At a conference last week, Federal Reserve Chairman Janet Yellen recycled a shopworn Democrat talking point about the supposed crisis of income inequality and stalled economic mobility. “The extent and continuing increase in inequality in the United States greatly concerns me,” Yellen said, going on to wonder “whether this trend is compatible with values rooted in our nation’s history,” especially “equality of opportunity.”
Like the mythic “war on women,” this progressive sound bite is misleading and duplicitous, based on statistical sleight of hand. Worse yet, it is a pretext for more and more government expansion and intrusion into the economy, and for more and more redistribution of income through entitlement programs. It makes one wonder what one of the most powerful government officials impacting the economy, supposedly a politically neutral technocrat, is doing recycling Democratic campaign slogans.
The “income inequality” claim depends on ignoring numerous data that contradict it. For one thing, it glosses over the mobility among the 5 income cohorts over time, assuming that the same people are rich or poor year after year. But as Stephen Moore and James Pierson point out, “In America they [the rich] don’t generally stay rich for long. A few years ago the Department of Treasury examined what happens to the wealth of families across several generations. Guess what: the poor got richer and the rich got poorer. The incomes of poor households rose 80 percent from 1987 to 1996 and then more than doubled from 1996 to 2005. The richer people were at the start of this period, the more income losses they suffered in subsequent years.”
The Treasury study indeed confirms this mobility, finding that between 1996 and 2005 over half of taxpayers moved to a different income quintile. Half of taxpayers in the bottom quintile in 1996 moved to a higher income group in 2005. Meanwhile, only 25% of the richest 1/100 of 1% in 1996 were still that rich in 2005. This mobility has indeed stalled, but not for “several decades,” as Yellen claimed, and not because of the sinister machinations of the wealthy. Its cause rather is the sluggish economic growth after the recession ended 5 years ago, and the blame for that in large part falls on Obama and the Democrats’ regulatory overreach, trillion-dollar deficits, “you didn’t build that” anti-business rhetoric, and redistributionist economic policies. Get the feds out of the way of the economy so it can grow, and we will see income growth and mobility again.
The “income inequality” meme ignores other facts as well. It focuses only on “money income,” neglecting the value of government transfers like Medicaid, Electronic Benefit Transfer cards (formerly known as food stamps and welfare checks), emergency-room health care, Section 8 housing subsidies, and the Earned Income Tax Credit, all of which boost the buying power of the statistical poor and lower middle class. For the middle class, “money income” ignores the value of employer-provided fringe benefits such as health care. As for the rich, “money income” ignores the highly progressive taxes they pay to fund those government programs. As Gary Burtless of the Brookings Institution writes, “To disregard the impact of transfers and progressive taxation on the distribution of income and family well-being is to ignore America’s most expensive efforts to lessen the gap between the nation’s rich, middle class, and poor.”
Finally, consumption––how much people spend–– is more revealing than “money income” as a measurement of economic wellbeing. In fact, consumption rates of the lowest income quintile have increased over the years, reaching nearly twice of income in 2005. As a result, Kip Hagopian and Lee Ohanian write, “A family claiming $22,300 in income in 2005 would have reported about $44,000 in expenditures in that year. As noted earlier, the gap between reported income and consumption is filled by various categories of government transfer payments (including Medicaid, food stamps, subsidized housing, the Earned Income Tax Credit, Temporary Assistance for Needy Families, etc.), family savings, imputed income from owner-occupied housing, barter, support from family and friends, and income from the underground economy.” Indeed, if one takes into account consumption, the statistical poor enjoy living standards higher than the average European. The obsession on “money income” ignores how well all Americans live.
Yellen’s second claim, that income inequality contradicts “values rooted in our nation’s history” like “equality of opportunity,” is equally muddled. If we look at the political order of the Constitution––our most important “national values”–– income inequality was taken for granted, a reflection of an unchanging and flawed human nature. In his famous comments on “factions” in Federalist 10, James Madison wrote, “As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other; and the former will be objects to which the latter will attach themselves. The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government [emphasis added]. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.” Hence “the most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society.” Income inequality is a fact of life, not a failure of government or the economy.
Indeed, the clashing interests of those with property and those without, and the political discord they create, were continually on the minds of the delegates to the Constitutional convention. New Yorker Gouverneur Morris, arguing for an appointed rather than a popularly elected Senate, frankly said, “The Rich will strive to establish their dominion and enslave the rest. They always did. They always will. The proper security against them is to form them into a separate interest. The two forces will then control each other . . . By thus combining and setting apart, the aristocratic interest, the popular interest will be combined against it. There will be a mutual check and mutual security.”
Thus the “mixed government” of the Constitution was designed not to eliminate property inequality, which is rooted in the differences of talent, hard work, virtue, and luck among people. Rather, it was created to prevent any faction, whether the rich or the poor, from taking control of the government in order to aggrandize its own power and serve its own interests at the expense of others’. Only that way can the freedom, property, and opportunity of all be kept safe.
Our “national values,” then, are for equality of opportunity, not equality of result. Yellen pays lip service to the former, yet that sentiment contradicts the whole complaint about income inequality, which is about result, not opportunity. Like most progressives, Yellen is really concerned with equality of result, something the Founders abhorred, for a tyrannical government always promises the masses equality of result, in the form of a redistribution of property, in order to secure the support of the people for centralizing and increasing government power and limiting personal freedom. But equality of result, as the sorry and bloody history of communism shows, is contrary to the reality of human nature and the unequal distribution of talent and character. As Plato wrote, it is “numerical” equality rather than “proportionate equality,” which takes into account the differences of character and virtue that exist among people, and “assigns in proportion what is fitting to each. Indeed, it is precisely this which constitutes for us political justice.”
America’s “national values” have traditionally included equality of opportunity, not equality of result. People should be free to rise to whatever levels their differing talents and virtues can take them. Differences of wealth over time and over large populations reflect those differences more than any unjust manipulation of the economy by the rich. Moreover, in a dynamic, free-market economy, the success of the well off improves the well being of the rest, whether by creating jobs or paying the trillions of dollars in taxes that fund the redistributive programs that have allowed millions of American to enjoy a material existence only dreamed of by most of the human race.
We still have equality of opportunity, whether measured by the millions of ordinary people who create and run businesses big and small, or the 11 million illegal aliens who didn’t risk their lives coming to America because it lacks economic opportunity. The Chairman of the Federal Reserve has no business indulging a progressive canard that exploits envy and resentment for electoral gain.
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