Income inequality and wealth redistribution. Doesn't everybody lose in the long run?

There's a lot of talk about what to do about income disparities as the percent of income in society is moving towards the wealthy.  The easy, almost knee jerk reaction of some is redistribution of wealth through raising taxes on the wealthy, raising minimum wage and so forth. 

But simply taking money from higher income people and giving it to another through a government welfare program often benefits no one in the long run.  Welfare, except for the truly needy, discourages work and initiative and encourages dependency.  The wealthy person taxed has less incentive to work hard and invest and create jobs, so there are fewer jobs for lower income folks.

Here's a discussion of this by columnist Robert Samuelson.  He references a French economist Thomas Piketty who dislikes income inequity so he wants to redistribute money.

He objects to extreme economic inequality because it offends democracy: Too much power is conferred on too few. His economic analysis sometimes seems skewed to fit his political agenda.

Take his tax increases. He doubts that they would hurt economic growth. This seems questionable. Incentives must matter, at least slightly. Or consider his predicted slowdown in the world economy.

This seems possible, but if it happens, capital owners would likely suffer lower returns. As for the power of the superrich, they hardly control most democracies. In the United States, where about 70 percent of federal spending goes to the poor and middle class, the richest 1 percent pay nearly a quarter of federal taxes. After-tax and post-government-transfer incomes are less unequal than Piketty's pretax figures.

Still, the present concentration of income and wealth instinctively feels excessive. It understandably stirs resentment. We'd be better off if the rich were less so and other Americans were more so. But it's doubtful that political action to force this transformation would be similarly beneficial. Class warfare is bruising; today, it would degrade the confidence needed for a stronger recovery. 

Welfare or work - which is more attractive?

Michael Tanner of the Cato Institute did a state by state study on the cash benefits derived from welfare versus getting a job.

He found that in Minnesota, the welfare benefits were the equivalent of $14 an hour, far above the minimum wage.

One can see why a person would tilt towards welfare if the alternative is a job they don't like.  Tanner summarizes his study by writing:

The current welfare system provides such a high level of benefits that it acts as a disincentive for work. Welfare currently pays more than a minimum-wage job in 35 states, even after accounting for the Earned Income Tax Credit, and in 13 states it pays more than $15 per hour.  If Congress and state legislatures are serious about reducing welfare dependence and rewarding work, they should consider strengthening welfare work requirements, removing exemptions, and narrowing the definition of work.  Moreover, states should consider ways to shrink the gap between the value of welfare and work by reducing current benefit levels and tightening eligibility requirements.

Is raising the minimum wage the panacea for what ails the poor? Or is family breakdown more of the problem?

There's a push for an increase in the minimum wage by both President Obama and DFLers in the Minnesota legislature.

Will it truly help the poor or actually hurt the poor?

Here's an interesting analysis by an economist on the topic.  He points to the economic reality that raising the minimum wage will actually lose jobs for the youth and unskilled, entry level workers.  He also points to the problems resulting from family breakdown, single parent households.  That's the critical issue.

President Obama's state of the Union Address  was to me, an interesting peek into the Administration's thinking, and a revealing piece of political rhetoric (I mean that in the good sense of "rhetoric," i.e. "what arguments we use to persuade people") 

...today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong....

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets....

What caught my eye is the "family with two kids,"  "...millions of working families." It paints a grim picture: mom, dad, two kids, trying to survive one wage earner's full-time minimum-wage job.

My thought: What planet do the president's advisers live on? Come take a look, say, at the south side of Chicago, where I grew up and live, and where President Obama spent many formative years as a community organizer and so knows it even better. Is the first-order problem of these neighborhoods that its residents live in intact families with two kids, one full-time wage earner, trying to live on the wages from a full-time minimum wage job, but  having a tough time making ends meet? Is there anyone like this?

The tragedy of the neighborhoods around where I live, and President Obama used to live, is the vast number of people with no job at all.  How does raising the minimum wage for the few who have a minimum-wage job help the vast majority who have no job at all?

Minimum wages are about teenagers and young adults, most still living at home. It's about the "dating" phase of work-force attachment, where people learn the skills and habits, and make connections by which they can move up to better jobs when they are ready to have families.

"Families" is an interesting word as well. Marriage among lower-income Americans is rare, as President Obama made clear when he came back to talk to students at Hyde Park High school and made some controversial remarks about the absence of fathers.

For example in zip code 60619, just south of the University, there are "4,967 married couples with children, and 12,745 single-parent households (2,655 men, 10,090 women)." Here's the marital status chart.

What "family" means in this speech is, by and large, a single woman with children. I'm not starting a Murphy Brown argument, but it is an interesting use of the word. I wonder how many of the Republican ears in the audience listened to "working families" and heard "single women with children and no father in sight?" More worthy of our sympathy, indeed, but a very different picture of what kind of policies might actually work.

