Do we need greater income equality in the United States or faster growth? In a post at RealClearMarkets J. T. Young comes down solidly on the side of faster growth:
Liberals have contorted an effect of America’s slow economy into its cause. However misperceiving reality does not change it, but simply delays our ability to successfully confront it. Such is the case if we focus on income inequality instead of the slow overall growth that is exacerbating it.
There are ample reasons for America’s economic concerns. For almost nine years, real GDP growth has not matched 2006’s 2.7% increase. During this time annual growth has averaged 1.4%. Unemployment is currently 5%, but only because labor force participation is down too (62.4%). If participation equaled 2006’s level (66.2%), today’s unemployment rate would be twice as high.
Amidst the general concern over this stubbornly slow growth, liberals have a particular one: Income inequality. It is unsurprising that they seize on this as the economy’s prevailing problem. The left sees free market competition as inherently inefficient and unfair. For them, it as a zero-sum system; that it is one with fewer – but bigger – winners, and more – but bigger – losers, simply validates their original verdict.
Liberals are unlikely to be persuaded by the obvious observation: income inequality is rather simply, if also miserably, cured. This is what the late and unlamented communist regimes succeeded so mightily in – an equality of poverty for all but their ruling political class.
You can read the rest if you must.
For a tonic I turn to that bastion of progressive thought, the Wall Street Journal where Janet Adamy has handily provided a graph illustrating the problem:
Unless you think that our economy has been growing too slowly for the last 40 years, something I would dispute
- The rise in income inequality started a lot longer ago than the last 7 years
- Which means that slow growth cannot have caused the disparity.
I think that we need both faster growth and greater income equality and, fortunately, the two are interrelated. For the bulk of the 20th century there was a consensus that income growth in the middle class was the key to a healthy and robust economy. That consensus has broken down and, well, si monumentum requiris, circumspice (“if you seek a monument, look around you”). But what is to be done?
I don’t agree with most progressives that the key to middle class income growth is unions. I think they’re confusing the deindustrialization of the United States that has taken place with the decline of unions, a case of reverse causality. Here are the things that I think need to be done in quick bullet form:
- Reindustrialize the United States.
- Counter the mercantilist policies of our trading partners that produced the situation.
- Control immigration.
- Stop subsidizing (or at least restrict the subsidies) of sectors that tend to concentrate wealth, e.g. finance and healthcare.
- Change the incentives so that creating and making things returns more than owning intellectual property and retail sales.
I’m not foolish. I don’t think that my plan will be adopted but I also think that it’s what will work. In the absence of the reforms I advocate I think we’re likely to see slow growth and a society increasingly divided between the very well-to-do and the working poor.
So, 63.6% of the reduction of the middle quintile essentially went to higher quintiles, while 36.4% of the middle quintile essentially went to the bottom quintile. I’m not sure why I should care about the first group at all.
Sixty-three percent of U.S. households in the bottom fifth of Americans by income had no earners for the entire year in 2013. There are not enough jobs or job-holders.
Because of how ferociously we’re subsidizing them.
PD
I think you should care in that it will lead to an explanation as to how they got there. A datapoint at 2005 or 2006 would be helpful, but clearly an uptick has occurred more recently. I personally think it speaks to the nature of the “recovery.” The corporate and home equity markets have been artificially inflated, and subsidized industries, wheel, subsidized.
Subsidy should be limited to the degree we can given political reality, but the Big 4 in my opinion are health care, finance, education and agriculture. Some income inequality results have roots that go much farther back in time, and I would posit have much to do with government policy.
As for Dave’s other dot points –
1 – Were trying
2 – 3. – agree, but what a task. Want to get labeled a xenophobe?
5 – not sure what he is really saying there.
That all said. Growth in my opinion is far more important than income inequality. If there is sufficient pie people will be OK. Further, if the government starts meddling more it will probably retard growth, and provide more opportunities for those who know how to grab an even greater share of the pie that exists. That appears to be an empirical fact. Professorial musings about income inequality outside of government meddling is a luxury we cannot afford right now.
