Velocity
Assume for a moment that you could walk into any coffee shop in the United States and eavesdrop at will and anonymously on the various conversations taking place among the patrons. I am willing to bet that in any number of cases, once the talk moves beyond baseball scores and the weather, you might hear some mention of the astronomical salaries paid to business executives, particularly in the financial sector. And then the cross-gender cursing, from mild to severe, might begin, along with some variant of “Those bank boys made a fortune at both ends of the recession. And on top of that, we bailed the [insert here your favorite expletive deleted noun] out.”
Income disparity, to use a mystifying phrase, is thus much on the American mind. But what are we really talking about here? Income disparity, broadly defined, is the extent to which income is distributed in an uneven manner. So, how much income disparity is there in the United States?
According to Emmanuel Saez, an economist at the University of California prominently featured in The Huffington Post, a lot. According to Saez, the data he analyzed through 2007 paint a “stark, disturbing portrait of wealth distribution in America.” And, of course, Saez says that things got much worse under George W. Bush. Saez points out that in the period from 2002 to 2007, while the bottom 99 percent of incomes grew only 1.3 percent per year, the top 1 percent of incomes captured two thirds of the economic growth. In other words, as the rest of us dawdled along while Bush was President, the rich got a whole lot richer, a phenomenon that Paul Krugman of the New York Times, calls “truly amazing.”
What to do? At this point, some variant of another mystifying phrase usually creeps into the conversation: income redistribution. Economists tend to love this one. According to the occasionally reliable Wikipedia, a study for the Southern Economic Journal found that, “71 percent of American economists believe that the distribution of income in the U.S. should be more equal and 81 percent feel that the redistribution of income is a legitimate role of government.” In other words, these economists think that government should redistribute individual wealth, an approach translated into bumperstickerese as “tax the rich.”
But a recent University of Michigan study suggests that the redistributionists are looking at the wrong data. The study has been following nearly 5,000 families since 1968. According to an article by Ron Haskins in The National Review, there is considerable “relative mobility” up and down the income distribution scale. So, if we divide income groups into five segments, 36 percent of adult children whose parents were in the bottom fifth made it to the top three fifths and 6 percent made it to the top fifth.
Now, the study also suggests that while economic opportunity may not be boundless in the U.S., there sure is a lot of it. What may be really important is not the gap between rich and poor but the ability of those whose families were poor to become relatively richer. It’s not the gap that is the key, it is the velocity of change between the top and the bottom segments of income distribution that makes all the difference.
So, when we indiscriminately tax the rich, we are sometimes taxing the children of poor families (that 6 percent in the U of M study), who by the force of their own will—and yes, sometimes aided by a combination of circumstances called luck—make it to the top. I can see old Horatio Alger now, rudely asking whether we want to use the tax system to diminish the American dream. Those at the tables in the stereotypical American coffee shop might, upon reflection, agree that we should not, even if that means the greedy, financially irresponsible bank bad boys get something of a pass. After all, those who make a boatload of money already pay, thanks to our progressive income tax system, a pantsload of taxes. Now, there is a thought that should give even the most ardent redistributionist pause. If we slowly kill the proverbial goose, what happens to the golden egg? And then what?
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