Progressive Policies Increase Income Inequality

If you take just a little time to understand how income inequality is measured, and how government redistribution programs work, it will be immediately obvious to you that increasing the redistribution programs will cause measured income inequality to increase, not decrease.  The biggest reason is that means-tested in-kind redistributions (think public housing, food stamps, Medicaid, Obamacare subsidies) present a tremendous incentive to reduce or stop work in order to qualify, and then are not counted as income to the recipient.  Another reason is that lots more than you might think of the redistributions (Social Security is by far the biggest example) go to people who are not poor.  And don't forget the destructive effects of the minimum wage (kids in multi-earner middle class families get a raise while poor blacks are rendered unemployable).

Last July I wrote an article for the City Journal pointing out this obvious fact (title: "What Causes Income Inequality? Progressive Policies Do.")  I followed that up with a post on August 3 on this blog ("Do Progressive Policies Cause Income Inequality?")  Those articles got some play at the time, but the small eclat quickly faded.  Certainly, my analysis did not cause any notable progressives (think President Obama, Hillary Clinton, Bernie Sanders, Bill de Blasio) to rethink their advocacy of more subsidized medical care, more subsidized housing, more subsidized nutrition programs, a higher minimum wage, and the like, even as they rail against income inequality.

This weekend the Wall Street Journal has published a long op-ed by Lawrence Lindsey covering the same subject and making many of the same points.  Title: "How Progressives Drive Income Inequality."    Most notable in Lindsey's article is his collection of data on how the explosion of handout spending under Obama has been accompanied by substantially increasing income inequality.  Here are Lindsey's data on increases in handouts, first since 1968, and then in the seven Obama years:

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. . . .  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.

So those vast increases in government handout programs should have resulted in at least some notable decrease in income inequality, right?  Of course, it's the opposite -- as anybody who pays any attention to this issue would already have known.  Lindsey discusses the government's three measures of income inequality: the Gini index, the mean log deviation of income, and the Theil index.  What has happened to those during the vast increase in redistributions since 1968?

Despite the redistribution of a sixth of all income [by 2014], inequality measured by all three of the Census Bureau’s indexes is far higher today than in 1968.

And how does Obama's record on income inequality compare to that of his predecessor, GW Bush?

The mean log deviation increased 37% more under Mr. Obama than under President George W. Bush, although when this statistic was released, Mr. Obama had only six years as president compared with Mr. Bush’s eight. The Gini index rose more than three times as much under Mr. Obama than under Mr. Bush. The Theil index increased sharply during the Obama administration, while it fell slightly under Bush 43.

Of the various factors contributing to these results, Lindsey doesn't get much into the one that I think is the biggest, namely the fact that the value of the handouts is not counted as income to the recipients.  (The big handout increases during Obama's tenure have been in Obamacare/Medicaid and food stamps.)  But he does spend some time on the strong disincentives to work caused by the increasing handouts, as well as on the inability of tax increases on high earners to have much if any effect on income inequality.  He points to research from the Hamilton Project and the Urban Institute showing that phase out of government handouts can have an effect equivalent to a marginal tax rate of 50 to 80% for a low income family considering having a second earner get a job.  And he points to a recent study from Brookings that concluded that enacting Bernie Sanders's proposal to increase the top federal marginal income tax rate from 39.6% to 50% would only lower the Gini coefficient by 0.003.

I would think that this issue would be a huge negative for a Clinton or a Sanders in the election; but so far it has been getting next to no attention.  And then, of course, you have the staunch refusal of their core supporters to accept any evidence from the real world.  For example, we have this from a commenter on Lindsey's piece named Skye Priestley:

Mr. Lindsey’s ideas, while somewhat intriguing, are clearly driven by the same inflated mythology that the owners of capital spread so incessantly through every media outlet they can get their grubby hands on: capitalism is the holy calf, and we should all cower lest it be besmirched. I propose an alternate explanation for the fact that income inequality has increased despite the policies of recent liberal administrations designed to combat it. Our nation is increasingly divided by class, and therefore increasingly vulnerable to the concentrating effects of inherited wealth and influence. It is not that redistributionist policies are not effective, but rather that cultural changes have made wealth concentration easy faster than policy changes have made it hard.

It's just that we haven't done enough income redistribution yet!  We have to double down!  Mr. Priestley seems completely unaware that the principal government redistribution programs do not subtract income from high earners, nor do they add income to low earners, as these things are measured.  I would ask Mr. Priestley to consider the main Bernie Sanders proposals of free health care for all and free college for all.  How exactly are these going to decrease income inequality?  But don't worry, Mr. Priestley will not do this exercise.