Sorry, But "Income Inequality" Is About To Increase

Yesterday, New Year's Day, new Mayor Bill de Blasio was sworn in on the steps of City Hall.  He gave an inaugural address reiterating all his major campaign themes.  Chief among these was what he calls the "crisis of inequality."

New York has faced fiscal collapse, a crime epidemic, terrorist attacks, and natural disasters. But now, in our time, we face a different crisis – an inequality crisis. . . .  It’s a quiet crisis, but one no less pernicious than those that have come before.  Its urgency is read on the faces of our neighbors and their children, as families struggle to make it against increasingly long odds. To tackle a challenge this daunting, we need a dramatic new approach. . . .   A city that fights injustice and inequality — not just because it honors our values, but because it strengthens our people.

There were no specifics in the speech as to what de Blasio intends to do about the crisis, or why he thinks he can solve it, if indeed it is a problem.

I have a prediction for de Blasio that he might not like:  income inequality, as measured by government statistics,  is going to increase over the next four years, both in New York and in the United States as a whole.  That will occur literally no matter what de Blasio does, no matter how much in the way of taxpayer resources he devotes to the issue.  The reason is that government policies beyond his control, largely at the federal level, have a powerful effect of increasing measured income inequality.  The big three policies driving measured income inequality are food stamps, Medicaid, and Obamacare.  The third has just begun to work its destruction.

President Obama is also all over the income inequality issue.  He gave a big speech on the issue in Kansas on December 4 (where he called income inequality "the defining challenge of our time"), and the smart money is betting that this will also be the big theme of his upcoming State of the Union address.  And of course government benefits for low income people have exploded during Obama's five years in office.  So has measured income inequality increased or decreased on Obama's watch?  The answer is that it has increased.  Not only has it increased, but it has increased faster than it increased during the eight years of GW Bush.  Among many articles discussing this seeming anomaly, here is one from the Huffington Post of September 1, 2013.  An excerpt:

The difference between America’s median and average wages grew at a rate of 0.28 percent under President Bush, while it’s grown at a rate of 1.14 percent -- or about four times that -- under Obama, according to The New York Times. The median wage is the midpoint of all workers’ wages, so it only ticks up when everyone is earning more. While a small group of people earning higher pay can push the average wage up.  So, as the difference between the two rises, it means that those at the bottom of the income scale are making fewer gains compared to those at the top.  This data point is one of many that illustrates that in Obama’s America the rich are gaining while the rest of us are struggling to get by.

How could this possibly be?  The answer is that increases in government benefit programs are actually the main cause of the increase in measured income inequality.  This happens because the government benefit programs have the effect of suppressing the measured income of the lowest tiers of the income distribution.

To understand why, you need to know two things: (1) government in-kind benefit programs do not count at all in the measurement of "income" that then goes into the measurement of "income inequality," and (2) at the bottom tiers of the income distribution, government benefit programs seriously discourage the formation of families with a breadwinner.  And thus we have large numbers of single-parent households, living largely or entirely off government benefits, all of which count as zero income.  No amount of new jobs in the economy, no amount of increases in minimum or average wages, no amount of union organizing, and for that matter no amount of increases in the in-kind government benefits, is going to provide these families with measured income. 

The increase in measured income inequality on Obama's watch corresponds to the explosions in food stamp and Medicaid enrollment during this period.  This is not a coincidence.  Put yourself in the position of a woman who has had a couple of children at a young age without marrying and has been able to make a go of it with a suite of government benefits, including housing, food stamps, and free medical care.  All of those things count at zero in the income statistics.  Now a hard-working young man comes along, interested in being with you, and he has a lower- to middle-class income, say $30,000 to $40,000 per year.  You would be out of your mind to marry this man.  Instantly you are disqualified from all the benefits (or in the case of the housing, your rent shoots up).  And why, when you can hang out with the guy four or five or six days a week, you keep the apartment and the food stamps and the Medicaid and he keeps the money (and maybe gives you some of it on the side)?  Ninety-nine percent of people facing this situation are going to make the same choice.  As more people get the benefits (the number on food stamps has increased by about 20 million since Obama took office), more will make the decision to perpetuate an income-free family unit to keep the benefits flowing. 

