How Not to Fix Income Inequality

Never underestimate the power of the “bully pulpit”, as President Theodore Roosevelt is said to have characterized the power of the presidency to focus public attention. Especially when it enables the media to turn to a subject they’d prefer talking about in preference to the president’s ongoing woes in actually doing anything, faithfully executing the law, etc. Presumably prompted by President Obama’s recent speech on income inequality in the United States we’re seeing quite a bit written on the subject. Politico notes that Democratic pols are seizing on the issue as a drowning man would to a bit of flotsam:

Democrats aren’t wasting any time tackling an issue they are convinced will help them this election year: income inequality.

One of the Senate’s first votes upon returning to Washington from its holiday break Monday will be on a bill reviving emergency unemployment benefits that lapsed at the end of 2013.

The vote marks the first concrete step by Democrats toward a populist economic platform ahead of the November elections. The inequality campaign will intensify later in the year with a push in the Senate to raise the federal minimum wage that will be synced with President Barack Obama’s State of the Union speech, which is expected to dig heavily into the issue of economic disparity.

There’s quite a bit of hyperventilating going on about this article in Rolling Stone in which Jesse Myerson exhorts millennials to support the following changes:

  1. Guaranteed Work for Everybody
  2. Social Security for All
  3. Take Back The Land
  4. Make Everything Owned by Everybody
  5. A Public Bank in Every State

See also the rebuttal here.

Most recently the Washington Post suggests that income inequality could be the defining issue in the 2014 midterm elections.

If it is, it will be a masterful job of misdirection for any number of reasons, most importantly because none of the policies most frequently mentioned in connection with remedying income inequality—an increase in the minimum wage and infrastucture spending programs—are a spit in the ocean towards actual remediation. What follows is a somewhat scattershot set of explanations as to why that might be.

First, let’s engage in a little visual exercise. Arrange twenty-five pennies in six stacks. One penny in the first stack, two in the second, three in the third, four in the fourth, five in the fifth, ten in the sixth. The first five stacks represent the five income quintiles and their incomes while the sixth presents the income realized by the top .1% of income earners.

The process of making those stacks more equal in height—equalizing income—is obvious. You take pennies from the sixth column and put them in the first four columns. We don’t do that. Consider our principle means-tested anti-poverty programs. By far the largest is Medicaid and by far the fastest-growing is Pell Grants. Those programs could increase ten-fold and of itself it would do practically nothing to change income inequality. How can that counter-intuitive outcome be true?

Because neither of those programs actually transfers money to the poor. Medicaid transfers money from the federal and state governments to healthcare providers. Pell Grants transfer money from the federal government to banks and institutions of higher learning.

Second, if your plan is to make incomes more equal by taxing away the incomes of the rich, how do you plan to accomplish that? There is no strong correlation between tax rates and effective tax rates. Even back during the Kennedy Administration when the top marginal tax rate was upwards of 90% taxes paid as a proportion of GDP weren’t a great deal different than they are now—a few percentage points, not enough to make much difference. Using the tax system as an instrument of income inequality presupposes a drastic change in political will and, importantly, in how taxes are imposed and enforced. I just don’t see it.

Third, a very high proportion of the poor or near-poor are immigrants or the children of immigrants. If you support mass immigration, you de facto support increased income inequality.

As I’ve said before when I was in college most U. S. wealth was held by middle income people and most U. S. income was earned by middle income people. That’s no longer the case and I’m profoundly uncomfortable with things as they are now. This just isn’t the country I expected back then and I do not find the development politically or socially benign.

However, I think the pat answers being offered by our political leadership are at the least ineffective in remedying the situation and at the worst cynical and nihilistic.

21 comments… add one
  • Cstanley Link

    Would a consumption tax system be less susceptible to manipulation?

    I would hate to see VAT imposed on top of income tax, but if starting over was an option or if somehow a do-over could be accomplished in the sense of transitioning from income taxation to consumption taxation, my hunch is we’d have a better system.

  • michael reynolds Link

    Income inequality by itself is not the point. Quality of life is the point. I’m ready to pay whatever taxes are necessary to ensure that everyone has good medical, a place to live, enough food, transportation adequate to ensure folks can get to their jobs and get their kids to school. But some random equality target seems silly. I voted against George McGovern in part because he’d floated a guaranteed income, but now I’ve warmed up to the idea.

