Liberal Programs Deserve Blame for Income Inequality



Tags: income, inequality, percent, because, wealth, liberals, people, getting, households, transfers

Liberals are treating a new Congressional Budget Office study showing that income inequality increased in America over the last three decades as the smoking gun they’d always been looking for—the ultimate indictment of America, capitalism, and apple pie.

The Nation’s George Vornick wrote a piece titled “Yes, Virginia, There Is Income Inequality,” billing the CBO’s finding as “dramatic.” And he wondered whether the study, released as the Occupy Wall Street protests gather steam, would finally force the Republicans on the deficit reduction super committee to face some “uncomfortable truths.” New York magazine’s Jonathan Chait wasted no time in accusing those not in a tizzy over the study of being “blinkered ideologues” and “income inequality deniers.”

But if not everyone is alarmed by dubious claims about rising Gini co-efficients, a metric that measures income inequality, is it because they are “blinkered ideologues” and "deniers." No. Income inequality tells us zilch about the only thing that really matters: Are the lives of Americans, rich, poor, and in between, getting better or worse?

The finding that generated the most headlines was that the after-tax household income of the top 1 percent of Americans grew by 275 percent between 1979 and 2007. But this figure was based on outdated pre-recession data that omitted 2008 and 2009, when the “1 percenters” saw a decade's worth of gains wiped out. This is nothing to weep over. They took the risk and they lost.

But is the fate of those lower on the totem pole cause for panic? Not really. The study reports that in the same period, households in the top quintile saw a 65 percent income gain; the vast middle in the 21st to 80th percentiles saw about a 40 percent gain; and the bottom quintile saw an 18 percent gain.

In other words, no group lost ground or even stagnated. So why all this breast-beating?

Few, besides vulgar Marxists, believe in the “immiseration of the masses” theory of capitalism anymore—the idea that the wealth of the top few is extracted by exploiting the labor of the bottom many. Burying this notion is one of the enduring intellectual victories of market theorists.

The post-liberalization successes of India and China have convinced even ardent liberals that markets play a crucial role in raising productivity and relieving scarcity, vastly expanding the proverbial social pie so that everyone has more to go around.

Of course, some gain more than others. But so what? Isn’t an unequal distribution of wealth preferable to an equal distribution of poverty? Is there any amount of inequality that liberal worrywarts would accept? Suppose the CBO had found that every group’s income increased by exactly 65 percent. Would they celebrate everyone’s good fortune or mourn the unwavering income gap? The question answers itself.

If liberals accept the market’s productive capacity but reject its distributive verdict, it’s because they think of the market as an abstraction that spews out wealth like a spigot, with who gets what being completely up for grabs. Rich people get more, they believe, because they are more skilled at clawing their way to the head of the line.

But in functioning markets, there is a connection between creating and gaining wealth. Those on the front lines of wealth creation get more than those at the back, regardless of whether they began as rich people or poor. Steve Jobs, whose net worth upon his death was $8.3 billion, got rich because he created a $360 billion company, not because he cut ahead of others. It bespeaks a profound conceptual misunderstanding to talk, as the CBO study does, about the growing concentration of income in the hands of the rich, as if the “rich” existed apart from the wealth—the value—they create.

Another thing liberals are worked up about is that the study attributes rising inequality to fewer “federal transfers” to the poor. But that’s not because poor people are getting less money from Uncle Sam in absolute dollars. In fact, they get more every year. It is just that they are getting a smaller portion of total transfers. This is not something that “income inequality deniers” have made up. It is what the study itself says.

It found that in 1979, households in the bottom quintile received more than 50 percent of all transfer payments. In 2007, similar households received about 35 percent of transfers. “The shift reflects the growth in spending for programs focused on the elderly population (such as Social Security and Medicare), in which benefits are not limited to low-income households,” the study explains. “As a result, government transfers reduced the dispersion of household income by less in 2007 than in 1979.”

