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Inequality in America: Does Redistribution Work?

A recent piece from the “Democracy in America” blog of the Economist suggests two ideas about inequality in America: that it could be much worse, and that the nation’s social programs could do more to lower the inequality gap by moving away from a low-income focus and embracing a universal view.

According to a graph created by Janet Cornick, an economist working with the CUNY research center, the United States has one of the highest income inequality rates in the developed world, 0.42 on the Gini coefficient, which is a scale that measures the income inequality of a given nation. (“The metric at play is a number between 0 and 1 known as the Gini coefficient. In a hypothetical country with a coefficient of 0, everyone has exactly the same income, while a nation with a coefficient of 1.0 is home to one fat cat who takes everything while everyone else earns nil.”) That said, although America’s rating would be even higher, 0.57, if its social programs and taxes were removed, “on that count America doesn’t fare badly in comparison to other OECD countries.”

From the Economist:

“At 0.57, America is neck-and-neck with Spain and every Scandinavian nation, and less unequal than Britain, Greece and Ireland. But the American taxation and welfare state clips only 0.15 off of the pre-tax-and-transfer Gini coefficient, while more aggressively egalitarian countries slice off 0.20 (Luxembourg, Norway), 0.24 (Germany, the Netherlands, Sweden) or 0.28 (Ireland).”

So while it’s true that America’s social programs do reduce economic inequality, the piece suggests that the U.S. could do more to reduce its income gap by focusing on a universal application of its existing programs.

Again, from the Economist:

“…pouring less money into low-income health programs in favor of universal social policies like national health insurance seems to be the recipe for greater equality. With more all-embracing programmes like Social Security, buy-in is broader and the social benefits are more stable.

But perhaps most interesting is the firestorm of comments this piece has provoked, including this one: “This is a terrible, terrible idea. Also note that Europe is far poorer than we are!”

You can read the full story and comments here.

9 Comments Post a comment
  1. This is an excellent post with links to the best intelligent discussion of inequality from the layman’s perspective that I have seen. I just finished reading Tocqueville’s French version of The Old Regime and the Revolution (1856), generally considered the best study of the economic and social structure causes of the French Revolution. I think Tocqueville would agree with Prof. Gornick, CUNY, that broad-based social programs are politically the most sustainable. It is another story whether such programs should exist in the first place, but if they do, they probably have to be broad-based to be sustainable. It is a principle as old as Aristotle, who argued that the public generally perceives an equal distribution of both the burdens and benefits of citizenship as the most fair. When one class or group lobbies for and receives special benefits not available to other citizens, that is when the problem of social cohesion arises, which became the overriding cause of the French Revolution (a combination of taxes payable primarily by the lower classes and lingering personal feudal servitudes to which this same group was subjected became the driving factors in popular support for the Revolution, which arguably started as a frolic of urban intellectuals in Paris, including some nobles). He or she who would avoid civil disunion in America needs to think about both the geographic and income-level disparities created by various social policies. Bailing out the money market mutual fund industry, the derivatives market for credit default swaps, and the money market for repurchase agreements in the fall of 2008 might have made eminent good sense in the urban Northeast, greater Chicago, and the coastal cities of California, for example, but it hardly made sense to the vast majority of the population that lived elsewhere. Whether it is factually true or not, the public perception remains that banks were bailed out but no one else was. In contrast, in the 1930s, whatever one thinks of the New Deal, its bailout activities were both limited in amount and widespread in scope. A good illustration is the first deposit insurance, which covered only the first $2,500 in each account. Remember that you could buy a new Chevrolet for $600 then — that was a fairly large amount of money. But the public generally accepted the new insurance, despite the comparatively generous coverage of upper-income or higher asset-value individuals, because it applied to everyone. Today, various programs aimed at the poor are under constant political attack, and some of the programs deserve that attack. A useful discussion going forward would be whether to abandon targeted social engineering programs and simply to enact a cash transfer (negative income tax) program applicable to citizens. Milton Friedman first proposed such a program around 50 years ago, and various programs enacted in the Nixon Administration began to implement it. Since the mid-1990s, under the Clinton Administration welfare reforms, the Earned Income Tax Credit functions as a limited negative income tax. If expanded, it could replace the government’s cash outlays for a host of targeted social welfare programs, including food stamps, for example. Anyway, a good post by Nate. Also, I commend the website managers for making it possible to reply or comment without jumping through all the WordPress passwords and hoops. — Walker Todd

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    December 11, 2013
  2. Carisa Weinberg, Research Fellow #

    Walker wrote, “When one class or group lobbies for and receives special benefits not available to other citizens, that is when the problem of social cohesion arises.”

