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March 28, 2009

The Root Causes of Income Inequality: Why Bigger Government Is Not The Answer

In November of 2008 a charismatic and gifted politician with little or no executive experience was elevated to what is arguably the world's most difficult and powerful position. Both historically and statistically speaking, Obama's victory was remarkable:

Since the Civil War, 49 men have won a major-party presidential nomination. Only three of these nominees were less qualified, by traditional measures of leadership and experience, than Obama.
... None of those men was able to win the White House.

In retrospect it seems obvious no private sector corporation would hire a Chief Executive Officer with no prior experience. It seems obvious that an amateur whose sales pitch consisted of detail-free promises ("Yes, We Can!") and a belief that successful individuals and entities are "greedy" would possess neither the leadership skills nor the financial acumen needed to lead us out of the current economic crisis.

Obvious, that is, to everyone but The Economist:

HILLARY CLINTON’S most effective quip, in her long struggle with Barack Obama for the Democratic nomination last year, was that the Oval Office is no place for on-the-job training. It went to the heart of the nagging worry about the silver-tongued young senator from Illinois: that he lacked even the slightest executive experience...

...Mr Obama has had a difficult start. His performance has been weaker than those who endorsed his candidacy, including this newspaper, had hoped. Many of his strongest supporters—liberal columnists, prominent donors, Democratic Party stalwarts—have started to question him. As for those not so beholden, polls show that independent voters again prefer Republicans to Democrats, a startling reversal of fortune in just a few weeks.

The Economist attributes Obama's disappointing performance to two factors: a tardy and unfocused response to the financial crisis and clumsy handling of Congress. But the deficiencies cited are not the root causes of Obama's failure. They are the symptoms of far more serious problem. Simply put, Barack Obama has no idea what drives the American economy.

If the presidency is a leadership test, Barack Obama has already flunked:

... even before I go into a company, or even if we’re looking at a business here at CCMP, I’m constantly asking the question, “What are the two or three levers that, if done right, if pulled correctly, will really turn this business?”

Obama's scattershot approach to fixing the economy betrays a fundamental misunderstanding of how individuals create and hold onto wealth. Recently he cited rising health care costs as "the biggest threat to the U.S. economy". Left unexplained was the precise role rising health care costs played in last Fall's mortgage banking crisis. But to hear Mr. Obama tell it, nationalizing health care will insulate America from fluctuations in the business cycle in much the same way it has protected Europe from the consequences of market instability.

According to Barack Obama, affluence "trickles up" from the lowest earning and least productive sector of the economy to the greedy and undeserving rich. Obamanomics identifies income inequality, not inefficient or unwise economic decisions, as the real enemy of prosperity. In Obama's consequence-free world there are no bad decisions; only unfair outcomes visited upon the the deserving poor by the well to do:

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years. They do so first by rewriting the tax code and, over the longer term, by trying to solve some big causes of the middle-class income slowdown, like high medical costs and slowing educational gains.

...Before becoming Mr. Obama’s top economic adviser, Lawrence H. Summers liked to tell a hypothetical story to distill the trend. The increase in inequality, Mr. Summers would say, meant that each family in the bottom 80 percent of the income distribution was effectively sending a $10,000 check, every year, to the top 1 percent of earners.

Barack and Michelle Obama tell a heartrending story of stalled progress for America's poor and middle class: one in which gains at the top of the income scale are achieved by stealing from those at the bottom. But the facts tell a different story:

In 1971, only about 32 percent of all Americans enjoyed air conditioning in their homes. By 2001, 76 percent of poor people had air conditioning. In 1971, only 43 percent of Americans owned a color television; in 2001, 97 percent of poor people owned at least one. In 1971, 1 percent of American homes had a microwave oven; in 2001, 73 percent of poor people had one. Forty-six percent of poor households own their homes. Only about 6 percent of poor households are overcrowded. The average poor American has more living space than the average non-poor individual living in Paris, London, Vienna, Athens and other European cities.

