Thursday, March 26, 2015

Redistributing Income to Reduce Inequality (excerpt)

Income equality is easy to achieve by making nearly everyone poor. That has been and continues to be the modus operandi of totalitarian regimes. Capitalist systems are often infested with corrupt cronies, but true capitalists tend to prosper when their customers have more income to spend.

Meanwhile, the income inequality debate continues to rage on today. Progressives claim that it has worsened in recent years. They typically show a chart of real median household income, which has declined 9% from a record high of $56,900 during 1999 to $51,900 during 2013. In addition, they show that the share of income going to the top 1% is at a record high.

I’ve previously noted that the degree of income inequality may be exaggerated by demographic changes. For example, the percentage of singles in the adult population (i.e., aged 16 years and older) increased to 50% during February, up from 47% and 44% 10 and 20 years ago. Households composed of a single person tend to have lower incomes than those of a married couple. Young singles tend to be just starting their careers. Older singles tend to be retired and living on their savings, dividends, interest income, and government support. As the Baby Boomers age and their longevity increases, they could significantly distort the extent of income inequality.

Which raises an interesting question about the income inequality debate: What are we arguing about? The median household income data so frequently used to show that standards of living are stagnating for most Americans do not include government support payments. Could it be that the Progressives are right about worsening income inequality, but are ignoring the fact that the problem continues to be fixed by the very government programs that they implemented during their New Deal and Great Society heydays?

Exhibit A is the fact that government benefits now account for 17% of personal income, up from 14% 10 years ago and 12% in 2000. Labor compensation (i.e., wages, salaries, and supplements) was down to 60.7% of National Income during Q4-2014 from its recent high of 66.2% during Q4-2008 and its record-high 67.9% during Q2-1980. However, total personal income continues to hover between 95% and 100% of National Income, as it has since the start of the 1980s. That’s all because of government support payments, which increasingly have been deficit financed.

The conclusion is that Progressives who claim that income inequality has worsened have to prove that this is so after government support payments have been made, not before. If they are still right, then they will undoubtedly continue to press for even more income redistribution. However, before they do so, they should prove that the existing redistribution programs are not the cause of worsening income inequality. Conservatives argue that government benefits erode the work ethic and thereby exacerbate income inequality. I agree with that view. The debate will continue.

Today's Morning Briefing: Running of the Bond Bulls. (1) Granada & Barcelona. (2) Alcazar & Alhambra. (3) Ruling class always lives well. (4) Income inequality now and then. (5) Income inequality before and after government support. (6) Progressives need to prove that redistributing income isn’t worsening income inequality. (7) Bond bulls worrying about Pamplona scenario. (8) Yellen and Draghi want to be reasonably confident of inflation’s rebound. (9) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

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