And even then, the modern Scrooge ("are there no workhouses?") might ask, "Is there no earned-income tax credit? Is there no home heating subsidy? Are there no food stamps? Is there no schip or medicaid? Have they not applied for social security disability? Are there no section 8 housing vouchers?"

The point is not to be heartless -- government programs or not, life on the lower end of America's economic and social spectrum is pretty awful.  The point is, if we seriously want to address the problems of the "working poor," if we want policies that actually work rather than spew a lot of TV time and make us feel good, let us paint a vaguely realistic picture of what their life is like. Absolutely nobody (except perhaps illegal aliens) is trying to support a family on $14,500 from a full time minimum wage job, period.  The actual economic life of the "working poor" is a welter of government programs, transitory employment, and a lot of illegal activity

And, one huge problem facing  people who do work full time and earn minimum wage is the astounding marginal tax rates that our various social programs imply.  In fact, much of the raise from $7.25 to $9.00 will be taken away. Even more of a raise to $20 an hour will be taken away. The structure of our programs that are supposed to help people are instead trapping them. (Previous posts here and here.)

Yes indeed, let us help families to "finally get ahead!" Let us talk about lousy schools, incentive-destroying social programs, horrendous violence, life-destroying incarceration, and the war on drugs run amok. The minimum wage may slightly help the few who can get such jobs, and put such entry-level jobs slightly more out of reach for many others. But it's just irrelevant to the real, first-order problems such families face.

To truly address the needs of the poor, one can't avoid family breakdown.  Failure to do so means more systemic poverty and calls for government social programs to do more and more.

The effects of the Obama's proposed tax policies on jobs and the economy

Here's an interesting article showing the impact of the Obama economic/tax plan on an actual business if implemented into law. His proposals for mandating health insurance by private employers, increasing the highest tax bracket, increasing the minimum wage, changing union voting rules will all impact private employers in a big way. One effect with reduced economic growth and fewer jobs.

Here's an excerpt:

Specifically, here's what the owner of the larger firm said regarding six of Obama's key proposals for the small-business sector: The average wage at his company, figuring the 52 paychecks of his office staff, installers and service workers, is $31,200, $15 an hour.

First, "Barack Obama and Joe Biden will require that employers provide seven paid sick days per year," states the Obama campaign's Web site. "I give three paid sick days," explained the business owner. His extra cost for this one new regulation would be $24,960 (4 extra days, 52 employees, at an average of $120 per day). "That's one of the women in the office," he said. "I can make up that cost by letting one of the office people go."

Second, Obama states that employers will be required to pay 100 percent of the cost of health insurance premiums for 100 percent of their employees or face a tax penalty. "I pay 75 percent of their coverage," explained the owner. "The family policy is about $11,000. For single guys, it's about $5,000." At an average annual cost of $7,000 per policy, his additional cost for 52 employees to cover the 25 percent of the premiums that he currently doesn't pay is $91,000. "That's the price of three installers," he said. "Just to stay even with where I am, I'd have to fire three more people or raise some prices and fire two."

The result is more unemployment or more inflation, or both.

Third, with the estate tax, Obama is calling for a top tax rate of 45 percent on estates valued above $3.5 million, producing an estimated "death tax" of $675,000 on an estate of $5 million. "You're kidding," he said. "They took half my income on the way up and now they want another half when I die?" He estimated that his business is already valued at more than $3 million, in addition to the value of his home and investments. "Why," he asked, "would I want to grow to 100 employees? What'll stop them from changing it to 75 percent?"

The cost in jobs that will never be created in the U.S. economy because of this single disincentive to growth? Incalculable.

Fourth, Obama's economic plan calls for a hike in the minimum wage to $9.50 an hour within three years. The business owner's reaction? "That's bad for two reasons. I don't have anyone at minimum, but raise the bottom by $3 and a guy making $15 wants $18. Plus it's bad for productivity when people think their pay raises are coming from government instead of from their own individual effort."

Fifth, saying he'll "play offense for organized labor," Obama is proposing that workers should be denied the right to a private ballot at work in deciding whether to unionize. "That'll never be," said the plumbing entrepreneur. "I'm in business because I'm independent, not to take orders from a grievance chairman. I'd shut down."

Sixth, the increase in taxes on this small business owner from Obama's proposed hike in the income tax rate from 36% to 39.8% on incomes above $200,000 and the proposed increase in Social Security taxes comes to $32,000 per year. "That's another employee," he said, referring to the termination of another installer in order to just stay even.

And the jobless plumbers? They can be re-socialized to work for ACORN.

At a time when our economy is already reeling, the accumulation of these initiatives will no doubt prolong and/or deepen a recession or worse.

With a Obama Administration, we will no doubt get change but change isn't always for the better.