    The problem is that certain groups lobby for and receive exceptional benefits all the time, but we tend to use the now-toxic term “redistribution” only when the flow of resources moves from the more fortunate to the less. This unbalanced accounting of just who receives “benefits” (whether monetary or non-monetary) in our society is one of the most troubling aspects of the current political discourse.

    Like

    December 11, 2013
  3. Political science studies indicate that the underclass seldom lobby for benefits for themselves. They tend to not engage in the political process at all. It is the well-healed from across the political spectrum who spend the most on lobbyists, and, consequently, receive the lion’s share of the spoils.

    Like

    December 12, 2013
  4. It is unfortunate that we vote for ourselves, not for the good of all. Should the quietest voices need to speak before we recognize how much they need? Great post, and shout out for the picture. Very nice.

    Like

    December 12, 2013
  5. jb #

    It seems to me that programs that promise something-for-everyone are not just sustainable politically, they are invulnerable politically, and therefore irremediable when they inevitably become unsustainable economically.

    This is exactly why we (or rather, our kids and their kids) are left with the mess called Social Security, it has become an insolvent pay-as-you-go entitlement program with ever-expanding benefits for everyone.

    EC Harwood saw the train wreck coming at its inception. I believe he used the term Ponzi scheme, quite appropriately.

    Walker’s suggestion of an expanded EITC (with much better enforcement) to replace the multitude of poorly designed programs has merit.

    Like

    December 13, 2013
  6. Katy Delay #

    On Social Security, E.C. Harwood actually wrote: “We realize that in designating Social Security as the second greatest swindle in the history of mankind [after chronic inflating], we may not be expressing a popular view. Who is going to like anyone who seems to be shooting at Santa Claus? … [However,] as now constituted Social Security is a swindle in that people are being induced to part with their money by promises that clearly cannot be kept…. If private operators endeavored to operate a similar plan, its promotors probably would all be in jail for fraud.” For more of this prescient article, see the AIER archives, EEB, November 1974.

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    December 13, 2013
  7. “In a hypothetical country with a coefficient of 0, everyone has exactly the same income, while a nation with a coefficient of 1.0 is home to one fat cat who takes everything while everyone else earns nil.”

    Therein lies the irrelevance of this argument, and the highly non-linear measure. When the coefficient is 0, no one is making anything of greater value (to others) than anyone else. It’s called stagnation. No one with half a brain cell wants to drive society to stagnation. On the other hand, a coefficient of 1 suggests that one person has the power to be the only person to create (and limit the benefits of that creation of) greater value to everyone else. The only way that can happen is throughout slavery.

    The only way either of these ratios can exist is by either the majority or an individual to force others to redistribute, either to one or to all, the value others create. Both are different forms of tyranny.

    Logically, the least tyrannical society is one with a coefficient of 0.5. I’m thankful we’re close. That’s not to say we don’t have countervailing tyranny that somewhat balance out. As John Stossel might say, Crapitalism (crony-capitalism) is bad, as are populist redistribution schemes.

    Like

    December 15, 2013
  8. A more thorough analysis requires an understanding of the Gini coefficient, which I found at the following link (http://en.wikipedia.org/wiki/File:Economics_Gini_coefficient2.svg). If I’m interpreting it correctly, this shows that in a perfectly “equal” Gini-coefficent state 1% of the population received 1% of the income. With a population of 315 Million and a gross national income of $16 Trillion, the US should have over 3 million with a cumulative income near $160 Billion. I think that’s an average of $50,000 each. With the median working age income being near $30,000…

    If I did that math correctly (there’s a lot of left over zeros floating around in my head), and keeping in mind that these are averages of averages, that’s still eye-wateringly “unequal” by the common use of the word equal. I’m not sure the Gini coefficient represents anything useful… or that the author used it correctly.

    Like

    December 15, 2013
  9. jb #

    For a very clever thought experiment regarding redistribution, check out this link:

    http://online.wsj.com/news/articles/SB10001424052702304483804579286252272713362?mod=WSJ_Opinion_LEFTTopOpinion

    Like

    January 12, 2014

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