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The false belief that income inequality can't be fixed

A lot of people have been suggesting lately that the problem of income inequality is insoluble. “'Is the rise in inequality inevitable?” George Mason economist
Income inequality - Tim Noah - 09/16/2013
Stewart Kern and Amy Smith wait to apply for the Federal food stamps program at the Cooperative Feeding Program on February 10, 2011 in Fort Lauderdale,...

A lot of people have been suggesting lately that the problem of income inequality is insoluble. “'Is the rise in inequality inevitable?” George Mason economist Tyler Cowan asks on NPR, touting his new book, Average Is Over. “It probably is.” Fortune’s Adam Lashinsky observes that “No one seems to have any good suggestions.” Harvard economist Greg Mankiw tells Thomas Edsall of The New York Times, “The question for public policy is what, if anything, to do about it.” Judging from Mankiw’s recent paper, “Defending The One Percent,” his own answer would be: nothing.

But actually, there’s quite a lot America can do to reverse growing income inequality. Whole books have been written proposing solutions. But the trend is getting worse under President Barack Obama—the first chief executive, ironically, to address the issue head-on since incomes started growing more unequal 34 years ago. “The problem that we’ve got right now is you’ve got a portion of Congress who–whose policies don’t just–want to– you know, leave things alone, they actually want to accelerate these trends,” the president replied when asked about this by ABC News’ George Stephanopoulos.

Classic Washington blame-shifting, right? But in this instance, Obama’s assertion is demonstrably true, as even a cursory glance at the inequality data demonstrates.

Stephanopoulos raised the issue by making reference to a recent finding by Berkeley economist Emmanuel Saez that 95% of all economic gains since the Great Recession formally ended in 2009 have gone to the top 1%. (In 2012, the last year for which data are available, the top 1% was every household that earned more than $394,000.) “Do you look at that, four and a half years in,” Stephanopoulos queried, “and say, ‘Maybe a president just can’t stop this accelerating inequality?’” Obama demurred. “I think the president can stop it,” he said.

What Obama should have added, but didn’t, was: “I have slowed it down.”

Most obviously, the rate at which the 1% is hogging recovery dollars has declined. Granted, 95% remains a grotesquely large share for the 1%. But one year before--that is, through 2011 rather than through 2012—Saez calculated the 1%’s share of recovery dollars at a seemingly-impossible 121%, which is another way of saying that incomes went up for the 1% and down for the 99%. Through 2012, the 1%’s income grew faster, but at least the 99%’s income grew, too (albeit at the paltry rate of 0.4%).

Another way to measure income inequality--less effective at calculating accumulation at the very top, but better at calculating the divergence between, say, people with college degrees and people without--is the Gini index. Imagine that you have a bag of marbles to distribute to a kindergarten class. If every child has an equal number of marbles, the Gini index is zero. If one particularly obnoxious child bullies all the other children into handing over all their marbles, the Gini index is 1. In 2011 the Gini index for U.S. incomes logged its biggest annual increase since 1993, jumping from 0.470 to 0.477. But in 2012, the Gini index was unchanged at 0.477, according to just-released data from the Census Bureau. It would be easy to make too much of this since increases in the Gini index are usually too small to make a measurable difference within a single year. But the rapid rise from 2010 to 2011 was halted in 2012.

President Obama’s policies had an impact on all this, as did policies pursued by Congress and the Federal Reserve. But an important limitation on the Saez and Census numbers—one that Stephanopoulos gave no sign of knowing—is that they do not take into account the direct redistribution that the government performs through taxation and through government benefits like Social Security, Medicare, and various forms of income support for the poor. Saez's and the Census' data measure only market income as reported to the Internal Revenue Service in Saez's case and to a government survey in the Census' case. And because the GOP militates incessantly to lower taxes and reduce government benefits, the president is quite right to say that their policies would accelerate inequality.

This is most obviously true with regard to poverty programs. The right has labeled President Obama “the food stamp president,” and the GOP-controlled House is angling to cut $40 billion out of the program over the next decade. That would eliminate food stamps for 4 to 6 million poor people, according to the nonprofit Center on Budget and Policy Priorities. This would accelerate inequality. CBPP has calculated that non-cash benefits like food stamps, rent subsidies, and refundable tax benefits like the Earned Income Tax Benefit—none of which are measured in the calculation of the official poverty rate—reduced poverty by eight percentage points between 1964 and 2011. If these programs hadn’t existed, inequality would have grown even faster than it has.

