utah and New Hampshire—are generally red states.

Steve and Rich then look at some specific comparison and some specific issues.

Texas is often regarded as an unregulated Wild West of winner-take-all-capitalism, while California is held up as the model of progressive government. Yet Texas has a lower Gini coefficient (.477) and a lower poverty rate (20.5%) than California (Gini coefficient .482, poverty rate 25.8%). Do the 19 states with minimum wages above the $7.25 federal minimum have lower income inequality? Sorry, no. States with a super minimum wage like Connecticut ($8.70), California ($8), New York ($8) and Vermont ($8.73) have significantly wider gaps between rich and poor than those states that don’t. What about welfare benefits? …In general, the higher the benefit package, the higher the Gini coefficient. States with high income-tax rates aren’t any more equal than states with no income tax.

So what’s the bottom line?

The conclusion is nearly inescapable that liberal policy prescriptions—especially high income-tax rates and the lack of a right-to-work law—make states less prosperous because they chase away workers, businesses and capital. …When politicians get fixated on closing income gaps rather than creating an overall climate conducive to prosperity, middle- and lower-income groups suffer most and income inequality rises. …John F. Kennedy had it right that a rising tide lifts all boats. It would be better for low- and middle-income Americans if growth and not equality became the driving policy goal in the states and in Washington, D.C.

Speaking of rich, guilt-ridden leftists, Michael Moore is getting divorced and the fight with his soon-to-be ex is resulting in some revelations about the immense wealth of this anti-capitalist crusader.

Here are some eye-catching details from a story in the UK-based Daily Mail.

According to Celebrity Worth, Moore has $50m in assets. …the Torch Lake mansion…put a spotlight on his wealth and opened him up for ridicule because he has so often criticized the rich in his films. …The home, which was completed years ago, is believed to cost in the neighborhood of $2m. …The lake house isn’t their only home. They own a total of nine properties in Michigan and New York. Their Manhattan condo was created through ‘the combination of three separate units,’ according to The Smoking Gun. …Together Moore and Glynn own ‘multiple substantial residences and multiple companies,’ including Dog Eat Dog Films, the production company behind films Roger & Me and Bowling for Columbine.

Nine properties, including a lakefront mansion and a three-units-combined-into-one Manhattan condo?!?

Who knew bashing the rich was such a lucrative gig.

Geesh, I’m a defender of the top 1 percent and I only have a house in Virginia.

I’m obviously doing something wrong.

P.S. While rich leftists say they want higher taxes, they’ve been exposed on camera as complete hypocrites.

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There’s a new book by French economist Thomas Piketty, called “Capital in the Twenty-First Century,”  that supposedly identifies the Achilles’ Heel of the market economy.

Piketty argues that the rate of return to capital is higher than the economy-wide growth rate and that this will lead to untenable inequality as the rich grab a larger and larger share of the pie.

The solution, he claims, is confiscatory tax rates.

I’m not impressed.

Garett Jones of George Mason University has a very good review that casts doubt on Piketty’s hypothesis, but I also think Margaret Thatcher pre-debunked (if I’m allowed to make up a word) Piketty in this classic video from the House of Commons.

Simply stated, if you care about those with lower incomes, your goal should be faster growth.

If the economy is more prosperous, that means a rising tide that will lift all boats.

Piketty’s class-warfare prescription, by contrast, almost certainly will hurt the poor because of anemic growth, largely because higher tax rates will discourage productive behavior and exacerbate the tax code’s bias against saving and investment.

This means less capital and there should be no doubt about the strong link between the capital stock and worker compensation.

But I sometimes worry that this type of analysis sounds too theoretical for a lot of people and that perhaps it would be helpful to offer some tangible real-world evidence.

So it is quite fortuitous that I’m currently in Lithuania as part of the Free Market Road Show and that one of the participants is John Charalambakis, who teaches at the Patterson School of Diplomacy and International Commerce at the University of Kentucky.

In discussing the importance of economic growth, he explained that Singapore and Jamaica were economically similar in the early 1960s and then asked why they are so different today.

