Obama's Misguided Obsession With Inequality

He uses statistics that ignore taxes and transfer payments. Faster growth is what the poor really need.

Click here to read this article by Robert E. Grady, WSJ, 12-23-2012. Mr. Grady, a managing director at the private-equity firm Cheyenne Capital Fund, is the chief economic adviser to New Jersey Gov. Chris Christie and chairman of the New Jersey State Investment Council. Excerpts:

"...the assumptions behind his defining challenge are misleading."

"Virtually all of the data cited by the left to decry the supposed explosion of income inequality, as Lee Ohanian and Kip Hagopian point out in their seminal paper, "The Mismeasure of Inequality" (Policy Review, 2011), use a Census Bureau definition of "money income" that excludes taxes, transfer payments like Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and even costly employee benefits such as health insurance. 

Thus the data that is conventionally used to calculate the so-called Gini coefficient—the most commonly used measure of income inequality—ignore America's highly progressive income tax system and the panoply of benefits and transfer payments. According to Messrs. Ohanian and Hagopian, once the effect of taxes and transfer payments is taken into account, "inequality actually declined 1.8% during the 16-year period between 1993 and 2009, when the Gini coefficient dropped from .395 to .388."

"In his speech, Mr. Obama cited a recent study from economists at Columbia University that found that already enacted benefits and tax programs have reduced America's effective poverty rate by 40% since 1967—to 16% from 26%. But he ignores all this when he claims that inequality is increasing."

"The Congressional Budget Office released a study that came to a similar conclusion in October 2011."

"family income, including benefits, on average experienced a 62% gain above inflation from 1979 to 2007. It also showed that all five quintiles of the income distribution spectrum experienced real gains in family income. 

The CBO study contradicts Mr. Obama's claims in the 2008 presidential campaign and early in his first term that the middle class was "falling behind."

"there was "considerable income mobility" in the decades 1987-1996 and 1996-2005. For example, roughly half of those in the bottom income quintile in 1996 had moved to a higher quintile by 2005. The "median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups" in that decade, while the real incomes of two-thirds of all taxpayers experienced an increase. 

Here is the bottom line: In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain, and have the opportunity to gain"

"Consider the Census Bureau data, which measure only money income."

"It fell, in real terms, by 5.7% from 1974-1982, when slow growth and high inflation ravaged the average family. Tellingly, in this period, real income fell for the bottom four quintiles, but held steady for the top 20%.

From 1983 to 2007, however, median family income grew substantially—by 21.6% above inflation—and real income grew for all five quintiles."

"Yet a recent analysis by BCA Research shows a sharp drop in real spending by the government on nondefense infrastructure since the president took office. When a Democratic Congress passed the president's massive $800 billion stimulus bill, seven-eighths of the total went to transfer payments like Medicaid, food stamps and sending a check to millions of Americans who do not pay income taxes"