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Inasmuchas I like to tend towards leftist views I drift off when those complaining about 'haves' and 'have nots' are looking at the #3 way and may inadvertedly bring about #4 if they had the power (Socialist countries?). Maybe #2 is good for the short term but we all know ideally it should be #1.

This concept is so simple, but it is lost on some very intelligent people (voters). Or it is not lost, but purposely bastardized for political gain (politicians). Does anyone recall having been taught this elementary concept in middle or high school? Does anyone have kids who have learned this? My guess is very few.

An ill-educated electorate, half of which don't pay taxes, have been taught that government is "to give you stuff." This mentality - and I am cynical enough to believe that it has been purposefully fostered - makes it difficult for economically literate voters and politicians to gain sufficient votes: #1 to get elected, and #2 if they do, to get pro-growth legislation passed.

Even now, in some Keynsian-like fog, we are seeing politicians and others promoting government largess to spur the economy out of a looming recession. The pro-growthers are the ones made out to be the bad guys when they propose a proper solution.

Granted, the mostly government-created subprime mess and housing bubble are significant, but I believe that the slowing is a logical market reaction in anticipation of higher taxes and increased regulation - "The Democrat Effect." The great incredible stimulative effect of the tiny rate cuts of 2001-3 have run its course, despite attempts to kill it sooner.

The failure to make the tiny tax rate cuts of 2001-3 "permanent," the raising of the minimum wage, and the expiration of the tax rate cuts coincident with expected Democratic electoral wins in 2008-10 and their promised anti-growth policies have created uncertainty. No one is going to risk significant capital in such a potentially hostile business clime - and rightly so - until they know how bad it is going to be; hence a general slowing of the economy and decreased consumer confidence.

Steve, i believe you have ignored the utopians' view of their reality, a combination of 2 an 3. Hurt the rich to transfer to the poor. Ya'no that ole Robin Hood story.

All of them are heroes in that reality. Of course ignoring any of the unanticipated consequences.

Joe C, said and I agree partially, "...but I believe that the slowing is a logical market reaction in anticipation of higher taxes and increased regulation - "The Democrat Effect."

I just don't think we can ignore the effect of the energy issue. Plus add the Democrat effect of pursuit of Global Warming initiatives which most assume will cost big bucks and slow growth.

Far be it for me to defend income redistribution, for I hate the very concept. So please don’t consider this my opinion as much as it is a description of the perception of the problem.
You have to take in living expenses, which, while fluctuating between the rich and the poor, Don't do so on the same scale as incomes do. This goes back to disposable income. In addition there is the perception (and I don’t know if its true) that the more money one has available to invest, the better "deal" one can get. So, if both the poor and the rich improve their total income by 10%, the rich persons disposable income improves more than the poor persons in percentage terms, and since its much higher in absolute terms, he is able to get better returns should he invest it. So, with some compound interest like magic, the rich would be better able to take advantage of the increase to benefit himself.
Personally, I don’t believe in income redistribution, and I think the only purpose of government handouts should be to reduce poverty and crime and after that everyone is on their own. But not everyone sees it like I do, and if the other side is to be convinced, one has to put these concepts in their language.

Oh, and bye-the-bye, the rate of change in the Gini Index of the U.S. has been essentially flat since 2001.

I did forget the Globaloney Warming hoax's effects, and the decades-long anti-capitalist enviroterrorist's economic effects preventing the safest, cleanest power - nuclear - and forcing foreign dependency for oil on us.

You're taking them too literally; they're not really concerned with the income equality as much as they are about punishing certain types of people -- mainly CEOs and hedge fund manager. You never hear them saying "Oprah and Tom Cruise make way too much."

I suggest that if you were to ask them to draw the chart, it would actually have four lines -- the R, M & P that you have, plus a new line, SW ("super-wealthy"). They would draw that line about 5 inches above the R line and, in their perfect solution, the SW line would point straight down while all the other lines go up.

It's a stupid thing to be concerned about -- there are so few hedge fund managers & CEOs that even redistributing *all* their income to the poor would have little effect.

The best way to improve the lot of the poor is (1) to better police where they live, making them more secure and (2) to invest in teachers and schools to make their children more successful. Many poor folks are hurt by their own horrible decisions more than they are by government policy -- an education helps them avoid those bad decisions, and the police protect them from others while they get that education.