I have to admit that I was skeptical. I know Singapore is much richer today, but was it actually the case that it had the same level of per-capita GDP as Jamaica as recently as 50 years ago?

So I looked at the long-run data and John was exactly right. Take a look at this chart and you’ll understand why rapid growth caused by free markets is so vastly superior to the stagnation caused by statism.

Singapore vs Jamaica

I also included the world average for per-capita GDP so you can see that Singapore easily out-paced a lot of nations, not just Jamaica.

P.S. Keith Hennessey of the Hoover Institution writes that it makes more sense to think of the economy as a garden rather than a pie.

The pie metaphor for the economy is misleading and damaging, especially if you place a high priority on economic growth. …because dividing a pie is zero-sum, the flawed metaphor assumes that if one person’s slice grows larger, it comes at the expense of others. The inapt metaphor and its accompanying flawed logic lead one to conclude that when rich people have a larger share of a bigger economy, they do so “at the expense of” others lower on the income scale. …A flower garden is a better metaphor for looking at economic growth and income distribution. A flower’s growth depends on the individual characteristics of that type of flower and that particular seed. …the rapid growth of a sunflower at one end of the garden largely does not come at the expense of a struggling tulip at the other end. The sunflower may have advantages the tulip does not, even unfair ones, but the fast-growing sunflower is not “taking growth” from the slow-growing tulip. Flowers will grow at different rates for a variety of different reasons. Policymakers should focus their energies on absolute growth rates rather than relative ones.

Keith is correct.

Or, if he isn’t correct, it’s because the garden analogy doesn’t go far enough. If my neighbor is akin to a fast-growing sunflower, that presumably creates more wealth that will benefit me and the other tulips of the world.

In other words, I’m more likely to get richer if my neighbor gets richer.

But if you like the “pie” approach, then this pizza graphic is very appropriate because it gets across the message that the pie isn’t fixed in size.

P.P.S. For more on the inequality vs. growth issue, here’s my PBS debate.

P.P.P.S. The indispensable Tim Carney addresses the relationship between growth and inequality in this post.

P.P.P.P.S. Last but not least, here’s a post with some very sage analysis by George Will, Ronald Bailey, and Scott Winship.

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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).

Pizza FairnessThe 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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If you want to know why the left is wrong about income inequality, you need to watch this Margaret Thatcher video. In just a few minutes, the “Iron Lady” explains how some – perhaps most – statists would be willing to reduce income for the poor if they could impose even greater damage on the rich.

This picture is another way of getting across the same point. It was sent to me by Richard Rahn (famous for the Rahn Curve), and it uses two pizzas to show how leftist policies would “solve” inequality.

Leftist Fairness

I like this analogy, and not just because I also used the pizza analogy to make the same argument in this TV interview.

The growing or shrinking pizza is useful because it helps to focus people on the importance of growth.

Nations that follow the right policy recipe can enjoy the kind of strong and sustained growth that enables huge increases in prosperity for all income classes. In other words, everyone can have a bigger slice if the pie is growing.

I even tried to educate a PBS audience that growth is better than redistribution if you really want to help the poor. Talk about Daniel in the Lion’s Den!

I don’t know if I persuaded anyone, but at least the facts are on my side. Consider, for instance, how the world’s two most laissez-faire jurisdictions – Hong Kong and Singapore – have overtaken the United States over the past 50-plus years.

That’s been great news for low-income and middle-income people, not just the rich.

So ask yourself whether you’d rather be a poor person in one of those jurisdiction or in France. The government in France has all sorts of programs to make your life easier, but you have very little hope of escaping a life of dependency.

And now ask yourself whether it’s good that Obama is doing his best to push America in that direction.

P.S. If you want another example of how long-run growth makes a big difference, check out this chart comparing Chile, Argentina, and Venezuela. Not only has Chile overtaken the other nation thanks to pro-market reforms, but the poverty rate has fallen dramatically.

P.P.S. Since this post shares a very good image about income inequality, let’s include a bonus picture on taxation.

