How Progressives Drive Income Inequality

The Obama years proved that transfer payments reduce incentives to work and lower incomes. Yet Clinton and Sanders are eager to go the same route.

By Lawrence B. Lindsey in the WSJ. Mr. Lindsey, a former Federal Reserve governor and assistant to President George W. Bush for economic policy, is president and CEO of the Lindsey Group. He is the author of “Conspiracies of the Ruling Class,” out on March 8 from Simon & Schuster. Excerpts:

"The Census Bureau releases annual updates on income distribution in the U.S., publishing three technical statistical measures—the Gini index, the mean logarithmic deviation of income (mean log deviation for short), and the Theil index"

"inequality rose more under Bill Clinton than under Ronald Reagan. And it wasn’t even close. While the inequality increase as measured by the Gini index was only slightly more during Clinton’s two terms, the Theil index and mean log deviation increased two and three times as much"

"Barack Obama’s administration follows this pattern, despite the complaints he and his supporters have made about his predecessor. The mean log deviation increased 37% more under Mr. Obama than under President George W. Bush,"

"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."

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

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.

In 2008, during the deepest recession in 75 years, 13.2% of Americans lived below the government’s official poverty line. The Great Recession officially ended in June 2009, but in 2014, after five years of economic expansion, 14.8% of Americans were still in poverty."

"From 2008 through 2014, the most recent year for which we have data, the number of two-earner households declined." 

"when families with children making between $20,000 and $50,000 attempt to have a second earner go back to work, the effective tax rate on the extra earnings—including lost government benefits such as food stamps, the earned-income tax credit, and medical support payments—is between 50% and 80%."

"the number of single-earner households rose by 2.6 million and the number of households with no earners rose by almost five million. In other words, two thirds of the increase in the number of families under Mr. Obama was accounted for by households with no one working. This is the reason the middle class has shrunk, and the reason inequality has increased."

"President Clinton increased the top tax rate on higher earners—yet inequality rose during his administration, and faster than under the tax-cutting Ronald Reagan. The same happened under President Obama."

"boosting the top tax rates even more, as Sen. Sanders suggests, would have little or no effect on inequality. The paper explored the effects of raising the highest marginal income-tax rate to 50% from 39.6%. Assuming no behavioral effects, the expected revenue was then distributed directly (and in theory costlessly) to the bottom 20% of income earners.

The $95 billion in extra taxes and transfers reduced the Gini Coefficient by only 0.003. To put that in perspective, that reversed only one fifth of the increase in inequality during the Obama presidency."

"Redistribution through the political process is not costless—even in a perfect world there would be a large bureaucracy to feed. Special-interest elites also emerge when so much money is being moved around. They take their cut, introducing even more inefficiency into the system."