I've spent a lot of time writing about economic growth in the last three years, and it will continue to be the foundation here. However, that focus all but ignores an entire political party's top economic priority: income distribution—or, more specifically, income redistribution. The top priority economic goal, according to the party in question, is to reduce two income gaps: rich versus middle class, and rich versus poor. So it's time I devoted an article to income distribution.
Unfortunately, that's about as specific as the problem definition gets. By "income," most people are talking about pretax wage & salary (money) income for a household, or for a person (which are sometimes one and the same thing). But an income distribution that's "fair" never quite gets quantified; all I hear is that it's "unfair" now, and the candidate in question will make it "fairer." It always makes me wonder how much income redistribution it would take before John Edwards, Hillary Clinton, or Dennis Kucinich said, "Okay, stop, that's enough; any more than that would be unfair to the rich."
On the other hand, maybe I shouldn't complain that nobody ever quantifies the word "fair," because I'd love to have a few basis points of Gates, Jobs, Buffet, Soros, Clooney, or Streisand income redistributed to me.
[Sidebar: I personally think using "wage & salary income distribution" for the analysis is a big mistake right off the bat. Why? Because our taxation system is already doing some redistributing. A better measure, in my judgment, would be disposable personal income after taxes and after transfers. "Spending power distribution" might be a better name for that, because it doesn't limit the analysis to pretax income; it also takes into account the effects of taxes, and of the outlays side of the federal budget, much of which is spent to help the poor. I strongly suspect that an unwed teenage mother would rather have $20,000 in after-tax spending power than $20,000 in pretax wage income. But it's moot; everyone talks of income distribution, not spending power distribution, so I'll go along with that idea for purposes of this article.]
So, below are four different ways to achieve the goal of decreasing the two income gaps, rich-vs-middle and rich-vs-poor. [Note: The vertical axis is not to scale—on purpose—because these are concept charts illustrating gap reduction. Also, these are only four of an infinite number of ways to reduce the gaps, but they bracket most of the possibilities.]
Each of these scenarios "improves" the two income distribution gaps. As you can see, I think of them as: (1) Help Everybody; (2) Help the Poor; (3) Hurt the Rich; and (4) Hurt Everybody. (If you can think of better headings, leave a comment.)
To achieve #1 it takes enhanced economic growth, because everyone gains a lot. Achieving #2 requires run-of-the-mill economic growth, plus more transfers; everyone gains, but not as much as in #1. Scenario #3 is what happens when we increase transfers and also have a recession. "Achieving" #4 requires a depression—in which just about everyone goes broke.
I can't think of anyone who advocates recession or depression—but that doesn't mean it won't happen if we expend our debating time mainly on fairness and redistribution, leaving little to no time for the importance of growth, and debating ways of achieving it. We all want scenario 1 (or at least 2), but scenarios 3 and 4 are what we risk if we leave growth out of the debate.
Which gap-improvement scenario do you prefer? Which party's campaign rhetoric, if implemented, would be more likely to yield the one you prefer?
[In spite of my first paragraph above, it looks like this turned out to be another article about growth anyway, doesn't it?]
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