It’s a helpful suggestion on how to make kids aware of the cost of big government.

Tax Lesson for Kids

Though let’s be sure to acknowledge that Obama is doing what he can to make kids more skeptical of class warfare.

P.P.P.S. On a separate topic, I’ve explained that the so-called “austerity” vs “growth” argument is grossly misguided because Keynesian spending isn’t pro-growth and also because it’s important to distinguish between good austerity and bad austerity.

Too many governments are choosing the wrong type of austerity, imposing destructive tax hikes on the private sector. What’s really needed in genuine spending restraint so that “austerity” is imposed on the public sector.

But some folks on the left say there’s been too much spending restraint in recent years.

So who’s right? Well, UBS has produced a report containing some very useful data.

Viewing the global economy as a single unit, we see a very  different picture to the post-crisis world of austerity – at least if “austerity” is taken to mean government spending cuts. The two largest components of global GDP, namely private consumption and fixed investment, both hit multi-year peaks in the first quarter of 2008. …Since the start of 2008, government consumption at the  global level has risen by 20% in real terms, whereas private consumption and fixed investment have risen just 8% and 5%, respectively. In other words, despite talk of austerity, government spending continues to run ahead of private-sector spending.

Hmmm…the burden of government has been growing faster than the private sector. That’s the opposite of what the Golden Rule calls for.

And not only has government been growing too fast in the past, it’s likely that fiscal policy will get even worse in the future.

Structurally, government debt, government spending, and the share of government within the economy must be sustainable. Government consumption’s share of global GDP has risen from 11% to 14% over the past 15 years. In 2013, it reached its highest level since 1980. At the same time, government debt-to-GDP ratios have hit record highs in many countries. In the long run, such elevated levels of expenditure (and corresponding levels of debt and deficit) are probably not sustainable, in particular, given other structural changes underway. For instance, demographic trends in many advanced economies pose challenges.

The moral of the story is that America and other nations should be restraining budgets, ideally by enacting the right kind of entitlement reform.

Though I’m worried that Obama is learning the wrong lesson from what’s happening in Europe.

Indeed, this Henry Payne cartoon shows what he has in mind. And if he succeeds, this satirical 2012 campaign slogan may become reality.

P.P.P.P.S. Here’s a final image that captures the essence of Washington.

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A bunch of well-connected rich people and government officials are descending upon Switzerland for the annual World Economic Forum meeting in Davos.

This upsets many people, and perhaps with some justification. After all, bad things often happen when big business and big government intersect.

But some folks reflexively think that wealth is bad and they would like us to believe that the economy is a fixed pie, meaning that the rich have more money because the poor have less money.

If you think I’m exaggerating, check out a new report from Oxfam, a UK-based group that was created to alleviate poverty but has largely morphed into a left-wing pressure group.

The folks at Oxfam complain about the supposed “capture of opportunities by the rich at the expense of the poor and middle classes” and that “tax rates for the richest have fallen in 29 of the 30 countries.”

Here are some excerpts from a report in the EU Observer.

As the world’s richest and most powerful men and women prepare to meet in the Swiss resort of Davos for the annual World Economic Forum on Wednesday (22 January), the British development charity, Oxfam, has issued a new report on global inequality. According to its findings, the wealth of the world’s 85 richest people – €81.2 trillion – amounts to that of the poorest half of the world population, or 3.5 billion people. …”In Europe, austerity has been imposed on the poor and middle classes under huge pressure from financial markets whose wealthy investors have benefited from state bailouts of financial institutions,” the charity said. Financial deregulation in the US has contributed to the situation, in which the richest one percent of the population has more money than ever since 1933.  …The charity said Davos participants should reverse the trend and pledge to support higher taxes for the rich, while refraining from using their wealth to seek political favours.

There are several parts of this excerpt that deserve attention, including passages that are correct (such as bailouts giving undeserved money to the rich) and passages that are nonsensical (the financial crisis was caused by intervention, not deregulation).