The "fairness" conversation gets very complicated very quickly when you start to deal with real life circumstances - and that's why it's avoided so assiduously.

Is it "fair" that more educated people earn more than the less educated? Does that judgment change if the difference is attributable to differences in opportunity? Does it change again if it's mostly due to differences in motivation? Can anyone point to someone else and tell me what their "fair" income (or disposable income) is?

And what if that person has children? Does the fair income go up? What if they have lots of children in a deliberate attempt to increase their fair share of income?

Is fairness computed at the individual level, or the family level, or the household level (or something else)? If there are two earners in a household, does the fair earning power of each get adjusted downward because they share living expenses? If there are three, does it get adjusted even lower? If Mom stays home and watches the kids, does the imputed value of that count as income for the family? Does that mean Dad's fair income is lower if Mom stays home to rear 6 kids than if she watches 1? Does the imputed value of those services (and hence the required adjustment to Dad's income) vary by the age of the children?

And so on. Creating by fiat a "fair" distribution of income, disposable or otherwise, entails more than simply transferring from one tail to the other, because total fairness can't be measured at the level of distributions. It is the sum of circumstances at a much more micro scale.

I think you left out the primary chart which has the rich arrow going down and the poor arrow going up (also mentioned above by the counterrevolutionary). That's what most redistributionists are talking about (though they will gladly accept 4).

I generally dislike this characterization because it assumes static groups forever (you're poor, you're children will be poor, etc.). That distortion basically concedes a great deal to redistributionists that ought not be conceded in my opinion.

Most of poverty is generationally self-inflicted, and has become cultural. Those that do not value education and/or embrace economically deleterious behaviors tend to have been raised by those who have the same characteristics; hence, it becomes cyclical.

Most poverty - a very relative term - would be eliminated just by people graduating from high school, and have a stable marriage before having children. Unfortunately, to many, those choices are considered too inhibiting and culturally insensitive, but then blame others for their lot. What makes it even more difficult is that these adverse behaviors are glorified by mass media, and lend it credibility as a viable alternative to responsible behavior.

Are there some that do not fit this model? Or, some that cannot follow this paradigm? Sure, but it is undeniable that these behaviors improve one's chances of avoiding poverty.

Come on, now. This issue has been around forever and will continue to be around ad infinitum. Way, way back the caution that it "is easier for a camel to pass through the eye of a needle than it is for a rich man to get into heaven" on through Robin Hood up to Lenin, Stalin and even today in socialist economies such as The Netherlands, these ideological battles persist.

Steve suggests a rising tide can float all the boats. Maybe so, maybe not. I'll take my chances with the rising tide though because all the other alternatives pretty much suck.

IMO, the real debate is how to get the tide to rise, not how many boats ultimately float.

One can criticize government all day long.....they really deserve a ton of it. However, if we are to be serious about floating all these boats then an objective look at business must also be on the agenda. I'm not suggesting government doing the looking, mind you.

I am suggesting that quite a few corporations need to take a good look in the mirror. Hypocrisy is not concentrated solely in government. How many corporations who speak to free markets do so while clamoring for one tax break or another or are a recipient of congressional earmarks? How many find it necessary to fund PAC's whle touting free market economics?

Plenty, I suggest. Indeed way too many.

So, when we talk about growth and investment let's include those bulemic organizations whose only focus is on the next quarters conference call. Call me them out for what THEY are while we call out government for what IT is.

Now, I's say that's really fair.

The biggest problem with the debate about income distribution is that it completely ignores age. Age is the leading cause of being poor. When you are young you have had little time to create wealth. The older you become the more wealth you have created (whether it's for yourself or for someone else is a whole other discussion.)

Smart private and government spending in areas that help the youth get a jump start on creating wealth would dramatically close that gap. The rest is just details :)

I like the underlying premise and the four various scenarios of income redistribution. The graph that we live with today is not shown-- it is one where the slope of the "rich" is increasing parabolically, while the other two are flat or slightly rising.

Perhaps this is fair-- we live in a meritocracy and those who work hard and/or attain expertise should benefit to a greater degree. Hardly any serious policy maker would argue with that.

The question is, can this be sustainable? Or will the disconnect damage the fabric of our society eventually? Remember the Gilded Age?