Meanwhile, at the higher reaches of the income distribution, income continues a slow but steady rise.  The effect of that, combined with government-caused stagnation at near zero levels at the bottom, is steady increases in measured income inequality.  

Suppose now that the government substantially increases all the benefits that it provides to the poor.  This has absolutely no effect on measured income inequality, since none of the benefits count in the statistics.

And into this mix, now throw Obamacare.  Beginning basically today,  Obamacare offers very substantial subsidies on medical care premiums to households depending on where their income stands relative to "federal poverty level" (FPL).  Subsidies continue all the way up to 400% of FPL, which for a family of four now approaches $100,000.   Here is a basic summary of the workings from Kaiser Health News.   To put it in simple terms, lots and lots more people are going to find it to their major economic advantage to not be married, which will in turn mean that there will be lots and lots more low and zero income households that previously would have been combined with other households to make middle income families.

So starting now, a young lady just getting started with a low income from freelancing and a little waitressing goes to healthcare.gov to look for a plan, and they ask her her household income.  Does she include the live-in boyfriend's income or not?  That could easily be a $5000 or $10,000 per year issue.  I'm guessing that maybe 97.23% opt for not including him.  OK, if she's really conscientious about honesty maybe he has to go and stay with his parents one or two nights a week.

There is no question but that Obamacare is going to have a large effect on increasing measured income inequality.  Sorry, Bill, but there is nothing you can do about this.  The good news is that little or none of it is real; it's just an artifact of the statistics.  But of course, de Blasio doesn't know that, or at least he hasn't shown any awareness of these issues in anything he has said to date.

There Are Two Ways Of Looking At The World. Is One Of Them "Right"?

On multiple occasions I have commented on the very divergent world views of progressives versus libertarians like myself -- a divergence that plays out, for example, in the repeated inability of Congress to reach agreement on basic things like a government budget.   A remarkable facet of this divide is the conviction of many, particularly on the progressive side, that their view is objectively "right," and therefore anyone disagreeing must be wrong, indeed evil and immoral.

To get us ready for the new year, I thought I would look around for a good example of the extreme version of this psychosis, and I have come up with this article by Egoberto Willies from the Daily Kos on December 8.  The particular subject of Mr. Willies is opposition to Obamacare, specifically opposition that goes to the point of advocating to the young and healthy that they should refuse to sign up.   Yes, I have definitely done that here at the Manhattan Contrarian.   Well, in the view of Mr. Willies, that is "immoral," "immoral and evil," and also "evil and immoral."  (Mr. Willies appears to be a bit challenged in the vocabulary department, but he does have the bare minimum number of words to get his point across.)

It is immoral and evil to encourage young people to forego insurance when you have no intentions of being there if they get sick or get into an accident. It is immoral and evil to build websites that trick citizens into accessing them while providing them with misleading information that dissuades them from getting the health care they need. It is evil and immoral to create false stories mimicking real people’s circumstances in an attempt to curtail the number of enrollees to Obamacare.

Now why would opponents of Obamacare stoop to this evil and immoral behavior?  Mr. Willies thinks he has the answer:

Opposition to Obamacare has characteristics of an addiction. One knows intrinsically when one is doing wrong or doing something detrimental. However, the cravings make one disregard reality and acquiesce to the drug. What is the drug? The drug is hate for all things Obama.

Well, trying to convince the likes of Mr. Willies is undoubtedly not worth the time and effort.  But if there are any on the progressive side at least a little interested in how a sane human being could disagree with them, I would offer two main reasons:

The Fallacy Of Perfect Knowledge.    Meaningful advances in human well-being come from a vast process of trial and error conducted by people acting in their own self-interest mediated by exchange of goods and services in markets.  The reason that meaningful advances must come about in this method is that no one, not even any group of people working together as a team, is smart enough to figure out a really meaningful advance on his or her or their own within the span of their lives.   And thus we have come up with things as simple as metal or agriculture, or as complex as a pencil or a computer.  But the people who have devised Obamacare think that these processes of trial and error are no longer necessary and that they can solve the problems of healthcare once and for all by the device of having a group of really, really smart people (themselves) utter a two thousand page statute containing the final answer to everything.  Might they make errors in this process?  No way -- after all, they are really, really smart.  They are so smart that they can impose their solutions by compulsory law that everyone else must obey, and can with complete confidence cut off the processes of self-interested market exchange, and instead compel people to act against their own self-interest to achieve higher goals of justice and fairness.

