Hillary Clinton and Bernie Sanders decry income inequality–and then go on to propose policies that have historically increased the gap between the rich and other Americans.
That is the conclusion of economist Lawrence Lindsey, who takes a look at the actual performances of progressive administrations and finds that, when it comes to narrowing the income gap, they are mostly talk.
The Census Bureau releases yearly reports on income inequality, and using three common methods of measuring income inequality, the gap increased more under Bill Clinton than Ronald Reagan. In general, Barack Obama follows this trajectory with more increases in income inequality than under George W. Bush.
One of the reasons is monetary policy:
Both Democratic presidents presided over bubble economies fueled by easy monetary policy. There is no better way to make the rich richer than to run policies that push up the price of financial assets. Cheap money is a boon to those who have access to it.
Interest rates were also too low under Bush 43, but that bubble was in housing, and the effects were therefore more evenly distributed than under Mr. Clinton’s stock-market bubble or Mr. Obama’s credit bubble.
That's not all, however. The transfers of wealth, always touted as a way to curb income inequality, actually drive more inequality by decreasing the incentives to work:
Money matters, but so do other policies, such as the long, historic sweep of the expanding welfare state. In 1968, government transfer payments totaled $53 billion or roughly 7% of personal income. By 2014, these had climbed to $2.5 trillion—about 17% of personal income. Despite the redistribution of a sixth of all income, inequality measured by all three of the Census Bureau’s indexes is far higher today than in 1968.
Transfer payments under Mr. Obama increased by $560 billion. By contrast private-sector wages and salaries grew by $1.1 trillion. So for every $2 in extra wages, about $1 was paid out in extra transfer payments—lowering the relative reward to work. Forty-five million people received food stamps in mid-2015, an increase of 46% since the end of 2008. Similarly, 71.6 million individuals were enrolled in Medicaid and the Children’s Health Insurance Program, an increase of 13.3 million since October 2013.
In 2008, during the deepest recession in 75 years, 13.2% of Americans lived below the government’s official poverty line. The Great Recession officially ended in June 2009, but in 2014, after five years of economic expansion, 14.8% of Americans were still in poverty. The economy was better, and there were a lot more handouts, but still poverty rose.
The structure of American households shows how this happened. From 2008 through 2014, the most recent year for which we have data, the number of two-earner households declined. These two-earner households have become the backbone of the American middle class.
Research by the Hamilton Project and the Urban Institute show that when families with children making between $20,000 and $50,000 attempt to have a second earner go back to work, the effective tax rate on the extra earnings—including lost government benefits such as food stamps, the earned-income tax credit, and medical support payments—is between 50% and 80%. This phaseout of the ever increasing array of benefits has created a “working-class trap” instead of a “poverty trap” that is increasing inequality and keeping the income of these households lower than they might otherwise be.
While the number of two-earner households declined during the first six years of the Obama presidency, the number of single-earner households rose by 2.6 million and the number of households with no earners rose by almost five million. In other words, two thirds of the increase in the number of families under Mr. Obama was accounted for by households with no one working. This is the reason the middle class has shrunk, and the reason inequality has increased. And unless we increase the number of people wanting to work and the number of jobs through economic growth, inequality will only increase.
Increasing taxes on the rich, also a popular and perennial proposal of progressives, is similarly ineffective. After President Clinton raised the top tax rate on high earners, income inequality grew at a faster rate than under President Reagan. Under President Obama, income inequality also rose along with tax rate hikes on high earners. Lindsey concludes:
Presidential contenders who boast of their plans to reduce inequality might ponder the fact that providing more free things is not the answer. Even free college and free health care are paid with taxes that discourage people from increasing their work, savings and entrepreneurship.
Attacking the rich and running against inequality may be a sensible political strategy. But in the end the programs to implement this strategy make the problem worse. Yet advocates come back and demand the same programs. That is perilously close to the definition of insanity attributed to Einstein: doing the same thing over and over again and expecting different results.
If I were in a flip mood, I'd say progressives must love income inequality because they create so much of it.