  • ... Link

    Funny how Dems are just now discovering income inequality, and are acting as if they haven’t been the party in power the last few years as it has gotten worse.

    Also, I don’t see how extending unemployment benefits is going to do a goddamned thing on that front, except give the Dems cover for their utter failure on the economic front.

  • Cstanley Link

    Michael, somehow it feels as though that idea needs as much fleshing out as does the underwear gnome scheme,

    1. Collect taxes
    2. ???
    3. Utopia!

  • michael reynolds Link

    Cstanley:

    Did I mention utopia?

  • Cstanley Link

    It was a joke, but seriously- the outcomes you specify do come closer to utopia than what any society has ever been able to achieve. So I’m just asking, what is the governance model that could get us there?

  • jan Link

    In 2012 the dems had the ‘fairness’ meme applied to everything in their campaign speeches. In 2014, readying themselves for the midterms, it will evolve to “income inequity,” screeds.

    What always seems to work well is pitting people against each other, creating wedge issues over authentic solutions, which serve more to heighten and intensify emotions, for the sole purpose of creating block voters for a given party. It’s all about political strategy and gamesmanship — something the dems are simply better at than the R’s, IMO.

    Basically, in a country suffering from economic malaise, where the middle class is shrinking, the upper class is thriving, income equality rhetoric creates perfect class resentments, literally poisoning the political electorate in considering anything other than their ill ‘feelings’ towards each other. Unfortunately, longer-term solutions are just not enough to whet the appetite for something more substantial than a quick easy entitlement fix, or extending UE benefits into eternity.

    Consequently, income equality will serve to muddy the waters in a way that the dems will do well in 2014, as they did in the last GE.

  • michael reynolds Link

    Cstanley:

    There are any number of schemes, all of which will be better developed than anything I can offer. But off the top of my head it would be like the Earned Income Tax Credit, but with numbers calculated to provide a market basket of goods and services in a given area. Issue it via a debit card with the proviso that the government could monitor your expenses and if they saw that nothing was being spent on food or rent they could follow up and ask why you were spending all your money on meth-cooking chemicals.

  • Red Barchetta Link

    Strangely enough, I agree 100% with Michael. What the hell is the whole safety net about, if not to take care of those who can’t, or, unfortunately, those who won’t. Those who won’t are excess baggage.

    Heh. So much for an uncaring Republican prick.

    The government spends so gd much money we could fund everyone. I’ve done the math. What liberals don’t understand is that we spend money on administration – for reliable voters – and not on the sick and poor. We just don’t. You fuckers don’t care about the poor, you care about the votes – and power and ideology. You say you care. You don’t. You just care about the election process.

    Sorry to be harsh, but I’m right. However, there are people who care, and realize there is a segment of the population that needs assistance. They are called Republicans.

    Deal with it.

  • TastyBits Link

    @michael reynolds


    … I’m ready to pay whatever taxes are necessary to ensure that everyone has good medical, a place to live, enough food, transportation adequate to ensure folks can get to their jobs and get their kids to school. …

    Honestly, it is getting a little old by now. When your party had all three branches with a filibuster-proof Senate majority, somehow nobody could remember to raise taxes on the rich. Really.

    The reality is that your party has been bought by rich liberals and big businesses. It is not an accident that the rich have grown richer under President Obama. Rich liberals want a return on their investments, and they will do whatever it takes to make it happen.

    Rich conservatives are too stupid to understand how they are being played. They actually think that that Warren Buffett is a shrewd businessman not a robber baron.

    Let me at the tax code, and I would have every one of you rich liberals squealing like a stuck pig.

  • michael reynolds Link

    Red:

    I don’t know where you’re seeing these Republicans. The Republicans I see spend their time yelling about abortion, hating Obama, pretending science doesn’t exist and demanding still more tax breaks.

    But setting that aside, it would certainly seem easier and more efficient just to put a floor under people – a guaranteed minimum income, guaranteed health insurance, and after that it’s up to the individual.

