President Obama has recently claimed, and reiterated in his state of the union address, that income inequality is the defining problem of our time. Inequality is more harmful to humanity than terrorism, tyrannical governance, nuclear proliferation, disease, etc. Yet, even if we agree with Mr. Obama the questions of why there is such inequality and how to create more income equality (assuming this is the goal) seem to be lost on the president. In fact, Mr. Obama must know that his “solutions” to this problem have much political weight but little hope of a practical impact.
Why is there so much inequality? Depending on who you ask, the answer is typically some version of the following: Individuals can attain higher incomes via hard work and productivity yet many others don’t have the knowledge or skills to do so, and this is the way it should be OR there is not enough income redistribution. The U.S. is going to have wealthy people and poor people (no one disputes this), but the question is should government do more to close the gap between these two groups. If you look at all the developed countries in the world that have more equality than the U.S., they are mainly concentrated in Europe and they all have significant redistribution programs in place.
The irony here is that in the president’s state of the union address this week, despite all the talk about working and work ethic, his solutions to inequality are impotent to actually make a difference. What’s more, income inequality is not the same as poverty (which he seems to conflate). Many countries have more income equality than the U.S., but overall they are much poorer.
Yet, even if the President believes we must close the gap so that incomes (he is not claiming wealth should be more equal) are more equal, will his proposals have any affect? Raising the minimum wage will impact a tiny portion of the labor market. Extending unemployment benefits will not even make a dent income inequality, and the modest increase in taxes on the rich proposed by the president will lower their income by a few percent. Mr. Obama seeks to pray on zero-sum thinking. If one person has a higher income than someone else must earn less, so it is only fair to take from those who have more and give to those who have less. This is a fundamental economic fallacy that unfortunately many believe. Wealth is not static, and people who earn high incomes are often creating new wealth.
Maybe the president should focus his attention on how the government can incentivize job growth and not income equalization. It should be clear to the Obama administration, that without a job Americans have no hope in attaining a more equal income.
It looks like the Obama administration knew that many Americans would not be able to keep their current health coverage if they purchase insurance on their own (and not through an employer). Is this a surprise? It is hard to imagine that a massive government program that is attempting to combine a market-based insurance system with a government mandate would be able to properly calculate the price of a policy. The government has no choice (because it lacks the information necessary) but to price an insurance policy by some arbitrary means. Given your income level, number of dependents, net worth, etc. your should pay X for health insurance. Also, it is impossible for the government to set the price and allow you to properly value your own heath risk.
Consequently, you have a system that penalizes the health conscious middle-income earner because he must subsidize the a category of individuals in the Obamacare “calculation” that are paying less and are likely less healthy.
The government cannot engage in market calculation. There is too much information known only to the individual and his unique circumstances, and when the government sets the price (or at least mandates a certain range of coverage and prices) the result a gross misallocation of resources.
Maybe this is what the Obama administration intended? Some have said this will move the American system closer to a fully government-run system eliminating private insurance all together. Whether this is true or not, the current system is likely to collapse under its own dysfunction.
Megan McArdle writes about the connection to wages and productivity, and markets.
When comparing Wal-Mart wages to those of Costco employees, the business model explains, in large part, why workers at the world’s largest retailer earn a much lower hourly rate.
A similar story will likely explain much of the difference in wages between McDonald’s employees and those at other retailers.
The North Carolina Senate GOP recently revealed a plan for far-reaching tax reform. This major reform will make several changes by lowering marginal income tax rates on both individuals and corporations, as well as begin to shift the burden of taxation to consumption rather than income. These changes would be financed by a reduction in spending (long overdue) and an increase of taxes on services that are currently exempted.
This is the type of reform that is needed in a state with persistently higher unemployment than seen nationally, and a tax system that penalizes earning.
Moving a greater share of the tax burden to consumption is more efficient and more “fair” by any measure. Critics argue that consumption taxes hurt those with lower income, yet this belief is based only on the current antiquated tax code. Income taxes penalize all earners, and these taxes create a disincentive to earn (and for small business owners there is a disincentive in show a profit). A system that forces any earner to hide and shelter their income is backwards. In fact, consumption taxes are much more efficient. They more you consume, the more tax you pay. Thus, those who earn more income (and who also spend more of that income) will pay more in taxes.
Economists have argued for decades that consumption tax systems are more efficient because they push the individual tax burden into the future. Younger tax payers will have more incentive to earn today, and then they will consume more in the future (especially after retirement).
Governor McCrory and the NC legislature should move forward on this reform and establish North Carolina as a national leader in tax policy change.
The Supreme Court is hearing two cases over the next two days on the issue of same sex marriage, and the reporting will no doubt last for weeks to come until the decisions are made this summer. The popular debate that gets repeated over and over typically rests on an argument of fairness and rights versus morality. One aspect of the contentious position over whether to legalize same-sex marriage rests in a much broader realm. What are the unintended consequences of such policy and the subsequent cultural impact?
One example in terms of marriage policy is the consequences of no-fault divorce law. Initially seen as policy that would help and protect women stuck in difficult or abusive marriages, the resulting culture of inequality and child poverty was not anticipated (yet is well documented).
A similar debate over same-sex marriage rings true today. Proponents argue that love and rights are the obvious benefits of these marriages and the broader cultural impact is often ignored (or deemed irrelevant). The economist Friedrich Hayek famously wrote that markets, via prices, convey and aggregate information that no individual or group could ever possibly do even with the most sophisticated technology. Similarly, Jonathan Rauch points out that Hayek as a social philosopher parallels this use of information in the broader societal context. He notes, “that human societies’ complicated web of culture, traditions, and institutions embodies far more cultural knowledge than any one person could master.”
The point is that using policy to change the deeply rooted cultural traditions that we hold will have consequences that are unanticipated and far-reaching. Thus, the debate before the Supreme Court is far more important than simply the rights of certain individuals. Changing how we define marriage will dramatically impact the broader culture. This is not a left versus right issue. The thousands of French who protested in Paris last week over the definition of marriage remind us that a deep rooted cultural change is at stake and not simply a policy difference between conservative religious groups and progressives.
Paul Krugman wrote recently in the New York Times another piece of wayward economic analysis. His focus is a critique of Marco Rubio’s response to President Obama’s State of the Union address on Tuesday night. Krugman claims that “that zombie economic ideas have eaten his brain” speaking of Senator Rubio.
Let’s look at these zombie ideas that Krugman claims the republicans, and classical liberals more broadly, are holding onto regarding the financial crisis, despite the facts:
Krugman “No, the government didn’t force banks to lend to Those People”
Krugman “[N]o, Fannie Mae and Freddie Mac didn’t cause the housing bubble”
Krugman “[N]o, government-sponsored lenders weren’t responsible for the surge in risky mortgages”
I guess Krugman still believes that markets, left to the process of self-adjustment, led to a housing bubble and collapse and intervening years of high risk lending. No, the government didn’t force banks to lend, but the government (via the Fed) did force the price of money down to historic lows spurring mal-investment and unsustainable borrowing. Did Fannie and Freddie cause the housing bubble? Why no Mr. Krugman, but they did incentivize high risk lending by buying mortgages from banks and other institutions. When government is the insurer…risky lending results.
When was the last time an unregulated industry collapsed?
There is controversy from the McCrory administration over the recent tax reform proposal by Senate Republicans, yet the proposed changes are a step in the right direction. Taxation on consumption rather than income is more efficient, and it creates the right incentives to earn and to locate a business in the state, but McCrory’s top budget officer has concerns.
Reforms are sometimes difficult, but eliminating the income tax would go a long way toward stimulating the North Carolina economy.