Most government transfers don’t go to the poor; they go to the elderly, in the form of Social Security and Medicare--programs that the GOP has in recent years sought to reduce drastically through privatization. But even when you add in these middle-class entitlements, the overall effect of government taxes and benefits is redistributive. The Congressional Budget Office calculates income distribution both before and after all taxes and transfers are taken into account, allowing us to measure the impact of those government actions. Before government redistribution, incomes for the top 1% rose nearly four times as fast as incomes for the bottom 20% between 1979 and 2009. But after redistribution, incomes for the top 1% rose closer to three times as fast as incomes for the bottom 20%. In 2005, the top 1%’s share of the nation’s income was 19%. But government taxes and transfers reduced that share to a more modest 15%.

One legacy of changes in tax and entitlement policies since the 1970s is that the federal government redistributes income less than it used to. In 1979, taxes and transfers lowered the Gini index by about 23%, according to the nonprofit Economic Policy Institute. By 2007, they lowered the Gini index by closer to 17%. Over time, the government’s weakened commitment to income redistribution exacerbated growth in income inequality. From 1979 to 2007 the Gini index rose about 23% for market income, but it rose about 33% when you factored in taxes and transfers. The government was still redistributing income, but it wasn’t redistributing as much as it had before.

In recent years, political scientists and economists have come to believe that most ways in which the government affects income distribution have little to do with direct redistribution through taxes and transfers. Instead, it’s achieved in a variety of indirect ways:

  • The Federal Reserve’s heightened focus on inflation-fighting since the 1970s has contributed to income inequality by shifting the Fed’s attention away from reducing unemployment. The current chairman, Ben Bernanke, refocused Fed policy a bit more on job creation—an adjustment opposed by Rep. Paul Ryan and other prominent congressional Republicans.
  • President Ronald Reagan weakened the federal government’s commitment to workers’ right to unionize, thereby accelerating a decline in labor that began with passage in 1947 of the anti-labor Taft-Hartley law. President Obama has tried to revitalize the National Labor Relations Board, labor law’s chief enforcer, but Congress only recently confirmed enough members to give the NLRB a quorum. Weaker labor rights translate into greater income inequality.
  • Another way the government affects income distribution is through the minimum wage. At $7.25 an hour, the federal minimum wage is 7.8% lower than it was, after inflation, in 1967. The 1963 March on Washington For Jobs and Freedom is best-remembered for Martin Luther King’s “I Have A Dream” speech, but among the marchers’ chief demands was an increase in the minimum wage to $2 an hour. The marchers deemed unacceptable the then-current minimum wage of $1.25 an hour. But today’s minimum wage is lower even than that—in 1963 dollars, it’s less than a dollar an hour. President Obama has proposed raising the minimum wage from $7.25 to $9 an hour (which would still keep the minimum wage, after inflation, below the level that the 1963 marchers were protesting). But even that paltry raise faces probably-insurmountable opposition from Republicans in Congress.
  • A principal driver of income inequality since 1979, particularly for the 1%, has been the deregulation of banking. President Obama reversed that somewhat with passage of the Dodd-Frank financial-reform law. But lobby resistance from Wall Street (with strong support from the GOP), has weakened government rules enforcing Dodd-Frank. The Obama appointee who’s fought more fiercely for financial reform than any other is Gary Gensler, chairman of the Commodity Futures Trading Commission. But a depressing Feb. 4 Bloomberg account by Silla Brush and Robert Schmidt documents how even Gensler was largely defeated in his attempt to rein in financial derivatives. In this instance, Obama himself (and particularly his Treasury Secretary, Jacob Lew) is partly to blame—but only for yielding too much to the opposition. Gensler, whose term ends in December, has received no signal that he will be reappointed.

Republicans deserve the lion’s share of the blame for the 1%’s appropriation of 95% of the financial recovery. Blame Obama, too, if you like, for failing to sufficiently reverse GOP policies that date back three decades. But don’t blame the Fates. Inequality doesn’t just happen. Government policies can diminish it or exacerbate it.