If these people are so smart, I might suggest that we should give them the challenge to make a pencil from scratch and put them out in the forest and see how long it takes them to do it.  The answer is, they will not be able to make a pencil in this lifetime.  But they are smart enough to remake the healthcare system into permanent perfection?  I wouldn't count on it. 

The Illusion of Infinite Resources.  Do some people have less than full provision of perfect health care services?  Well, we'll just order that they must get what they need!  There are no limits here.  Where will the resources come from?  We'll order that people who already thought they coudn't afford health insurance must now buy it!  We'll order that they will pay double or triple the fair price for their level of risk!  But won't people have to give up things that they think are more valuable in order to achieve these goals?  That is not something that a progressive needs to think about.

And of course the healthcare overreach is just one example of the infinite resources illusion.  To consider a couple of current issues here in New York, how about ordering that all hospitals currently operating must remain open forever!  (Result: multiple uneconomic hospitals limping along and losing money hand over fist, including one in Brooklyn, LICH, with 1400 employees and a current 10 or so patients kept open by court order and costing millions a month.)  And then we'll order that anybody who wants to live in Manhattan can do so at taxpayer expense!  We'll build them all "affordable" apartments in the most expensive location in the country!  

And why stop there?  For our next move, we will eliminate income inequality!

Well, sadly resources are not infinite, and government overspending on low priorities is a prescription for impoverishment of the people.  And thus you have the overspending states like New York and Illinois losing status and population to those who keep spending under control; and the European nations having followed the progressive prescriptions to their logical end and going into permanent stasis.

As Margaret Thatcher said, the problem with socialists is that they "always run out of other people's money."

The Cure For Income Inequality Is Malaise

The new theme for Obama and de Blasio is the "crisis of income inequality."  And with the top guys having adopted it as the theme, it now gets talked up all over the place by the parroters of the approved talking points.  For example, here we have Jason Furman, Chair of the President's Council of Economic Advisers, in a Business Week interview on December 19:

Two trends have made life harder for middle-class families. First, the overall growth rate in the economy slowed after 1973 as our productivity slowed. The second is that income inequality began a steep increase, starting in the late ’70s. 

The late '70s?  Yes, that was the low point for income inequality as measured by government data for the share of national income going to the top 1% of earners, as compiled by left-wing economists Piketty and Saez.

But was the late '70s a good time for Americans?  For those too young to remember, July 15, 1979 was the date that President Jimmy Carter went on TV and delivered what is forever known as the "malaise" speech, although the word "malaise" was not actually used.  Read the speech to get an understanding of Carter's sense of the national mood at the time.  Here is an excerpt:

I want to talk to you right now about a fundamental threat to American democracy. . . . The threat is nearly invisible in ordinary ways. It is a crisis of confidence. It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation.  The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America.

Why the erosion of confidence?  Two reasons stand out.  One was the government price controls on energy that led to shortages throughout the economy, including long waiting lines to get gasoline.  And the other was ludicrously high marginal income tax rates, including a top rate of 70% at the Federal level.   In New York, combined state and local income tax rates approached 19%.  In simple terms, the government was taking away the ability of the people to get ahead by hard work.

Measured income inequality has increased substantially since that time.  Mostly it is an artifact of the government policies and statistics, but there is also a real element.  With marginal tax rates (federal plus state and local) for top earners in the 80+% range for many people in the late '70s, people stopped reporting or recording income at high levels.  In 1979, most tax shelters were legal, and their use was an art form.  The basic idea was to defer income from one year to the next, and then the next, by various rollovers and non-cash deductions.   Or you could just hold on to appreciating assets and not sell them.  Some people with good connections and lawyers could get ahead by owning the right assets and gaming the tax system; but nobody could get ahead by working hard and earning cash income subject to ordinary income tax.  Is it any wonder that Americans had "lost confidence in the future"?    

