I think that Phil Gramm and John Early are guilty of finessing the actual issues in their op-ed in the Wall Street Journal on income inequality:
We have shown on these pages that Census Bureau income data fail to count two-thirds of all government transfer payments—including Medicare, Medicaid, food stamps and some 100 other government transfer payments—as income to the recipients. Furthermore, census data fail to count taxes paid as income lost to the taxpayer. When official government data are used to correct these deficiencies—when income is defined the way people actually define it—“income inequality†is reduced dramatically.
We can now show that if you count all government transfers (minus administrative costs) as income to the recipient household, reduce household income by taxes paid, and correct for two major discontinuities in the time-series data on income inequality that were caused solely by changes in Census Bureau data-collection methods, the claim that income inequality is growing on a secular basis collapses. Not only is income inequality in America not growing, it is lower today than it was 50 years ago.
While the disparity in earned income has become more pronounced in the past 50 years, the actual inflation-adjusted income received by the bottom quintile, counting the value of all transfer payments received net of taxes paid, has risen by 300%. The top quintile has seen its after-tax income rise by only 213%. As government transfer payments to low-income households exploded, their labor-force participation collapsed and the percentage of income in the bottom quintile coming from government payments rose above 90%.
I would point out that the situation is quite different with respect to wealth inequality:
Fifty years ago half of the national wealth was in the hands of half of the people. Now half of the national wealth is in the hands of a tiny fraction of the people. I think that kind of disparity is corrosive to a society like ours.
It has a number of causes including far too many poor immigrants coming into the country, over-financialization of the economy, and perverse incentives. I recognize that we can’t completely level wealth or incomes in the society but the present trajectory is completely wrong. And, contrary to the preferred policies of the Congressional Democrats, it can’t be solved through taxation. It will require changes much more basic than that including in some areas they consider sacrosanct.
“I think that kind of disparity is corrosive to a society like ours.â€
Maybe, maybe not. Perhaps only because pols see it as an easy issue. Even though they are the primary drivers.
When I was 22 all I wanted was a shot at it. Just a shot. No favors. Just a shot. Further, look at the wealth disparities in many, many countries. We are not unique.
I think income disparity is a bigger issue in creating wealth disparity than most people. Tiger Woods became a billionaire as an entertainer in just 15 years. Sports stars, movie stars, music stars, movie producers or directors. Big money. Drained from John Q Public. But not at gunpoint. Willingly.
I’m still waiting for a coherent explanation of how financialization is the culprit. But there are many endeavors that garner income that create wealth people. Tech? Business ownership? Myriad risk taking efforts.
Perverse incentives? Sure, at times. But far less than critics imagine IMHO.
I’m not sure what to do about income or wealth disparities that aren’t more harmful than helpful. I really know of only one: stop government, and politicians, setting rules and handing out favors that facilitate excess profit in exchange for political profit.
That will be the day……..
I strongly recommend that all of this blogs participants go to Zerohedge and read a posting today from B of A on equity returns. I wont preach, but truly think about the data they cite and the implications. Then think about so many of the points I’ve made here over the years.
That depends on who you’re comparing us with. Our income inequality is unique when you compare us with European countries, Canada, Australia, New Zealand, or Japan. Even when you consider taxation and transfers, our comparative equality doesn’t compare with those of European countries, Canada, Australia, New Zealand, or Japan.
In wealth inequality we compare a bit more favorably with European countries—there are a few of those in which wealth disparity is greater than in the U. S. My point about wealth inequality is that it didn’t used to be this way. In living memory.
You’re right, Dave, about wealth inequality, “it didn’t used to be that way.†However, almost everything across the board is different from the way it used to be. Our culture, values, families, expectations from government have all been transformed – some 180 degrees from where they used to be.
However, while graphs and stats are tools the intellectually blessed apply as evidence defending a certain POV, one can simply assess the new norms around them in order to glean that something is terribly out of wack in how our society is functioning. Frankly, I tend to put many of these unsatisfactory changes at the feet of big, ever-expanding government, who are given to tinkering with social engineering methods in order to achieve their desired cultural Petri dish of equality and social justice.
I just don’t believe a sustained or justified quality human existence can be manufactured by the artificial means of a relatively few government bureaucrats, self-inflated with their power over many.
@Drew
I have cited the numbers for the debt to money supply ratio, and this amount of leverage is not sustainable. As I have noted previously, these numbers do not include foreign accounts, private banking, or money-like financial entities.
(NOTE: As, usual, I use private banking rather than the “pop literature” word.)
The increase in M2 is due to a form of collateralization, and this will be leveraged to increase the financialized wealth of those with existing financialized wealth.
Before you ask, financialized wealth is created with financialized money. By this I mean, money that only exists because of the Modern Monetary System. Zuckerberg is a billionaire because on any day a few people are willing purchase Facebook stock at an unrealistic price.
Were the gold cover and Bretton Woods re-established, Zuckerberg and Buffet would be living next door to you. Chinese imports would cease, and unless manufacturing returned, most Americans would have a substantially reduced standard of living.
