Income and quality of life comparability

From Income Equality, Not Inequality, Is the Problem by Phil Gramm and John Early.  The subheading is Those in the middle work much harder, but don’t earn much more, than those at the bottom.  

There is a longstanding, but subterranean, debate in the US as to which is the most important priority - ensuring that people have enough or ensuring that people are more equal.  

For classical liberals, libertarians, free marketers, etc. the answer is obvious.  Focus on making the market work so that there is enough productivity to raise all boats.  And since the industrial revolution, that has been largely the approach pursued, heavily modified and veiled though it might be.

For socialists, communists, and people of very tender feelings for the poor, the answer is that the priority has to be on equalizing everyone.

It has taken a while, and the data is not widely understood yet, but the empirical answer over the past three decades has become increasingly clear as well.  No country has found a mix of policies which allow its economy to grow while prioritizing equality.  No one.  

The only conditions which have been demonstrated to increase economic equality have been so horrendous that the cure is worse than disease.  The only nations where economic equality increases are those which are shrinking owing to war, plague, civil disturbance, and the like.  No country grows economically while equalizing incomes.

That's just the empirical data.  It hasn't stopped the ideologues or the tender hearted from pursuing economic equality.  For them, despite the repeated failed efforts at socialism and communism, the failure is always because it "wasn't done right".  Despite uniform and repeated failures and despite the solid empirical data, the bliss of economic growth with economic equality is just over the horizon with just one more, more effective, effort.

Meanwhile in the economies that prioritize economic growth, income inequality continues and often grows, but everyone is better off than they were.  The poorest quintile are less and less equal to the richest quintile but they enjoy more and more economic choices and better and better consumption outcomes.

You can see the pragmatic evidence of this when you compare the consumption patterns of the poorest 20% of Americans versus those of other countries.

For example, the poorest 20% of American citizens consume the equivalent of the middle quintile of European developed nations such as Germany, France and Britain.  The bottom quintile of Americans own the same number/percentage/rate of cars, homes, technology, white goods, consumer durables, etc. as do the middle quintile Europeans.  

The comparison is especially dramatic when you compare the bottom quintile of Americans to the top quintile of successful developing nations.  The bottom quintile of Americans have the same consumption profile of the top quintile of Indians or Vietnamese or Argentinians, etc.  

The empirical data is clear.  Prioritize economic growth and everyone will be better off.

But that doesn't stop zealots from pursuing a moral crusade of economic equality.

Gramm and Early are arguing something slightly different.  They are arguing that there is now a bifurcation.  We equalized consumption among the bottom three quintiles while the top two quintiles have drifted away from them.

Contrary to conventional wisdom, the most dramatic and consequential change in the distribution of income in America in the past half-century isn’t rising income inequality but the extraordinary growth in income equality among the bottom 60% of household earners.

Real government transfer payments to the bottom 20% of household earners surged by 269% between 1967 and 2017, while middle-income households saw their real earnings after taxes rise by only 154% during the same period. That has largely equalized the income of the bottom 60% of Americans. This government-created equality has caused the labor-force participation rate to collapse among working-age people in low-income households and unleashed a populist realignment that is unraveling the coalition that has dominated American politics since the 1930s.

On these pages, we have debunked the myth that income inequality is extreme and growing on a secular basis by showing that the Census Bureau measure of income fails to include two-thirds of all federal, state and local transfer payments as income to the recipients and fails to treat taxes paid as income lost to the taxpayer. The Census Bureau measure overstates current income inequality between the highest and lowest 20% of earners by more than 300% and claims that income inequality has risen by 21% since 1967, when in fact it has fallen by 3%.

Our most significant finding from correcting the census income calculations wasn’t the overstated inequality between top and bottom earners. It was the extraordinary equality of income among the bottom 60% of American households, regardless of employment status. In 2017, among working-age households, the bottom 20% earned only $6,941 on average, and only 36% were employed. But after transfer payments and taxes, those households had an average income of $48,806. The average working-age household in the second quintile earned $31,811 and 85% of them were employed. But after transfers and taxes, they had income of $50,492, a mere 3.5% more than the bottom quintile. The middle quintile earned $66,453 and 92% were employed. But after taxes and transfers, they kept only $61,350—just 26% more than the bottom quintile.

I endorse their methodology but am a little dubious of their outcomes.  They are communicating a concern about the disincentives that the government creates against work and that is a fair issue, but I think there is more going on.  

I suspect that the equalized incomes per capita per household are somewhat mitigated by reality.  In general, the poorest quintile and the second poorest to some degree, lead chaotic lives with many uncontrolled events.  They change jobs more often and have unanticipated expenses more often (particularly health and transportation).  

Gramm and Early are highlighting that the middle income quintile at $61,350 after tax are earning only 26% more than the $48,806 received by the bottom quintile and even though the middle had 92% labor force participation rate versus the bottom quintile labor force participation rate of 36%.

They are right that the income compression is an issue but I wonder if it is quite the issue they make out.  I would wager virtually no one among the normal and competent middle quintile would choose to take a 26% cut in income in order to achieve a 70% reduction in time worked.  

The quality of life in the bottom quintile just is no match for that of those in the middle quintile.  The after-tax and income transfers numbers may come out in the same ballpark but the quality of life does not.

In which case, perhaps, the labor force participation rate is perhaps not due to income tax disincentives.

But they may be right that the squeezing of the bottom three quintile income levels may still have an effect.  In the bottom quintile, everything received (income and transfers) is consumed and the transfers come with a lot of strings attached.  For the middle quintile, the capacity for net saving is higher and investments are in cars with a material asset value and homes rather than in clunkers and low resell value manufactured mobile homes.  

The real gap in quality of life is probably material because of differences in long term and short term spending strategies.  However, because of the prioritization of the short term among the bottom quintile, that apparent magnitude in the long term quality of life differences are probably overlooked.

The middle quintile end up feeling like they are competing with the bottom quintile at a tactical level, even though their longer term prospects are dramatically higher.

And the gap between the middle income quintile and the top two income quintiles gets bigger and bigger.  And the condescension and incomprehension from the top two quintiles gets larger and larger. 

If that is what is truly happening, and it could be, then we do have some significant problems to overcome.  That's is not quite what Gramm and Early are focused on though.