Two common cries often heard in liberal progressive quarters are that capitalism produces inequalities and inequities and the corollary argument that income inequality has been growing over the past 30 years because of capitalistic policies. Many years ago University of Chicago economist Casey Mulligan began addressing these issues by pointing out that we should not measure economic wellness by an income standard, but rather by an “ability to consume standard”. In other words, a welfare family having no income may be able to consume $45,000 worth of goods and services. Think food stamps (SNAP), rent support, Medicaid and CHIPS, transportation stipends, etc. A person making the minimum wage making $15,000/year is able to consume much less. If they could make the new purposed minimum wage, they could make $30,000/year still far less than what they could get in transfer payment benefits. Why work?
But here is what is important. The difference in the ability to consume has closed down significantly within the lower 60% of people living in several of our States. Last week in the Wall Street Journal the former Senator Phil Graham followed Mr. Mulligan’s lead in pointing out that traditionally we have been defining income inequality based on Gross income and when taking all levels of income into account we are in fact observing greater discrepancies between high and low wage earners. But wait—If we use net income after taxes for those that actually pay taxes, and income including government transfer payments—all forms of welfare including Medicaid, that number becomes almost static. The ability to consume has stayed the same over 30 years. But here is the kicker—that difference is not just because those receiving benefits are getting more—which they are, but because those in the middle quintiles are seeing less after taxes. Worker’s ability to consume has decreased. People on welfare’s ability to consume has increased. Why work?
One must also consider that the top 2 quintiles of income pay 82% of income taxes, and the majority of property taxes, and the bottom 40% pay no taxes at all—they don’t even pay grocery taxes if they are in SNAP programs. People in the lower tax brackets are paying nothing and those in the middle tax brackets are paying more.
But herein lies the problem and we are seeing it in States like Hawaii with huge welfare populations dependent on government largesse to support their programs. There is now significant upward pressure on wages for workers in the middle of the bell-shaped curve, because they could do nothing and have the ability to consume—a family of 4 could make over $80,000 for example. Why should the breadwinner work for less than $100,000? This raises the cost of living by increasing the cost of goods and services that are affected by employee wages that account for 50% of consumer costs.
I point this out in the context of my original statement and that is it is not capitalism that causes income discrepancies, but rather liberal progressive programs. In an article entitled INEQUALITY BY WAY OF GOVERNMENT in the March 30th WSJ Andy Kessler makes similar arguments to those above. Five areas of progressive liberal policy are what are driving income inequality and upward mobility. First is education—specifically the teachers unions. In Chicago the average teacher makes $108,000/year and the head of the teacher’s union makes $500,000/year. Reading and math scores are amongst the lowest in the nation and a chance of a child going to college coming out of the Chicago public school system is near the lowest of any city in the country. Is that value for price paid? That only hinders upward mobility. The only people that see upward mobility in that system are the teachers who aren’t teaching. A second favorite of progressives is their stranglehold on occupational licensing. There are over 1000 job titles that in at least one state require a license. Hairstylists, pedicurists, even in the legal and medical professions an occupational license is a barrier to entry—credentialing is a better solution. Third is a favorite of both Republicans and Democrats—land use restrictions. Try filing for an easement on one’s property, or ask for a new solar or natural gas hookup. Whatever you do, don’t let your grandchildren sell lemonade or old retrieved golf balls over the backyard fence to golfers coming by—actually I think we got that fixed in Idaho this year. The price of farmland is at an all-time high in the US because of expanding “impact zones” by local municipalities at the same time commodity prices are at a 10 year high. How does a young farmer without family connections get into the game? Government gets you every way they can. And finally the welfare transfer programs themselves pay out so much to recipients that they can now compete for income (based on ability to consume) with entry level jobs. On our own Idaho Health Insurance Exchange, I was disappointed to see that there is a 90% reenrollment rate implying that this group of people are not moving up the income ladder as fast as I would believe. More research needs to be done on this. Are the ages of recipients staying the same or increasing? Is the Advanced Premium Tax Credit (APTC) in anyway working as a disincentive for workers to pursue higher wage opportunities? Are either employers or employees gaming the system—working off the book jobs or placing workers in part time positions so they are encouraged to seek exchange products and the APTC? Or all of the above? When I joined the Exchange Board it was my hope and I know Governor Otter’s that the Exchange would act like a bridge for upwardly mobile workers and their families and serve as a backdrop in economic downturns. That was in my opinion an important function of government—I actually tried hard to privatize the exchange but wasn’t very successful.
And my favorite liberal progressive disincentive—minimum wage. By increasing the minimum wage to $15.00/hour the Congressional Budget Office estimated that 1.6 million jobs would be lost. Milton Freidman stated 40 years ago that “minimum wage laws are the best way for employers to discriminate between people who don’t have skills”. Access to entry level jobs is a primary means for young people to begin the journey on the ladder to upward mobility and be removed from the yoke of government dependency.
So next time you hear about capitalism being the cause of inequality or a lack of upward mobility remember the above points. And also remember Milton Freidman’s charge and I paraphrase that, nowhere in the history of the world has the yoke of grinding poverty, slavery, and indenture hood been lifted from the backs of men than in places where capitalism has been allowed to thrive.
MAGA “Fight Like Hell”