In other words, poor people are getting relatively fewer handouts thanks to the Great Society programs that liberals themselves put in place for the elderly. This demonstrates the core problem with unfettered redistributionism: Eventually, you run out of other people’s money. And when you do, you have to make hard choices about whose needs to prioritize—not demonize opponents.

Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, where this column originally appeared.

Update: Since many readers have asked, the CBO figures are adjusted for inflation. Check "Notes and Definitions" on Page 4.

Not yet rated. Be the first:

<< Previous Article      Next Article >>


Comment

Name:

Kamandar said... Rating: 0   Vote +   Vote -  

Of course I could be proud to be Labour. I could be proud that Labour ldaeers have elevated themselves from the life of poverty that many citizens of the UK still find themselves within. I could be proud that Labour has sought to enrich the wealth of the wealthy. I could be proud that bankers and speculators have increased their own wealth and living standards...but I could only be proud if the increased wealth was distributed in fair proportion to the real generators of wealth brought about by the toil of the worker. There is an argument that large financial incentives are required to ensure that the UK captures the talent of the so called "money makers" that in turn will cascade investment, productivity and prosperity for the nation. I have been waiting a long time to see the proof of this argument. If this argument were true, then poverty in the UK should be falling.The converse argument that fair reward to incentivise the worker to achieve full productivity is never heard from Labour ldaeers. It is a national disgrace that, in spite of a "national Minimum Wage" too many workers do not earn enough to pay for even the basic needs of food, water, heating, clothing and travel to work costs,(not to mention the costs of regressive taxes paid by the masses according to the inabilty to effectively challenge unfair taxation, and not paid upon the abiltiy to pay) to the extent that government accepts that there is a need to indirectly subsidise miserly employers by paying tax credits to poorly paid workers. If respect and fairness were ever words to be uttered from Labour's lips, then a minimum wage should at the very least be based on a true cost of basic survival without any need to claim benefits or tax credits. However, true value of the individual should be considered if Labour ever dares to utter the words "respect" and fairness."To my mind, respect and fairness would reflect value to society. I cannot live without food produced by a farm worker. The farm workers contribute in more than an average way to my well being, so why is s/he paid so little, and so greatly below the national average income? - a more than average contributor to my life, but a recipient of a less than average wage. The same is true of the hospital cleaner, who guards my health when I am least able to defend it, and the shop worker who supports me by serving goods to cater for my needs (at least when I can afford to pay for goods and services)....and whoppeedee that more people in Britain are now working than ever before. There was a time in the history of this nation, that many families could choose for only one member of the household to work, and the other partner to stay at home yet still could afford a roof over their heads, food on the table, fuel, dental treatment, children, local taxes etc.there is nothing wrong with equality, if the rewards of equality at work are received. Gender equality in the workplace has not entirely resulted in emancipation, but has contributed to an increased abilty by the greedy to charge more for products and services. All other things being equal, "equality" and more people working should have resulted in a greater effective spending power amongst the workers, but the collective increase in worked hours and hence family wages has only given the greedy the abilty to price housing and other goods and services at a higher level than could otherwise be sustained. Logically, if more people are working than ever before, then there is an argument that everyone could be working fewer hours. Collective gross wages might of course be less, but the abilty of the greedy to extort inflated prices from a consequential reduction in gross collective income would be reduced. Poverty is getting worse, and will continue to do so until individuals are given the respect they deserve, and the abilty to earn fairly. I would expect a government elected by the people to do the job they are supposed to do ...i.e.: represent the people, all of which deserve their respect. If a member of the community contributes in an average way to the rest of the community, then reward them in an average way, for example by allowing that person the average income. If a person performs a little less, then fair enough, pay them a bit less, but not a poverty income. If government policy prevents a person from working in the intersts of the economy (e.g. a flexible workforce needing spare capacity), then pay the value of having flexibilty to the victims of the policy. There is enough money to go round, if it was shared out fairly.Perhaps I'm naive, perhaps I'm a socialist, but perhaps I'm not proud to be Labour, or a least not proud to be Labour in the form that it manifests itself today.

8/23/2012 1:48:46 PM