The fact is that we would all benefit if the underclass were educated and healthy, but it is the resolute "small government" crowd that fights any effort toward this every step of the way. Providing free birth control or vaccines would do wonders at promoting economic growth, for no other reason than it would keep the unwashed masses unpregnant and healthy enough to finish some vocational training. Think of universal health care as an economic investment. Without it, these folks are going to get sick anyway, and we're all going to pay for it eventually. Penny wise, pound foolish.

As usual on this site, the discussion devolves into a relentless bashing of "Democratic" straw men, as if all the troubles in our economy were the result of Democratic policies.

I couldn't disagree more with Joe C. more when he says, "...but I believe that the slowing is a logical market reaction in anticipation of higher taxes and increased regulation - "The Democrat Effect."

Oh P'shaw!! The current slowdown is due to a complete abrogation of any regulatory authority by our quasi-private Central Bank. Allowing people with no jobs to borrow money for overpriced houses and overpriced lattes and giving credit cards to college kids has damaged the confidence investors have in our credit markets... so nobody is willing to put capital at risk under these circumstances.

Look at your almanac to see who was running the congressional banking committees and appointing Treasury Secretaries during that period of time. Even as recently as last summer, Sec'y Paulsen called the subprime debacle "largely contained." Largely contained?! To quote Nero, "Ah. It's just a brush fire, it'll burn itself out."

Our economy is further damaged by the reliance on natural resources from despotic regimes that torture their citizens, thus invoking wrath upon us. Co Rev and Joe C. think that global warming legislation is hurting our economy? That's pure, unadulterated delusion. And even it it were, the main proposal is the McCain-Lieberman cap and trade plan (neither of the sponsors have "D"'s after their names, my friend.)

I would argue further that if we had placed a tax on gasoline in 1991, as proposed by Sen Kerry, then we probably would not be in the untenable mess we are in today, with our president dancing arm in arm with horrifically tyrannical Saudi martinets.

I usually appreciate Steve's insights on such matters, but I have to say that I am disappointed with the nattering fear mongering that serves as debate by most of the commenters. And it seems to be worsening with each passing week. This has quickly become a haven for whiners and selfish misanthropes.

And since you want to know my "real name" so badly, I'll furnish it: Tony Vincent. Does that somehow make my argument more valid?

Steve -

The Demonicrats make sweeping charges on income inequality, and often state that there has been no real income growth for the middle class and poor for decades. This is nonsense and the data is readily available.

The mistake is in the statistics and the way they are used. The Census Bureau does not count income against individuals, but against families. And then that income is based on gross wage income, not on total real income.

Poor families are smaller than well-off families. Counting family units rather than individuals, the Census Bureau finds that for each individual in the bottom quintile, 1.7 individuals are found in the top quintile. So for every 10 million people in the bottom quintile of families by family income, there are 17 million people in the top quintile of families by family income. Do 17 million high earners earn more than 10 million low earners? Well, yes, but the numbers are quite distorted by counting families rather than individuals.

By the simple expedient of making the quintiles based on people rather than families, you add millions of people with higher incomes to the bottom quintile, and reduce the size of the top quintile. The average income of both quintiles goes up. In fact, the middle quintile changes little by individual count or income, but each of the other four quintiles has larger average income.

Gross wage income is not the only available income; SS, Medicare, welfare, etc., must be taken into account when determining income.

In addition, virtually all income taxes are paid by persons in the higher quintiles of income, and these and other taxes necessarily reduce the taxpayers' incomes.

Heritage ran the numbers and found that individual incomes in the top quintile average four times the income of individuals in the bottom quintile. Not quite what the Left is telling you.

But the Demonicrats are not trying to have a rational discussion on family income, or anything else. Both Hillary and Hussain grew up on Saul Alinsky. For them, data is not a collection of facts, but a tool to win power. If distorted data is more useful that straight facts, no problem. That is why Paul Krugman got off on the distorted data in the first place.

There is another issue when trying to hold a rational discussion with a power-hungry Demonicrat. Any source they disagree with is not considered, but is disparaged and refused. So any factual data is beneath their contempt and unworthy of their consideration, because they do not agree with the source. That makes rational discourse difficult.

http://www.heritage.org/Research/Labor/CDA99-07.cfm

Did the rich not work for their money? I'm pretty sure most are wealthy because they put the time and effort into doing so. Granted, everyone does not have the same opportunities, but shouldn't we focus on extending these opportunities to the poor and let those who are willing to work for it like the rich have reap the benefits. I think this makes more sense than sending the poor a check every week. Maybe free educational programs or financial classes could help do the trick?