    It is certainly the case that dozens of programs mean overlap and inefficiency – not to mention needless hassle for the recipients who presumably don’t want to spend their days filling out forms and sitting in government offices.

  • Andy Link

    Agree completely with Dave’s post except I would take it further – like much of what passes for politics, the primary aim is to gain political advantage over the opposition. Appearing to solve problems or appearing to try to solve real problems is more important than actually solving problems.

    Thus the debate on “inequality” is merely a means to an end. The debates about small changes in tax rates or the minimum wage are conducted as if ultimate policy decisions were a hinge of fate for our future prosperity – in reality the policy prescriptions are a drop in the ocean but policy is not the objective – domestic political advantage is the true prize.

  • steve Link

    1) Inequality was not just discovered. Left of center economists have been writing about it for years. They have won awards for their research, years ago.

    2) “Because neither of those programs actually transfers money to the poor. Medicaid transfers money from the federal and state governments to healthcare providers. Pell Grants transfer money from the federal government to banks and institutions of higher learning.”

    So if give them money and they buy food, we are just transferring money to food producers? If they use it to buy clothes, it is just a transfer to the apparel industry?

    3) I think it clear inequality is a problem. How can our economy function if all of the wealth is held by very few people? The ancients knew this was a problem. We should also admit it. That said, the remedy is not really clear. We can certainly undo subsidies which favor the wealthy. We can make all (or try) political donations transparent. Still, at this point the wealthy have such a head start, and have so successfully brainwashed the population, I am not sure what will work.

    Steve

  • Steve, money is fungible. Medicaid, SNAP, and Pell Grants aren’t.

  • Red Barchetta Link

    Michael

    We just come at things differently. It doesn’t make you a bad guy, or me. I just see no evidence that government programs work. Christ, the “War on Poverty” is now 50 years old. Its just a vote getting mechanism for Dems. You tell me you care about the poor. I’d be really pissed at the results. They suck. The Big Dong. I’ d like to see things get better. They don’t.

  • Ben Wolf Link

    The most effective method of dealing with this issue is growth at the bottom of the wage structure. “Taxing away” is a trigger designed to scare anyone from actually dealing with the problem because Socialism. We did this for nearly forty years during and after WWII in a process called the Great Compression, where inequality slowly fell as workers’ income grew at a faster rate than that of the wealthy.

    New thinking, people. You can’t fix your problems by staying in the paradigm which created them.

  • jan Link

    “New thinking!” Create a “New paradigm” rather than see-sawing back and forth from an either-or one! What a concept. This kind of reminds me of Popehat’s commentary suggesting destroying everything and starting over. How can what Ben Wolf calls for happen without defusing the old two-party system first? After all, it seems that each party, the D and the R, seem ultimately concerned about either remaining in power or getting to it, rather than what can be devised that will really help the people at large. And, when I say ‘people,” I mean all the people — not just the constituencies of one party.

  • ... Link

    Inequality was not just discovered. Left of center economists have been writing about it for years. They have won awards for their research, years ago.

    And apparently left-of-center politicians discovered all of that research while reading during their Christmas holiday. (Uh, excuse me, Anti-Global Warming Contemplative Period.)

    Did Obama not read any of the goddamned reports put out by his own BLS over the previous five years? (Probably not, as he never seems to discover anything the government is doing until it appears in the NYT or WP.)

    And it is awfully suspicious that all of a sudden they’ve discovered this NOW, and are running against it NOW, instead of running on their record of the previous few years. You know, the one that has resulted (amongst many other things) in more income and wealth inequality. Create or exacerbate the problem, and then run against the problem, all the while cashing in. Burn it down, and them with it.

  • TastyBits Link

    I guess we know where the stimulus went. Like I said, rich liberals will always get a payback on their investment.

  • ... Link

    I guess we know where the stimulus went.

    Sure as shit didn’t get down to my level in any meaningful way. But hey, it paved the way for the Administration to pass ObamaCare, which is killing us on healthcare costs, and that’s a big win for people like me! Woo hoo!

  • ... Link

    Oh, also the stimulus helped spur the stock market to record highs, so that Warren Buffet made a killing. Another blow for the little people from the caring liberal elite!

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