Walter Rhett

Dean Baker On GOP Economic Alchemy

In National Affairs on January 23, 2012 at 11:41 am

394 Fifth Avenue, New York. 1911.

House Budget Committee Chairman Paul Ryan drafted a response to the Congressional Budget Office’s recent study on inequality. This piece pulls out all the usual tricks. Most notably it:

a) argues that we should be focused on growth rather than inequality, failing to note that the U.S. economy is doing poorly by this metric also;

b) challenges the data showing growing inequality by saying the government data are wrong;

c) tries to divert attention to Medicare and Social Security raising the banner of generational war; and

d) ignores all the ways in which deliberate government policy has been responsible for the upward redistribution of income over the last three decades.

Representative Ryan’s first summary bullet point is:

“The question for policymakers is not how best to redistribute a shrinking economic pie.  The focus ought to be on increasing living standards, expanding the pie of economic opportunity, and promoting upward mobility for all.”

That sounds great, except the last three decades have not only been a period of rising inequality, they also have been a period of slower growth. According to the Commerce Department, in the 32 years from 1947 to 1979, when most of the population shared the gains from growth, per capita income rose at average annual rate of 2.6 percent. In the 31 years from 1979 to 2010, when most of the gains have gone to the top, growth in per capita income has averaged just 1.8 percent.

The difference in growth rates meant that in the first 32-year period average per capita income rose by 124.7 percent. In the last 31 years average per capita income has only grown by 71.8 percent. Not only have we done poorly in seeing a sharp upward redistribution over the last three decades, we also have slower growth to go along with the inequality. In other words, most people are seeing a smaller share of a less rapidly growing pie.

Next we get Representative Ryan challenging the data telling us that growth has actually been better than the official data show. This is a line that conservatives like to bring out whenever it is convenient.

First, it important to note that none of the claims that we have overstated inflation and therefore understated growth is new. In fact, much of the research in this area dates from the 60s. Given the improvements in measurement since the 60s, it is virtually certain that the consumer price index (the main measure of inflation) is a better measure of inflation today that it was 30 or 40 years ago. In other words, if the claim is that our measures understate the growth of the last three decades, they almost certainly understated growth by an even larger amount in the 50s, 60s, and 70s.

Also, it is worth noting that if we believe the claim that growth has been substantially understated, then we must have been much poorer in the recent past than the official data show. This would mean that those of us who grew up in middle-class households in the 50s and 60s were actually living below the current poverty line in our youth.

Ryan also gives us an argument that the poor have actually benefited more from reductions in prices than the wealthy. The study that he bases this assertion upon relies on the prices of a narrow group of goods and almost seems designed to capture the consumption patterns of comparison shoppersrather than the typical lower-income household.

Ryan also includes an interesting discussion where he tells readers that the poor really enjoy pretty much the same consumption patterns as the wealthy. If this were true, then presumably the wealthy would not care much if they saw big tax increases since their standard of living would be little affected.

Of course government data is not perfect. If Representative Ryan is really concerned about adjusting for the inadequacies of the data he may want to consider the fact that many of the least-well-off people are not included in government surveys. For example, the Current Population Survey (CPS), one of the most widely used surveys for measuring income, misses close to one-third of young African American men. It is likely that the men it misses have lower income and employment rates than the men it finds. This means that the data derived from the CPS likely understates inequality.

Representative Ryan also throws in the usual riff about the elderly making out like bandits because of Social Security and Medicare. This is rhetorical equivalent of throwing sand in people’s eyes.

Ryan says that transfer programs are less redistributive now than 30 years ago because these huge programs are not very redistributive. This is true, but that is not their purpose. These are insurance programs that are run through the government because it is more efficient to run them through the government. Both Social Security and Medicare have much lower administrative costs than their private-sector counterparts as has been documented numerous times by the Congressional Budget Office and others.

In the case of Social Security, which is modestly redistributive, the program is completely self-financed, so it should not affect the extent to which the rest of the government is redistributive. Medicare is drawing money from the rest of the budget, but this is primarily because we overpay providers. Representative Ryan is effectively pointing a finger at our country’s seniors and saying that they are getting too much in benefits because he is insisting on overpaying Pfizer for drugs and General Electric for its medical equipment.

If we got our prices in line with the rest of the world, Medicare taxes would be sufficient to pay for most Medicare benefits. The rational response would be to focus on getting prices down, not taking away benefits from the elderly — but that is the difference between class war and the generational war that Representative Ryan is trying to promote.

Finally, Representative Ryan is seriously wrong when he says:

“The primary means by which government policy directly affects income inequality is through the redistribution of wealth via taxes and transfer programs such as Social Security, Medicare, and Medicaid.”

This is not true. The government has pursued a wide range of policies over the last three decades that have had the predicted and actual effect of redistributing income upward. For example, it has adopted a trade policy that drives down the wages of much of the working population by putting U.S. manufacturing workers in direct competition with low-paid workers in Mexico and China and other developing countries. By contrast, the most highly paid professionals, like doctors and lawyers, are still largely protected from the same sort of competition.

The government’s policy on labor-management relations has been one-sided pro-management. Management side violations of labor laws are routinely ignored or at worst punished with a slap on the wrist. By contrast, when unions violate labor laws (for example staging a secondary strike) their assets are typically impounded and their leaders are thrown in jail.

The government has hugely increased the strength of copyright and patent monopolies over the last three decades, both of which hugely benefit the wealthy. Patent protection on prescription drugs raises their price by more than $250 billion a year compared with the free market price, this is roughly five times as much money as is at stake with President Bush’s tax cuts for the wealthy.

In short, the rise in inequality over the last three decades can be traced to a long list of deliberate government policies. The head of the House Budget Committee should know this fact.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s