The key policy goal in economics is growth, and "growth" is for all income levels but especially for the middle class (remember your Aristotle?). That said, incentives that reward upward growth from poverty to middle class are the most important; those that reward upward growth from the middle class to the rich are less important, and those that move the rich to 'super-rich' are far less important, perhaps even unimportant. No where in such a system is there anything called, 'redistribution.'

Take Solow's technological innovation, correct for Mankiw's human capital, and stimulate creativity through incentives for upward growth for all economic classes--while emphasizing the middle class's growth especially--and we have a growth curve longer than 200 continuous years.

However, the market forces that reward talent with hedonistic sums are also the market forces that have schizophrenics walking our streets and the elderly impoverished. There is plenty of 'growth' to alleviate poverty; but there is damned little practical education of the imoverished on how that growth into the middle class is achieved. Incentives, incentives, incentives...and flood human life with choices.

Tony,

I prefaced the exact passage that you doubted with you point: "Granted, the mostly government-created subprime mess and housing bubble are significant..." Now, they are even compounding the problem by trying to "fix it" by doubling down.

Secondly, you don't think that the very likely possibility that the next president being a Democrat with a Democrat Congress all pledging to increase taxes and take profits from business during a looming recession doesn't have an effect on capital decisions and hiring? I'd be scared ****less if I were contemplating a new venture or expansion now or in the near future. I'd wait until I knew what type of punative regulations were coming; hence, part of the reason for the slow down, and lack of confidence.

For Tony:

I'm sure you felt you were on a roll there, but your argument omits some other facts. This is a paragraph from your entry:

"The current slowdown is due to a complete abrogation of any regulatory authority by our quasi-private Central Bank. Allowing people with no jobs to borrow money for overpriced houses and overpriced lattes and giving credit cards to college kids has damaged the confidence investors have in our credit markets"

You use this to refute the concept of "The Democrat Effect," when it in fact supports it. The lavish issuance of credit to everyone able to sign their name is the product of a liberal brainstorm that was initially intended to assist black families in buying homes. But the logic always takes a wrong turn when considering demographics. Because black people make up a large percentage of the nation's poor, and legislation cannot be blatantly racist, the policy was applied to all people at or under certain income levels, thus creating the mess you've described.

This outlines perfectly how liberal fiscal policy can never work. The more you attempt to help any single demographic group, the more potential instability you create for the other demographic groups. While, in a system where everyone works to help themselves, everyone benefits. It's basic math.

I got tired of arguing about the "growing income gap" with a Marxist friend (yeah, I'm an academic, with lots of Marxist friends [the universities are full of people who will cheerfully admit they're Marxists]), so I asked him to consider an analogy.

Since 1900, there has been a "growing age-at-death gap". That is, some people die at age 1 day (or even less) and others die much later. In 1900, the "gap" averaged between < 1 day and @ 45 years. Today, the gap averages between < 1 day and @ 85 years!! We must do something!! By analogy, we must *punish* those who live to long. Probably, we must take some of their life to reduced the "age-at-death gap".

He gaped at me and then tried to show the analogy was false. Well, if there are fewer dying at age < 1 day, or even < 10 years, there are also fewer people who have zero income (at least percentage wise), and if measuring the age gap differs from measuring the income gap I sure don't see it.

In fact, they tend to mirror one another. That is, the gap exists *because* on average everyone is living longer and has higher income. That is, the median (as well as the mean) is moving drastically to the right. Presuming only a skewed distribution curve, the "gap" in each case shows a *GOOD* thing: that, on average, everyone is getting longer life and greater income.

He's still thinking about that one.

Government should not be involved at all. (notice the period)!

I am all for charity. It makes us human and less arrogant. However, how dare anyone or any entity presume to take from one to better the lot of another. How dare anyone reach into my pocket and take the reward of my hard work.

I will give to whom I will give.

Only with resentment, thoughts of revolution and tax avoidance schemes do I continue to pay my taxes.

I give to whom I give. My business----My Choice. (notice the word 'choice' for all those of a liberal mind set).

I am for some level of income redistribution, but would prefer it to be as a very transparent subsidy, that would be indexed somehow so as to avoid the occasional large boost to its number.