If I was a cynic I’d think it was simply a manufactured issue to create voting blocs. If I was a cynic……..
I’ll see if I can explain #5 a little better. We have volumes of laws that make owning intellectual property pay well and penalize actually making things. Retail pays well.
The paradigm for the industrial model we’re fostering is Apple. Apple designs the products, the products are made in China beyond the reach of pesky U. S. environmental and labor laws, and then they’re brought back into the U. S. (I presume as an intra-company transfer) and sold at a high markup. We’re effectively discouraging people from building factories in the U. S. or hiring factory workers here.
I don’t have any Apple insider knowledge but I’d bet one of those shiny new dimes I keep talking about that you can go to China and buy an iPhone or iPad knock-off completely indistinguishable from the real thing for a fraction of the cost of the real thing. That’s just the way the engineering culture is over there.
That’s a perverse model. We shouldn’t be fostering it.
We are hurting because of the microchip that made computers and the internet possible. Today Capital, with a capital C, has wings, leaves old producers for new in seconds. By it’s nature has no loyalty to any nation state, or to employees or communities. Capital goes where it gets the best returns, any where in the world.
What to do? I think if we want to take care of Americans, if that means anything anymore, enact tariffs, import taxes, whatever. In other words, I see no crime in looking out for you’re own workers when others use slave labor.
The yuan is not convertible. There are no returns to capital investment in China. Or, more precisely, it’s a lot more complicated than that. If the Chinese weren’t subsidizing their own industries, imposing import quota, and we weren’t selling them Treasuries, things would be a lot different.
To put it another way, if that chart of income quintiles showed only relative movement from the middle quintile to the upper quintiles, would this post exist?
Note that the underlying report indicates that incomes in all quintiles has increased since 1971, though none have recovered to levels before the Great Recession.
2 – 3. – agree, but what a task. Want to get labeled a xenophobe?
How about not giving a fuck when people with highly questionable motives call you names? I’ve been getting called a fascist Klansman since at least 2006, and I don’t give a fuck. It’s liberating. Go on, try it!
Yes, it would. For two reasons. First, as suggested by the title, they’re endogenous not exogenous. And, second, as I’ve said any number of times, this is not the country I lived in 40 years ago, it isn’t the country I wanted. The country I wanted is the one I was living in where middle income people earned more than 50% of the income and owned more than 50% of the wealth.
It’s interesting the change has been at the ends. Upper middle and Lower middle remained constant, while the highest and lowest expanded at the expensive of the middle.
Looking at the Pew data I found they adjusted income to a household size of 3 with the breakpoints for the middle class at around $41k to $126k in income. So a household with 5 people (like my household) the breakpoints are $52k and $162k. For a single person it’s $24k and $72k.
I think there are a few problems with this method of adjustment. For example, my family (with both of us working) earn considerably less than that $162k but I would still consider us upper-middle income because we live in relatively cheap Florida. It also isn’t clear whether they are counting before or after tax income (or AGI) – I’d have to dig into Pew’s source documents for that.
So, while I think this graph is true when it comes to the general trend, I’m not sure that income adjusted only for household size is the best measure for inequality – at least not without adjusting for non-trivial impacts like relative tax burdens and locality-based cost of living.
@Andy, they are using equivalency income: your total household income is divided by 5, with a factor that introduces of economies of scale (each additional person costs less to provide for than the previous). Then they normalize the data to assume everyone has a three-person household. No COLA-factors introduced.
By playing around with household demographics I think they hide the ball on a big point. In lower quintile households, 63% have no jobs. In top quintile households, 75.2% have two or more jobs. And over the last twenty-five years the income from the second job has risen much faster than the first job, either because greater job opportunities for women, or income roles have flipped.
The other point you allude to is cost. The idea of trying to equalize households of different sides points to the reality of different purchasing power. Maybe income is not the proper metric, but costs are.