In 1986 a major federal tax reform under President Ronald Reagan brought the top federal marginal rate down all the way to 28%.  Most tax shelters also became illegal at that time.   Suddenly many high incomes started getting reported and taxed.  Equally as important, it became possible again to get ahead by the straightforward method of working hard and earning cash taxable as ordinary income.  

So we know how to reduce income inequality as measured by the government data.  Just jack up the income tax rates high enough that nobody can get ahead by hard work any more, and all those high incomes will go away.  Of course, we should also expect the return of "malaise."  That's the cure for income inequality.   

Official Manhattan Contrarian Predictions

The end of the year being upon us, it's time to engage in some prognostication for the new year.  I'm going to limit myself to a few key areas.

Obamacare.  I have already officially predicted that Obamacare will fall apart over time, although we can't know how quickly that will occur.  So that one doesn't count.  But here's an important one:  I predict that the number of "uninsured" in the U.S. will increase as Obamacare is fully implemented in 2014.  (I put the word "uninsured" in quotes because health coverage in this country long since ceased to be real insurance, and instead is some muddled mixture of part insurance, part prepayment of routine expenses, and part income transfer program.)  At this point it is virtually certain that the number of "uninsured" will be up on January 1 over a year ago, because the rate of sign-ups is not nearly fast enough to catch up with the number of policy cancellations already in place.  

The increase in the number of uninsured is a big deal because the existence of a large population of uninsured in this country, and the alleged need to fix that terrible problem, was the main reason given for Obamacare in the first place.   Well, the supposed solution was to increase the price, make the product less desirable for most people by forcing payment for lots of things they don't want or need, and increasing deductibles, and then ordering healthy people with little money to buy this undesirable, overpriced product.  In other words, they made health "insurance" much less insurance and much more income transfer program than it already was.  Why again did anybody think that this would reduce the number of uninsured?

One more prediction re Obamacare:  the "mainstream media" will treat the increase in the number of uninsured as a non-story.  However, I think that Fox News and the Wall Street Journal (as well as the Manhattan Contrarian) will be on top of this one.

Red states/blue states.  I predict the continued relative economic advance of the red states and the continued relative decline of the blue states. 

The sales pitch for the blue state model is a generous society that cares for the neediest among us.  But when you actually look at the numbers, you find out that the lion's share of the extra spending in the blue states does not go to the neediest, but rather to the state and local employees, and even then not to the active ones, but rather to the retired ones for pensions and healthcare.  California, New York, Illinois, New Jersey and Connecticut are at the top of the list of states that have overcommitted to pensions and healthcare for retirees, with the bill starting to come due.

As the pension costs mount, alternative programs get squeezed out, and the pressure is on to increase taxes.  Thus California has seen almost no pension reforms, but passed by referendum in November 2012 a big income tax increase that takes the top state rate to 13.3%.  Supposedly the money is mostly for education, but there's nothing to keep the pensions from swallowing it up.  Illinois raised its income tax from 3% to 5% in 2011, and finally passed its first serious steps toward pension reform just a few weeks ago.   Those steps (mostly adding a few years to retirement ages for new hires and reducing cost of living increases) are rather paltry, and fall far short of fixing the problem.   But of course the employee unions are suing to overturn the changes, on the theory that Illinois' constitution protects workers who have been working for as little as one day from ever having their pension formula reduced, even on a prospective basis.

Here in New York City we are up to contributing over $8 billion per year for employee pensions, and multiple additional billions for retiree health care.  The pension contribution alone exceeds the entire take from the city income tax.  New Mayor Bill de Blasio seeks an income tax increase, supposedly for pre-K education and after school programs, but again, nothing will keep the pensions from swallowing the money.  Mayor Bloomberg gave an important valedictory address two weeks ago, using the occasion principally to warn of the desperate need to reform the pensions:

The costs of today’s benefits cannot be sustained for another generation–not without inflicting real harm on our citizens, on our children and our grandchildren . . . .  Simply put, our pension and health care system must be modernized to be sustained.

