The story which prompts today’s post is a study reported in the Economist Magazine. It examines “inequality” in countries, before and after taxes and transfer payments. The study originated at the City University of New York (CUNY). (Unnecessary Disclosure: I received my undergraduate degree from CUNY, actually its flagship campus, CCNY).
The story has some implications for the elevation of inequality as a public issue by President Obama in his State of the Union speech last night, and to earlier statements, by the President, the Pope, and many others, along these lines. Here is the Economist story: http://www.economist.com/blogs/democracyinamerica/2013/11/inequality-america
As the story details, the CUNY professors first measure income inequality after the government has taxed its citizens and used some of the money for “welfare” and “safety net” programs. They measure the inequality by computing a “Gini Ratio.” The higher that number (between 0 and 1), the more inequality. The Gini Ratio has been around and used by economists for a very long time. I first learned about it in an ECON 101 class in 1968 at CCNY.
Then the CUNY profs looked at what inequality would have been without those tax and transfer policies. The result is a reasonable, if imperfect, measure of how much governments do to minimize income inequality.
Not that there aren’t some problems with the data. One red flag: The data used by the author is from the early to mid 2000s; so it does not include the effects of the Great Recession nor differences in the policy responses of the countries after the 2008 crash.
We know, for example, that inequality, based on many measures, has increased in U.S. since 2008. The Federal Reserve’s “quantitative easing” policy has helped boost equity markets, which has generally been more beneficial to upper income people. I don’t know what has happened with inequality in other countries over that time.
As confirmed by many other studies, the CUNY report shows that the U.S. leads all advanced economies in post tax and transfer inequality. Perhaps surprisingly, the U.S. is not an outlier when you examine pre tax and transfer income inequality. In other words, (free) market driven forces don’t seem to foster much more inequality in the U.S. than elsewhere, according to the CUNY findings. But other countries apparently do more with public policy to protect people who don’t fare well in the free enterprise system.
One obvious conclusion that might be drawn from the study is that more spending on income transfer programs and more shifting of taxes from lower to higher income people – i.e., more policy driven re-distribution — reduces inequality. That should not be a surprise.
Of course, there are fierce ideological differences about redistributive policies; and a lot of differences about how much they harm (or help) overall economic growth, and the size of the total pie to be sliced up and distributed.
The Economist story (based on the CUNY research) reminds us that the few (potentially effective) things government can do to enable lower income folks to be more prosperous, are very difficult to accomplish, either because the political support is lacking or collateral damage is (or is believed to be) too high. There is also (collateral) damage of not acting.
In addition to major changes to tax and transfer policies, changes to both International and Domestic Free Trade policies, are two other things government can do to move the needle on wage and income stagnation. The International side of this would have to include an end to currency manipulations (thanks again to Alex McLaughlin for the reminder) by our major trading partners, which make their goods artificially cheaper here and our’s more expensive abroad.
Changes on the Domestic Free Trade side would involve creating strong national labor, as well as tax and industrial policy, standards covering all the states. That ain’ going to happen any time soon, without a massive change in public opinion, and a different Congress and Supreme Court. Besides, there are also legitimate collateral damage issues here.
Notably, President Obama did not really suggest any blatant re-distributive policies in his State of the Union Address on Tuesday. At least I did not hear them. I am sure that his opponents did, whether he said them or not, Yes, he proposed some changes to transfer policies — a modest increase in the minimum wage and restoration of lapsed unemployment insurance benefits. Both of these are marginal and will move the needle only a little for relatively few people.
Also, I did not hear the President mention anything about raising taxes on the rich, this time. Did I miss that? And the only mention of Free Trade was a pitch aimed at fast tracking the Trans Pacific Trade Pact. He may have also said something about FAIR Trade, to acknowledge skeptics in both parties who believe that NAFTA style Free Trade has been harmful. But significant or game changing transfer payment, tax code, trade and labor policy changes were notably absent.
The President is a pragmatist, to the chagrin of Democrats on his left. Those on his right think it was all he could do to not quote from the Communist Manifesto. So it goes.
The President did talk about education and training as a remedy for wage stagnation. That plays better with conservatives and many others, who prefer policies which aim to improve “opportunity” rather than “outcomes.”
Education and training reforms are worthy. But, unless they are more finely tuned than simply “lets send everyone to college,” they will not make much difference, especially if they add to mounds of student debt that are both personal tragedies and a major drag on the economy.
We need a vastly better (and respected) system of workforce training. And we need to help a lot more poor and (shrinking) middle class folk to learn the high end mathematics, science, computing, and engineering skills needed to play a part in the front end of commerce, the ideas and inventions, which can’t be outsourced to cheap labor abroad. The President mentioned both of those approaches, even if he couldn’t resist more cheer leading for NAFTA like Free Trade. (Does he really believe that, or is it part of the accommodation pact with the Clintons?)
Getting back to overall economic growth, and the size of the pie to be sliced up and distributed. We may be on safer ground here if we take Yogi Berra’s observation to heart. When asked by a waitress whether he wanted his pizza sliced in four or eight pieces, he said, “well, Geez, I don’t think I can eat eight.” Policy makers ought to keep this in mind when they decide how finely to slice the pie.