Less odious regulations, have greater oversight into local bureaucratic corruption, decrease capital gains, get rid of estate taxes, encourage educational pathways that lead to real jobs, concentrate on growing the economy…..
http://www.zerohedge.com/news/2015-12-10/how-americas-middle-class-lost-war-one-simple-animation
jan,
There’s no reason to think another decrease in capital gains will result in greater real investment. Income is much easier to grab putting cash into financial products which is why so many industrial producers have turned themselves into unofficial banks while continuously scaling back their product research and development.
Another tax break will increase my trading profits but nothing else. Dave has it right that we need to incentivize real investment and disincentivize financial speculation.
We had significantly higher rates of investment in the past when capital gains taxes were much higher because the incentives were there.
I guess I’m dense. As a general proposition retail profit margins stink. Businesses that I think of as being intellectual property intensive admittedly do relatively well: entertainment, entertainment software, drugs…
Separately, it would not be controversial at all to claim that the inherent discounted cash flow price of an asset or investment opportunity would be different for a pre-tax cash flow stream of $1.00, $.85, or $.70. No one would flinch. Yet introduce the mechanism of a tax to modify those (net) cash flows and people deny that prices or investment appetite change. Fascinating. This country’s biggest investment problem is perceived opportunity relative to risk. Much of those risks arise from the uncertainty of tax and regulatory policy. More recently, the sustainable spending power of consumers has come into question as more and more spending has been redirected to taxes, and a select few industries, and as consumer debt loads have increased, all in the face of baby boom bulge that has not saved for retirement, and a younger generation not generating incomes commensurate with the past. Expect to see more renting and less home buying (and smaller home footprints) fewer car purchases, less furniture and home appliance purchasing……..and so it goes.
Ben,
I’ll post a Forbes article countering your opinion that decreasing capital gains does nothing to increase real investment. There’s an excerpt from a Fraser Institute study which, IMO, is very relevant to this discussion.
That part about “distorting” decision making warrants special attention, as what kind of taxes are involved in divesting or selling off any investment is oftentimes a crucial deciding point of whether or not to sell. There is definitely a case to be made that when sales are less handicapped by large taxation people are more inclined to take equities out of older, smaller investments and reinvest them into bigger ventures. However, when capital gains taxes are too high, taking profit out of a sale and giving it to the government, it often discourages people from even entertaining thoughts of selling an asset, which then would enable them to reinvest and expand their business positions — directly participating in economic “growth” rather than the economic stagnation now experienced.
The effects of capital gains tax rates must be set in their historical context.
Here we have gross domestic private investment as a share of GDP:
https://research.stlouisfed.org/fred2/series/A006RE1Q156NBEA
At its height at the end of the 1970’s the rate was 28% and was at previously higher in some decades. From the end of WWII to the height of domestic investment at the end of the 1970’s an upward trend dominated; after the Economic Recovery Tax Act of 1981 the rate was reduced to 20% and the trend reversed, continuing downward ever since. Under the supply-side theory of the time investment should have increased, but it didn’t. On the contrary after a sharp increase immediately following the end of the recession investment fell almost continuously throughout the 1980’s. Each peak since then has been lower than the previous.
I’ve been complaining for most of the last 15 years that the 2000-2001 recession was a shortfall in BI. That means that Bush’s reaction to it was an error—there wasn’t enough decline in C for a cut in personal income tax rates to help.
That doesn’t let Democrats off the hook. We’ve reached a point in our economic development at which good old fashioned Keynesian pump priming just isn’t as effective as it used to be. We import too much.
Ben:
I think that’s a result of what’s broadly called “globalization”. There’s plenty of BI just not domestic BI. I don’t think it’s a coincidence that China ended its policy of autarky in 1979.
I don’t doubt the existence of other factors, I simply question the notion of tax cuts as a panacaea. In truth I think the Keynesian theory of investment is much more correct than the neoclassical supply-side.