Pethokoukis

Some inconvenient facts for income inequality worriers

Image Credit: shutterstock

Image Credit: shutterstock

The case that income inequality is currently harming the US economy is not a strong one. A recent blockbuster study from the Equality of Opportunity Project found “little or no correlation” between the share of income going to the 1% and upward mobility. And new data analyzed by e21 has seriously undermined the White House’s “Great Gatsby Curve,” which supposedly suggested that diminished mobility was the logical consequence of higher income inequality: ”When we plot the inequality levels of the U.S., Canada, and Sweden against their relative mobility levels, the Great Gatsby Curve indicates that higher inequality corresponds with less immobility, not more.” Finally, CBO data find that real incomes for the broad middle-class were 40% higher in 2010 than in 1979, hardly stagnant.

Lots of inconvenient facts for die-hard, inequality worriers. Of course the impact of upper-tail income inequality could change in the future. A lack of GDP growth and good jobs would seem to be the bigger problem right now, though. To focus on inequality is to distract from improving mobility and raising living standards.

So with the economic case against income inequality in ill health, some progressives are switching to a moralistic, emotional one. Here is New York Times columnist Paul Krugman:

It’s all very well to talk in the abstract about the dignity of work, but to suggest that workers can have equal dignity despite huge inequality in pay is just silly. In 2012, the top 40 hedge fund managers and traders were paid a combined $16.7 billion, equivalent to the wages of 400,000 ordinary workers. Given that kind of disparity, can anyone really believe in the equal dignity of work?

How exactly would we determine “equal dignity of work?” Equal pay for all? Equal incomes for all? Some might suggest that, unfortunately. Scott Hodge of the Tax Foundation calculates that to give household in America the current average income of $82,000 would require taking 74% of the top 20%’s income versus 21% today and redistributing it. I would guess such an income grab would radically change incentives for work and risk taking for that group. Anyway, here is Krugman’s solution:

So what would give working Americans more dignity in their lives, despite huge income disparities? How about assuring them that the essentials — health care, opportunity for their children, a minimal income — will be there even if their boss fires them or their jobs are shipped overseas?

OK, he’s losing me here. I thought it was the pre-tax, pre-transfer disparity that was immoral? Is this column still about inequality? Now Krugman seems to be saying, what, that a stronger safety net and better schools will restore dignity to the middle-class despite that disparity? All is revealed in this next bit:

Conversely, the drive by conservatives to dismantle much of the social safety net, to replace it with minimal programs and private charity, is, in effect, an effort to strip away the dignity of lower-income workers.

Oh, I get it. It’s one of those columns by Krugman, the red-meat kind that assumes everyone to his right wants to return to the pre-New Deal, pre-Fed, pre-income tax status quo. This is the kind of column meant to close minds, rather than open them. Some on right do fit Krugman’s characterization — just as some on the left might want to radically equalize incomes — but hardly all or even most. Here is my boss, Arthur Brooks:

One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something, it’s nuts to want to be doing something like that. We have to declare peace on the safety net.

The reform conservative movement seeks to strengthen the middle class, reform the safety net, and increase the rewards for low-income work. At the same, it rejects crony capitalist policies that enable vast wealth through government favor rather than innovation. Lots of interesting economic policy ideas are being generated and discussed: wage subsidies, expanded child tax credit, copyright and patent reform, a college completion agenda — just to name a few. Seems like they would make for far more interesting analysis by a Nobel laureate than something meant to confirm the existing biases of readers.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

18 thoughts on “Some inconvenient facts for income inequality worriers

  1. This is just silly. The Fed is a massive generator of economic inequality because it works in favor of crony capitalism. Claiming to be in favor of managed currency AND to oppose crony capitalism is either cognitive dissonance or economic ignorance.

    The main reason? Cantillon effects.

  2. “Areas with greater mobility tend to have five characteristics: less segregation, less income inequality, better schools, greater social capital, and more stable families. ”

    Direct quote from the Equality of Opportunity Project.

    “The second factor we explore is inequality. CZs with larger Gini coefficients have less
    upward mobility, consistent with the “Great Gatsby curve” documented across countries (Krueger
    2012, Corak 2013).”

    Another direct quote from the Executive Summary, which contradicts the premise of this entire post.

    • It does not. The countries that have a stated policy of limiting income differentials will of necessity have narrower bands of inequality, making it easier to climb (or fall) from one to the other. What appears as greater social mobility is largely the consequence of diminished opportunity to rise or fall, a position embraced by many European welfare states and American “progressives” but less so by many Americans in the more individualist United States.

        • Where the Executive Summary compiled its data is irrelevant. Countries which place a high premium on equality of condition will necessarily have more compressed income differentials, making it easier to rise and fall since there is less distance between them. Whether you think this is good or bad depends on your political sympathies. I am simply pointing out that this phenomenon exists.