But I want to focus solely on the inequality issue. Let’s assume Oxfam is right and that the world’s 85 richest people have $81.2 trillion of wealth. The group obviously wants us to think this accumulation of wealth is bad and that it somehow comes at the expense of the rest of us.

Tim Carney of the Washington Examiner hits the nail on the head, explaining that there’s a big difference between honest wealth and riches obtained through government coercion.

…is it a bad thing for a country to have some really rich people? Again, it depends on how they got rich. Sutirtha Bagchi of the University of Michigan’s business school and Jan Svejnar of Columbia’s School of International and Public Affairs studied how inequality correlates with economic growth. In general, more inequality meant slower growth, and less inequality meant faster growth. But in many countries, over various time periods, growing inequality had no effect on economic growth. The new study suggests that an increase in inequality hurt the economy when the rich were getting rich through political connections. That is, inequality hurts the economy when “a large share of the national wealth is held by a small number of politically connected families,” as the authors put it. …Bagchi and Svenjar took pains to classify political billionaires as narrowly as possible. …The political billionaires were only people who “would not have become a billionaire in the absence of political connections that resulted in favoritism and/or explicit government support.”

The oft-missed lesson here is that undeserving wealth generally is obtained because of big government.

Which reminds me of a very astute observation by a former Cato colleague, who wrote that, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”

Carney continues, pointing out that wealth obtained through markets is good. Such success creates a bigger pie and helps boost living standards for everyone.

But wealth achieved via government is cronyism, and that contributes to economic stagnation.

When a country’s wealthiest got wealthy through market means, the resulting inequality has no negative effect on economic growth. This jibes with what we know about free markets. If people can get rich by providing valuable things at good prices, then society will get more valuable things at good prices—and people across the income spectrum benefit. But if people get rich by pocketing subsidies and using the state to crush competitors, then they gained their wealth at the expense of everyone else. Bill Gates became a billionaire by making and selling something that makes regular people more productive and more connected. Buffett got rich largely by providing capital to underfunded but well-run businesses. If Bagchi’s and Svejnar’s findings are correct, then the bottom line is this: Inequality itself doesn’t hurt the economy. Cronyism hurts the economy.

I fully agree with Tim’s analysis, though I would have drawn a distinction between the younger Warren Buffett, who was a savvy investor and the older Buffett, who has climbed into bed with the political elite.

The bottom line is that the poor aren’t poor because of honest rich people. The poor are suffering because of big government, including the cronyism that lines the pockets of dishonest companies and individuals that feed at the public trough.

Unfortunately, many insider leftists are perfectly content with those policies and they use inequality to distract voters from the real problem.

There are honest leftists, of course, and they presumably would be outraged by the sleaze in national capitals. Their problem is that they genuinely think the economic is fixed pie. Or they think that inequality is such a bad thing that they would be willing to reduce incomes for the poor if it meant the rich suffered even more.

If you don’t believe me, watch this marvelous video of Margaret Thatcher debunking the left.

And my old grad school colleague Steve Horwitz also has some very sage observations on income inequality and class warfare.

P.S. In its report on inequality, Oxfam also went after tax havens and said more revenue for government would help reduce poverty.

Oxfam also estimated that €15.5 trillion of the wealth is hidden from the taxman in offshore accounts, at a time when governments are cutting public spending. …tax avoidance by EU and US corporations in Africa is depriving its governments from resources which could be use to fight poverty.

I wrote a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax taliban.”

But what really irks me about that passage is the assumption that bigger government reduces poverty. That’s nonsense. The data shows that growth is the best way of helping the poor.

Christie JokeP.S. I wrote yesterday about Chris Christie’s problems in New Jersey. I said his real challenge was the need to reduce the burden of government, not the bridge scandal.

But I’m a sucker for good political humor, so enjoy this image that appeared in my inbox.

P.P.S. Since Oxfam criticized tax havens, I can’t resist calling your attention to my video tutorial on tax competition and tax havens.

Simply stated, we need some external check on the greed of the political class.

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