Brian Wesbury Challenges Stiglitz On Inequality & The Recession

See One Man Against the 1%: For the past 50 years, liberals have gotten almost exactly the policies they’ve wanted. So why are they still complaining? Excerpts:

"The reality, however, is that the financial crisis was not caused by inequality or by banks. It was caused when the government used Fannie Mae and Freddie Mac, under the banner of equality, to encourage subprime lending to promote homeownership. Then the government allowed a very strict mark-to-market accounting rule to be enforced, turning a fire into an inferno. The crisis would have never spun out of control if government had avoided overly strict mark-to-market accounting rules.

Mr. Stiglitz acknowledges that global inequality has narrowed in recent decades, but he says that “American inequality began its upswing 30 years ago, along with tax decreases for the rich and the easing of regulation on the financial sector.” He contrasts this with the decades after World War II, when the U.S. “grew at its fastest pace, and the country grew together.” But now, he says, “the American dream is a myth.” The 1% are sailing along, while the rest are drowning. Like advisers to FDR who believed the Soviet Union had found the secret to growth through central planning, Mr. Stiglitz holds up China as a role model, praising the country’s top-down economic management. Yet the truth is that embracing Western-style free markets and adopting technologies invented in the U.S.—not central planning—have lifted hundreds of millions of Chinese out of poverty.

A running theme of the book is that the American dream is dead because policy makers have failed to implement truly liberal policies. But for the past 50 years, liberals have gotten almost exactly what they wanted. Between 1950 and 1965, government spending outside of defense was just 7.8% of GDP. Liberals weren’t happy with that, so they proposed to make America a “Great Society” by creating the modern welfare state along with Medicare and Medicaid. After five decades of growth in these redistribution programs, nondefense government spending is now 16.8% of GDP. In other words: Core, prosperity-sharing government spending has more than doubled, while military spending has fallen from 9.5% of GDP to less than 3.5%.

Liberals have shaped the tax code to their preference as well. In 1979 the top 1% paid 14.2% of all federal taxes. In 2011 that share had risen to 24%. The lowest quintile paid just 0.6% of all federal taxes in 2011, down from 2.1% in 1979. Following the expiration of the temporary Bush tax cuts in 2012, and the new surcharges in ObamaCare, this dichotomy has widened.

Mr. Stiglitz constantly refers to income inequality without adjusting for taxes and transfers. But this is misleading. A 2014 Congressional Budget Office (CBO) study showed that the lowest quintile of income earners saw their market income grow just 16% between 1979 and 2011, while the highest quintile experienced a 77% increase. But after adjusting for taxes and transfers, the CBO found that the lowest quintile, which receives about a third of its income from transfers, saw an increase in income of 72%, while the top quintile had a gain of 87%. In other words, liberal policies of tax and redistribute have created a much more level playing field than liberals will admit.

Liberals are the like the dog that finally caught the car. Now what will they do? If Mr. Stiglitz is indicative, they will gripe about the wealthy, argue that their ideas of redistribution weren’t tried hard enough and blame self-interest for hampering real progress. Conservatives said that our current fiscal path would be bad for the economy; liberals insisted that it would be good. The fact that Mr. Stiglitz is still complaining would seem to be proof that liberals were wrong.

Mr. Wesbury is chief economist at First Trust Advisors LP in Wheaton, Ill."