          • So the reason counties located in the United States of America with higher gini-coefficients have less mobility is because they have more “American” style policies? And the counties which have lower gini’s and better mobility have European style policies?

  3. I took the time to read the data that the author references to support his opinion. The “Equality of Opportunity Project” numbers were very vague (it was about half a page of data). Still, the data confirmed that the gap between upper and lower income groups have significantly grown. It shows a small increase in upward mobility (for lower income groups) but does not take into account the growth (or lack thereof) of the upper income groups. Also it does not account for true buying power for the middle and lower income groups.

    The CBO data shows a 40% increase in income for the lower income groups but also shows a 201% increase in income for the higher income groups. Again, this data doesn’t account for inflation.

    The cumulative inflation rate between January 1979 to January 2010 is 217.26%. The wealthy average income has almost kept up with inflation, whereas the lower income groups are grossly far behind inflation. This means that this lower group has less buying power. Less buying power for the masses means smaller bottom lines for most retail corporations.

    Let’s be honest with ourselves and accept the true numbers. There is an alternative.

      • I blame it on politicians thinking in the box that is their political theology. If they stepped outside of that box, they could see that the solution is actually a fusion of different ideologies..

  4. Jesse B, see the bottom of page ii of the CBO report: “Income is adjusted for inflation using the personal consumption expenditure price index, which is calculated by the Bureau of Economic Analysis.”

    • Hey Matthew, your right. I missed that vital detail. Still, it does not minimize the differencial between the highest and lowest classes.

      201% increase in income after inflation? WOW!

  5. So you quote Krugman and say he’s making an emotional appeal, and then quote Brooks making such rational arguments as “war against the social safety net, which is just insane,” “….one of the greatest achievements of our society,” and “zero out food stamps or something, it’s nuts to want to be doing something like that.” And that’s as good as it gets for non emotional arguments?

    Well, I am one of those “wants to return to the pre-New Deal, pre-Fed, pre-income tax status quo.” And that’s what reason dictates.

  6. So I went to school until I was 29 years old to earn a Ph.D. in Chemistry. During that time I worked low paying jobs to get by. Upon graduation, I did research to fix problems most people cannot even pronounce. I helped discover two new classes of drugs and have made discoveries that have saved industry millions of dollars a year. I currently earn a very, very good salary. So can anyone give me a realistic reason why I should get paid less and the barista down at the coffee shop should get more? Can anyone understand that if I did not have the promise of a substantial salary then I would not have waited 12 years before starting my career and have gone to college? A push for income equality is a push for mediocrity, a push to cease all societal and scientific advancement, and a push to reward those who deserve little. This push for income equality is not only a false crisis brought about by an administration seeking to divert attention from their incompetence onto something else, but it seeks to reward laziness and not accomplishing anything while penalizing those who work hard and excel. It is purely the politics of envy and nothing else.

    • Cleetus, you are the perfect example of why I believe that the minimum wage should be raised to $15.

      First off, kudos to your work ethic and innovations.
      I agree with you that socialism hinders innovation and innovation is the key. To support and encourage innovation, more people need to have opportunities and be hindered with as little friction as possible. An significant increase in minimum wage will allow us to spend less in social programs. This in turn will allow us to lower taxes to companies most affected by such a move. The wage increase will in-turn empower families and improve their work ethic, while minimizing government dependency.

      By the way, did you notice what some are suggesting to combat the wage disparity? Wage subsidies? Expanded child tax credit? Really? More socialism? Smh. With a significant minimum wage increase, we can even significantly lower the Earned Income Tax Credit.

      Most low income earners don’t want more hand outs. The best way to climb “the ladder” is to significantly raise the minimum wage. It will lower government spending, corporate tax and increase innovation.

      • Great idea except for one minor problem. With workers getting so much pay, the costs of our products will increase even more. So, who will buy products that they cannot afford on the world market? The answer is “No one” and there in lies the great flaw with your scheme.

        • Actually, there are lots of details that I have left out, but I do have an answer for the inflation possibility. Basically, I believe that inflation will be stymied with the tax credits. It stands to reason that corporations with an increased cost of doing business will be inclined to increase prices, but with the increase in wages being balanced with a decrease in tax, the cost of doing business should be minimally affected.

          Also, the last two series of minimum wage increases (1990-1997 and 2007-2009) actually saw decreases in inflation. During the 90′s the economy was in overall good health and during the latter increase the economy was in the Great Recession. So take that for what its worth.

          Still, the government will be spending less (less social programs needed), thus allowing it to pay down the deficit (though the tax rate will be lower, the tax collected should increase based on increased business as we saw in the 80′s). The lower deficit will further strengthen the economy and as inflation tries to creep its ugly head, the interest rates will begin to increase (also improving the bond market), making it more lucrative for investors to enter the finance business (providing another market besides the stock market, thus avoiding another bubble).

          Does it make sense?

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