Wednesday, April 9, 2008

Oh no! Some folks are getting wealthier too fast!

The San Francisco Chronicle aptly sums up the media's overall reaction to a new report on income inequality by the Center on Budget and Policy Priorities and the Economic Policy Institute: "Rich getting richer, poor getting poorer." It's a facile reaction to a publication heavily larded with policy proposals up-front that have to be endured before you get to the part that's causing all the fuss. And once you get to the meat of the paper, you find that the Chronicle's take is ... well ... untrue.

According to Pulling apart: A state-by-state analysis of income trends, between 1987-1989 (the initial period studied) and 2004-2006, the bottom fifth of income-earners saw an 11.1% increase in real income while the top fifth of income earners enjoyed a 36.1% increase in real income.

The Chronicle was able to make its "poor get poorer" point by skimming the report's intro and highlighting the authors' statement that, "on average, incomes have declined by 2.5 percent among the bottom fifth of families since the late 1990s, while increasing by 9.1 percent among the top fifth." That's since the late 1990s -- a subset of a longer period of time over which incomes grew for everybody. The period of income decline is actually even shorter. According to the report, "Specifically, real wages for low- and moderate-income families grew more slowly in 2002 and the first part of 2003 and then began to decline." Yes, it's of concern when incomes decline in the short term, but it's more important that they grow in the long term.

Perhaps that's why the Center on Budget and Policy Priorities and the Economic Policy Institute focus their attention on "income inequality" -- the fact that, according to their figures, everybody is getting more prosperous, but wealthier Americans are growing in prosperity at a faster clip than poorer Americans. According to the report's authors, it's a bad thing that not everybody is getting wealthier at exactly the same pace.

This trend has broad implications. A widening gulf between the rich on the one hand and the poor and middle class on the other hand can reduce social cohesion, trust in government and other institutions, and participation in the democratic process. Growing income inequality also has widened discrepancies in political influence — a particular problem given political candidates’ heavy dependence on private contributions. This may have contributed to the increase in the number of Americans who feel that their elected officials do not care much about the views of ordinary citizens.

Also, as the divide grows among families at different income levels, families at the upper end of the income scale have less and less contact and familiarity with the problems faced by low- and middle- income families. For example, when income growth is concentrated at the top of the income scale, housing prices can be bid up beyond the reach of low- and moderate-income families, yet an upper-middle-income family living in the suburbs may have trouble understanding the extent of this problem. Similarly, wealthy families that can afford private schools for their children can lose sight of the need to support public schools. As a result, support for the taxes necessary to finance government programs declines, even as the nation’s overall ability to pay taxes rises. The failure to invest adequately in programs that educate children, meet the health and housing needs of families at all income levels, and support low-wage workers can dampen the nation’s future economic growth.

If I'm reading that correctly, it's basically a complaint that, if the wealthy keep getting wealthier, they might not be willing to advocate for the interventionist economic policies and expensive government programs favored by the Center on Budget and Policy Priorities and the Economic Policy Institute.

Yeah ... I don't think I'm going to buy that argument. Like I said, I do think it's a problem if incomes are declining. I don't think it's a problem if incomes are growing at different rates for different segments of society -- especially since we haven't yet looked at things like income mobility. According to a recent U.S. Treasury Department study, "Income mobility of individuals was considerable in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years." You can debate whether that's enough mobility for your taste, but it means that the "bottom fifth" of 1987-1989 isn't made up of all the same folks as the "bottom fifth" of 2004-2006.

Which makes it all the less pressing to consider the policy nostrums that the Center on Budget and Policy Priorities and the Economic Policy Institute peddle at the beginning of their report:

  • Raise, and index, the minimum wage.
  • Improve the unemployment insurance system.
  • Make state tax systems more progressive.
  • Strengthen the social safety net.

Because nothing says economic opportunity like an expanded welfare state and increased taxes to pay for it. Well, nothing other than increasing the price of labor through a higher minimum wage, which deprives low-skilled workers of jobs and (at best) drives them to work in the underground economy without guarantees, benefits or legal protections -- often with long-term consequences.

Look, none if this should be read as an apologia for the economic policies of the Bush administration, such as they are. Sending a trillion dollars into the desert so you can blow it up and greasing your friends with whatever is left over do not a viable program make. Nor does the domestic spending spree in which the government engaged with borrowed money. I don't think it's any mistake that the short period of income decline that the CBPP/EPI report found was on Bush's watch. The Clinton administration, whatever its shortcomings, was reasonably good about negotiating (somewhat) liberalized trade and then getting out of the way of the market.

But, if everybody is getting wealthier over time, does it really matter that some of them may be getting wealthier faster? I don't think so. I don't know how you'd make income grow in some statistically impossible lockstep across the economy, anyway. And I'm not about to buy "inequality" as a crisis that justifies a grab-bag of economic nostrums that have a track record of damaging economic opportunity rather than improving it.

Update: In a piece published last year, Cato's Alan Reynold disputes much of the data used to justify claims of growing income inequality.

In sum, studies based on tax return data provide highly misleading comparisons of changes to the U.S. income distribution because of dramatic changes in tax rules and tax reporting in recent decades. Aside from stock option windfalls during the late-1990s stock-market boom, there is little evidence of a significant or sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth over the past 20 years.



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