De Blasio still has not even mentioned the issue.  Is he even aware it exists?

Meanwhile, in the red states, things are going exactly in the opposite direction.  Here is a rundown on eight states that cut income taxes in 2013:  Arkansas, Indiana, Iowa, Kansas, North Carolina, Ohio, Oklahoma and Wisconsin.  States including Kansas, Nebraska and Louisiana are talking about complete elimination of their income taxes.

The stock market has given the blue states a good year, showing returns of around 25% for the major indices.  That has undoubtedly taken off some of the pressure for pension reform in the blue states.  But this is a slow moving problem.  Continued gradual economic advance for the red states, and decline for the blue, is a very safe prediction.

Those interested in the slow relative change going on between red and blue states will enjoy the chart below taken from Steven Hayward at Powerline.  It compares our third and fourth largest cities, Chicago and Houston.  Currently Chicago has 2.7 million people, while Houston has 2.15 million.  In 1970, Chicago had 3.4 million, while Houston had 1.2 million.  Houston has just about caught up from way behind in household income.  And check out how that gun control thing is going for Chicago:  its murder rate is fully four times that of wide-open-for-guns Houston.

UPDATE (January 5, 2014):  A reader points out that Chicago did not have over 1800 homicides in 2012, but rather about 500.  This would translate to a homicide rate of about 18.5/100K, rather than the 38.4/100K in the chart above.  This is about double the rate in Houston, but not four times.  i regret the error.

New York, Capital Of Crony Capitalism

Our governor Andrew Cuomo seems to be cruising to easy re-election next year, but that doesn't stop him from going on a record-breaking binge of crony capitalism.   Can we even keep track of all the handouts to non-needy businesspeople?  Well, let's start a list:

Regional Economic Development Councils.  On December 11, the governor announced grants of $715.9 million of state taxpayer funds as this year's installment for these regional councils.  Here is the press release.  How are the state government geniuses able to out-guess the market as to which will be the successful businesses?

[A]s part of the Round III process, a Strategic Implementation Assessment Team composed of state agency commissioners traveled to every region of the state to view progress on projects that have received state funding, assess the regions’ strategic plan implementation, and review priority projects endorsed by the regions in their 2013 applications.

Clearly the investment bankers at Goldman Sachs are no match for the acumen of this assessment team.  This is an annual program, so expect roughly the same amount of handouts again next year and every subsequent year.

To put the $715 million in perspective, it is more than 1% of annual state tax revenues (that are projected at about $69 billion for 2014), and about 0.8% of the state-funded portion of the entire state budget.

START-UP NY.  Then there is the big program of tax exemptions for so-called "start up" businesses.  This one is advertised all over the airwaves at night.  Off-budget of course, so there's no way to get a handle on how much it costs.  You don't have to start up from scratch -- "adding jobs" will do the trick.  The exemptions apply to business taxes, property taxes, sales taxes, and even the personal income taxes of employees.  You are a successful long-time New York business just struggling to keep going in this high tax environment?  Too bad, you don't qualify.

NY-Sun Initiative.  No politically correct program of crony capitalism would be complete without massive handouts for wealth-destroying renewable energy projects.  Crain's New York Business reports today that New York is "finally" giving a push to solar energy after years of lagging the lights of Vermont and Massachusetts. 

NYSERDA said that as of the end of this year and several rounds of awards, 299 megawatts of solar power had been brought online or were in development through NY-Sun. A total of $126 million for 184 projects was awarded this year, the authority said.

Where does the money come from?  "Mostly through assessments on utilities."  In other words, through jacking up your electric bill to get the same energy that would be available elsewhere for less.  Today we had barely 7 hours of sunlight and even that was totally obscured by heavy overcast and rain.  Well, it's a good thing that we had a full back-up fleet of fossil fuel energy projects in place.

Fracking?  Here's something the private sector is eager to do with no need for subsidy or tax break.  In other words, it would create rather than destroy wealth.  But in New York, that is forbidden.

The bottom line is that for a few billion taxpayer dollars a year we create a dependent class of government crony business people who destroy wealth but can be counted on to give back in political contributions to their paymasters in Albany.  Meanwhile the upstate areas that get all these grants and exemptions continue their long-term economic decline.

