Thinking Straight (Updated)

There’s an interesting sort of Point/Counterpoint going on at the Washington Post on the subject of income inequality between Scott Winship and Jared Bernstein. There’s plenty in both of their points of view to make your eyes cross.

Scott Winship takes a pretty typical tack of the sort that used to be called “supply side economics”. Inequality isn’t really a problem; the real problem is slow growth:

Are American levels of inequality harmful? Some analysts claim that they hurt middle-class incomes or increase poverty. But child poverty is at an all-time low, and middle-class incomes are also at historic highs. Across developed countries, those with higher inequality have slightly higher middle-class incomes and less poverty.

Others argue — based on mobility measures constructed to look worse when inequality rises — that higher inequality causes lower economic mobility or leads to political inequality. In fact, research claiming that the rich get their way in Congress over other voters has been debunked; in truth, across most issues, rich, middle-class and poor Americans have similar policy preferences. And in the United States, mobility has remained flat while inequality has risen over the past generation. 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.

Left unstated are what are to me the gravest problems with our present high level of income inequality. The first is that if you subscribe to the beliefs of the Founding Fathers you must believe that a country divided between a very, very wealthy 1% and a much less wealthy 99% (or, even more problematic to my way of thinking, a .1% with more than 20% of the total wealth rather than the 6% they held in 1975), will inevitably lead to tyranny. The temptation to exploit and wealth and power to gain more wealth and power is irresistible. Very high achievers will have much less highly achieving offspring but they will seek to have those offspring maintain their wealth and power without the achievement.

But even more serious to me is that’s just not the sort of country I want to live in. I’m concerned about social inequality following wealth inequality.

But I found Jared Bernstein’s views even more distressing. Here’s an example:

Democrats tend to think in terms of tax and transfer policies, moving resources — money, food, housing services, help with child care or subsidies for low-wage jobs — from the rich to the poor. Such redistribution through the tax code is absolutely called for and has been highly successful in reducing poverty and boosting opportunity. Democrats, including President Obama and Hillary Clinton, have also embraced tax increases on the wealthy: an excellent place to start. But the current set of ideas is too limited. More broad-based tax increases will be necessary just to maintain our current set of inequality-reducing policies as our population ages.

I realize that’s what many Democrats like to think they believe but based on their actions over three generations what do they actually believe? They believe in helping the poor by paying the rich or the nearly rich. Consider how federal money is actually disbursed:

Which of the slices in the pie chart above reflect direct transfer payments to the poor? None of them do. Some small proportion of total Social Security payments goes to the elder poor. That’s about it. The payments in “healthcare spending” go to providers; the payments classified as “education” pay teachers and administrators (in Chicago most teachers and administrators are in the top income quintile). And so on. Unless you think that “interest on the debt” is being paid to the poor.

In other words both political parties now subscribe to something like John Kenneth Galbraith’s memorable description of supply-siders: they want to feed the sparrows by feeding more oats to the horses.

The same pattern is seen at the state and local level. Spending doesn’t go to direct transfer payments to the poor. It goes to healthcare providers, teachers, police officers, firefighters (in Chicago the typical police officer or firefighter earns in the six figures), and grantees who, presumably, help the poor (with very little oversight). The evidence that all of this spending actually helps the poor is weak.

Consequently, I don’t think that increasing union power (one of Mr. Bernstein’s pet reforms) or increasing the taxes paid by the poor (astonishingly enough, one of Mr. Winship’s) will bring income and wealth equality back into a zone that is more consistent with historical levels.

Some of their prescriptions, e.g. Mr. Winship’s desire to reduce the number of low-skilled immigrants and Mr. Bernstein’s desire to negotiate “trade deals that ‘prioritize the interests of workers and communities’ over those of multinational corporations are things I’ve recommended here. I’d do a couple of other things as well.

First, stop subsidizing the rich. If your preferred policies result in more income and wealth for the ultra-rich, pair them with highly targeted Pigouvian taxes.

Second, recognize that size itself is a problem. Big companies hire fewer people per dollar of earnings than small ones and pay much higher salaries to top management, exacerbating income inequality. Stop enacting laws that benefit large companies to the detriment of small ones. Break up large companies that have abused monopoly power.

Most importantly, stop making up airy stories about what you believe in. As Shakespeare put it, suit the action to the word.

Update

Scott Winship, author of one of the pieces cited above, responds in comments to clear up some of misconceptions about what he wrote.