Presently, it is in your interest to not see what is happening, but when the eventual crash comes, you will not be exempt. You would do well to stock up on pencils and a tin cup. In the ensuing years post-1929, many people learned that financialized wealth can disappear quickly.
Now, Zuckerberg and Buffet will probably “weather the storm”, but will you? More importantly, will your daughter and your grandchildren? Me, I am on the government dole, but even so, I eagerly await the day I “crawl into the ground”.
Since policy is largely made to benefit the wealthy of course it matters. Now that the wealthy control even more they get to have even more influence.
Would love to hear Gramm’s explanation for how such a high percentage of wealth got concentrated into so few hands absent some income inequality. (Not really.) Gramm was such a major contributor to the banking crisis that I am surprised he still has credibility.
Steve
“My point about wealth inequality is that it didn’t used to be this way.”
No, I understand. I still think income is a big driver of wealth inequality. (and I agree too much can be corrosive) But what to do?
You can find all kinds of measures, but one I came up with shows that a NW > $10MM is in the top 1%. So, I must be somewhere like top .5%. I have no servants. No private jets. No………you get the point. At age 30 my net worth was -$6K. And the real wealth must be in the top .1%. Are we really going to develop policy around a vanishingly small number of people? And how long could we finance government if we took it all from the wealthy? A month?
Policy must focus on 1) the vast majority called the middle to upper middle class, in providing them a continuing opportunity, and 2) opportunities for the poor to lift themselves. As a civil society we must provide some minimal cushion for the impaired, and even the lazy no goods.
I see almost nothing from government, especially the progressives, that would accomplish anything. Education is being diluted or destroyed and replaced by politically motivated indoctrination. Covid school policy is a disaster for the poor. Ghoulish. Defund the police? Let Antifa and BLM burn down small businesses? Pols get rich off of being bribed by large corporates who tilt the tables. It goes on and on.
You say it didn’t used to be this way? Well government didn’t use to be so intrusive either. The hallowed president FDR was the beginning of the end. Johnson and the Great Society slipped the knife in. And Obama/Biden may just be the ones who preside over the bleeding out.
@jan
… intellectually blessed …
You are too kind. At best, they are intellectually dishonest, but most likely, they are complete idiots. Even for the intellectually honest, numbers are easily misinterpreted. Over 300 years of empirically derived numbers were “tossed on the trash heap” by one photograph.
(Being intellectually honest, that is a bit of hyperbole. Newtonian mechanics is still used to build bridges, but graphs and stats could not save it from Einstein.)
@steve
Yes. Sen. Phil Graham played a major role in the financialization of the economy, and thus, the creation of financialized wealth. He did not create the regulations and incentives to offshore manufacturing. Nor did he create the incentives for companies to increase stock price rather than pay dividends.
When the eventual crash comes, you will not be exempt, either. You would do well to ensure that you have a black bag and long range vehicle. The healthcare industry is the beneficiary of a financialized economy, and once the hospitals go out-of-business, you will be making a lot of housecalls. In the ensuing years post-1929, many people learned that financialized wealth can disappear quickly.
@Drew
If you are going to reference a ZeroHedge article, please provide a link. On my RSS reader, there are at least 100 posts per weekday, and with a paid subscription, there are more. I am sure it is easy for you to afford one, but believe it or not, being on the government dole is not financial nirvana.
I found Bank of America Expects The S&P To Return Just 0.2% Over The Next Decade, but I doubt we have drawn the same conclusions.
There is no link to the original source to determine the context. Other than the original source author’s name and position (Bank of America’s chief equity strategist Savita Subramanian), the original source is not identified.
About halfway through the ZeroHedge article, the writer notes that Ms. Subramanian switches positions, and since the ZeroHedge writer notes that this friendly advice is beneficial to BoA’s institutional clients but not necessarily others, I suspect it is totally self-serving.
Perhaps, you mean the remarks about pension funds. If so, I agree that they are screwed in the long run.
… “the market is rife with long-term inefficiencies.”
This is my take-away, and the question is “why”? What are these inefficiencies, and why do they exist? My answer is financialization which allows “the regulations and incentives to offshore manufacturing”, and this, in-turn, allows additional debt (private & public) to be collateralized and leveraged into additional debt.
In reality, you and Sen. Phil Graham have made the government you decry possible.
My two cents worth is that we almost all get our financial education from television commercials, where we’re taught that “we are worth it”, and should “go for the gusto”, and one of life’s finer achievements is to qualify for a high limit credit card with unlimited cashback points.
The result is we spend more than we can afford , then have to sell our time for less than it’s worth in order to make installment payments on our deteriorating durable goods.
Rather than a focus on increasing our credit limit we should take quiet satisfaction from the myriad opportunities to save something for ourselves. Retailers are better at their game than we are, take some small pleasure from walking away.
As for Tiger Woods, I don’t know that he wouldn’t be happier with less, but he has his own race to run. If you remember, he spent his misspent youth chasing golf balls, all the time. You and I didn’t do that.