Amicus Brief Filed In Utility Air Regulatory Group v. EPA

Several weeks ago I was honored to be asked to help write an amicus brief for the Supreme Court in UARG v. EPA on behalf of a group of scientists and economists and in support of the cert petitions of Southeastern Legal Foundation and a group of states led by Texas.  The petitioners ask the Court to vacate an EPA rulemaking in which EPA found that because it had determined that CO2 is a "dangerous pollutant," now it must institute a permitting regime for so-called "stationary sources" that emit CO2, which include things like power plants and factories.  The rulemaking is part of the Obama administration and EPA campaign to restrict and reduce all carbon-based energy and, it seems, to eliminate coal from the economy entirely.  EPA claims to find a basis for its rulemaking in Clean Air Act amendments dating from 1977, although nobody had previously thought that these provisions had anything to do with this subject matter, and even though there have been many unsuccessful attempts in Congress in the intervening time to pass legislation restricting carbon-based fuels.

We filed the brief last night, and it is publicly available today.  It's not up yet online at the Supreme Court or the ABA site, but can be found at ICECAP here.  I'll update this post with a better link when I find one.

Meanwhile, you might enjoy a few quotes.  From the introduction:

Unlike other “pollutants” subject to the CAA, CO2 is not some incidental impurity or imperfection in the processes of civilization, but rather is fundamental to all processes of life and equally fundamental to the large majority of energy generation that drives our and the global economy. The emission of CO2 from stationary sources occurs in the processes by which the large majority of our electricity is generated; in the heating, cooling and lighting of our homes, offices, schools, hospitals and stores; in our use of computers and the internet; in the production and preparation of food; and in nearly everything else we do. Under the guise of a technical statutory interpretation, the EPA now asserts it has discovered a central role for itself to control and dictate all aspects of our lives under an over 30-year-old statutory provision never previously thought remotely to cover this subject matter.

While the merits briefs of the petitioners took on technical arguments of administrative law and statutory construction, our amicus brief also addresses the fake "science" by which EPA has claimed to find that CO2 -- the gas that gives rise to all life -- is a "dangerous pollutant":

The entire hypothesis on which EPA has purported to find that CO2 emissions supposedly “endanger” human health and safety has been falsified by real world evidence.  As the most important example, EPA asserts as its central “line of evidence” for CO2 “endangerment” that CO2 will warm the surface temperature of the earth through a mechanism by which rising CO2 concentrations in the troposphere in the tropics block heat transfer into outer space.  See 74 Fed. Reg. at 66518 (Dec. 15 2009).  If this theory were right, there would necessarily be an observable “hot spot” in the tropical upper troposphere.  But this tropical “hot spot” has been proven not to exist.

And finally, we addressed the most shocking aspect of EPA's carbon-restriction program, which is the intent to impoverish the people, and particularly poor people, by increasing the price and limiting the availability of cheap carbon-based energy:

If EPA succeeds in limiting the availability of hydrocarbon based energy and raising its price, it is not the rich who will be priced out of purchasing the energy they need.  It is the poor.  Cheap carbon-based energy from stationary sources means that relatively low income people in this country can afford, for example, to heat, cool and light their homes, cook meals, use the internet, talk on cell phones, buy products like automobiles made of inexpensive steel and other metals.  If the lowest cost energy available is unwisely restricted, all Americans will suffer greatly, but the poorest the first and the most.

This rulemaking by the EPA is a massive power grab that deserves far more attention and push back than it has gotten so far.  But maybe our brief will mark at least one small step forward in countering the global warming hysteria.

My clients are too numerous to list here (the full list is in the brief) but include the likes of Joe D"Aleo (of the excellent ICECAP.us web site),  Craig Idso (who has done excellent work on the benefits of CO2 in the atmosphere and runs the co2science.com website), Harrison Schmitt (the former astronaut and Senator), George Wolff (former chair of EPA's clean air scientific advisory committee), and economist James Wallace.

So far I have seen links to our brief at icecap.us, wattsupwiththat.com, and climatedepot.org.  Many thanks for those.  I'm sure there will be more.

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