Ideally you'd have a simple flat tax, too, so politicians could sum up their economic programs like this:

Subsidy: 18,000
Tax rate: 15%

It would be pretty easy to see chicanery in such a system. I'd also make voting and taxation be clearly linked. Pay your taxes in booth 1. Then vote in booth 2.

Dream, dream, dream,

Very interesting discussion topic. One of my favorite essays "Mind the Gap" explores this topic:
http://www.paulgraham.com/gap.html

It is excellent and well worth the read. I imagine Steve has set up this discussion for a follow-on of how each could be accomplished. Part of the follow-on will likely show that scenario #3 is an impossibility that will inevitably lead to scenario #4. The above essay argues this position well.

I'm definitely not sold on the idea that a gap is a bad thing. People having basic living expenses is one thing, but 'more equal' disposable income is quite another. It is unfortunate that so many in this country have an entitlement mindset. That mindset is what allows these candidates' message to have such wide appeal.

Scenario #1 and to a lesser extent #2 are those that have a positive outcome.

Scenario #3 and #4 can close the gap, but they sure wouldn't be any fun for anyone.

Clarly this is set up to dump on the "possible scenarios" to ..yes: vote for the GOP and see how well they handle our money. The lad who bitches about the dumb electorate--pal, this is a democracy and we all vote. Some do not vote your choices. And guess what? The GOP is now turning back to Keynes to bail out the nation, sunk under the spend like wild, give money to the wealthy, watch housing market evaporate--your people! time for a change.

"We all want scenario 1 (or at least 2)"

We don't all want scenario 1, or even 2 necessarily. For example, Listen to what former secratary of state, Madelline Albright said recently:

"“If we were all rich, that would be very nice. If we were all poor, it would be too bad, but we would be the same. What the problem is now is the poor know what the rich have as a result of information technology and the spread, generally, of knowledge. And, it creates a whole new host of problems in terms of disquiet and anger.”"

This is the Gospel according to Marx. Amen.

Has this theory ever actually been proven scientifically over the past 160 years, by the way?

"We all want scenario 1 (or at least 2)"

We don't all want scenario 1, or even 2 necessarily. For example, Listen to what former secratary of state, Madelline Albright said recently:

"“If we were all rich, that would be very nice. If we were all poor, it would be too bad, but we would be the same. What the problem is now is the poor know what the rich have as a result of information technology and the spread, generally, of knowledge. And, it creates a whole new host of problems in terms of disquiet and anger.”"

This is the Gospel according to Marx. Amen.

Has this theory ever actually been proven scientifically over the past 160 years, by the way?

Steve,

I believe you have done an excellent job of conceptually demonstrating what it means to have capitalism at work.

Abraham Lincoln has been quoted as saying, in sum, that you cannot help the wage earner by penalizing the wage payer (as a means of "helping" the wage earner).

Further, you are once again demonstrating the fact that we are having a national discussion as to the proper role of the Federal government:

- Does it need to be in the business of deciding which class of people get more or less of another class of peoples' productivity (see, this point's already un-American, in my view, as we're pitting "classes" of people against each other -- why can't we simply all be Americans?)?

- Isn't the proper role of the Federal government to provide protection against enemies, both foreign and domestic?

- Isn't the best way to help people help themselves by providing the incentives for savings over spending (see, e.g.:, China's savings rate: isn't it at least 40%?)?

Adam,

You state, "The lavish issuance of credit to everyone able to sign their name is the product of a liberal brainstorm that was initially intended to assist black families..."

You need to review your Constitution and the recent history of the subprime meltdown. The executive branch is in charge of enforcing regulation and the Federal Reserve, which is not provided for in the Constitution, is in charge of regulating banks.

You characterize these policies are "liberal brainstorms", but I would rather view them as the free market run amok. Nobody in charge was issuing warnings or prohibitions on writing bad loans, and the negative outcome was predetermined.

You can scapegoat the liberal bogeymen all you want, but such blame is completely misdirected and, frankly, delusional.

I am not a liberal and would characterize my leanings as libertarian if anything, but I do see value in regulating markets. When the history books are written, this "crash" will be seen as a lack of proper regulation and oversight by the banking industry.

James, that's why I'll forever call her mAdledbrain Alldim.

Joc C. spot on.

It seems to me that an overlooked, but critical question is whether the poor improve their situations as individuals? I mean is it always the same poor families, or do they not perhaps improve their lives as others? Our concern should be about upward mobility for individuals, something that is lost in the statistics.

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