Nearly three-quarters of poor households own a car; 30 percent own two or more cars. Seventy-eight percent of the poor have a VCR or DVD player; 62 percent have cable or satellite TV reception; and one-third have an automatic dishwasher.

For the most part, long-term poverty today is self-inflicted. To see this, let's examine some numbers from the Census Bureau's 2004 Current Population Survey. There's one segment of the black population that suffers only a 9.9 percent poverty rate, and only 13.7 percent of their under-5-year-olds are poor. There's another segment of the black population that suffers a 39.5 percent poverty rate, and 58.1 percent of its under-5-year-olds are poor.

Among whites, one population segment suffers a 6 percent poverty rate, and only 9.9 percent of its under-5-year-olds are poor. Another segment of the white population suffers a 26.4 percent poverty rate, and 52 percent of its under-5-year-olds are poor.

What do you think distinguishes the high and low poverty populations? The only statistical distinction between both the black and white populations is marriage. There is far less poverty in married-couple families, where presumably at least one of the spouses is employed. Fully 85 percent of black children living in poverty reside in a female-headed household.

Poverty is not static for people willing to work. A University of Michigan study shows that only 5 percent of those in the bottom fifth of the income distribution in 1975 remained there in 1991. What happened to them? They moved up to the top three-fifths of the income distribution -- middle class or higher. Moreover, three out of 10 of the lowest income earners in 1975 moved all the way into the top fifth of income earners by 1991.

The facts, when the lifestyle choices of individual Americans are taken into account, are striking. In general, the "greedy rich" owe their ill-gotten gains to three factors: they stay in school, they work longer hours, and they reside in dual income households:

tradeoffs.jpg


Click for bigger version.

Looking at the median number of wage earners in various income brackets is instructive:

median_wage_earners.jpg

America's most prosperous households do one other thing differently from their poorer neighbors: they are, to an overwhelming degree, married:

One frequently overlooked dimension of the gap between the "rich" and the "poor" is how much it is affected by marital status.20 As Chart 10 shows, only about 30 percent of all persons in Census's bottom quintile live in married couple families; the rest either live in single-parent families or reside alone as single individuals. In the top quintile, the situation is reversed: Some 90 percent of persons live in married couple families. In this case, equalizing the numbers of persons within the quintiles makes little difference; even after each quintile is adjusted to contain the same number of persons, 85 percent of persons in the top quintile continue to live in married couple families compared with one-third in the bottom.

cda99-07cht10.gif

Wikipedia puts it more succinctly:

In the United States the increasing gap between the top 30% and the bottom 70% of society is attributed to the large increase of single parent households.

It stands to reason that any government program purporting to encourage prosperity should encourage behavior that creates wealth and discourage behavior that impedes the creation of wealth. But Obama's proposed solutions get this equation exactly backwards: he proposes that our tax system punish workers who make smart economic decisions and reward those who make inefficient decisions:

...the most astonishing sentence in the op-ed is this one: “His plan would not raise any taxes on couples making less than $250,000 a year, nor on any single person with income under $200,000.” It amounts to a declaration of war on two-income families, a marriage penalty of punitive proportions.

If those two single persons with income just under $200,000 get married, Mr. Obama is going to hammer them with a huge tax increase. If the second earner, who in many cases is the woman, is going to have to give 54% of what she earns to the government, she might as well stay home with the children.

While one may well argue the societal benefits of having one wage earner stay home with the children, it's hard to argue that punishing stable families who have figured out how to create and hold onto wealth encourages fiscally responsible decision making. The fact is that under the Obama's planned restructuring of the American economy, less productive and responsible behavior is rewarded while time-tested and more efficient economic decisions are punished. The Obama plan for economic recovery, in a nutshell: find the levers that move the economy... and then break them.

... why don’t we organize society so that it rewards hard work! We could even see that people who work harder and do better make more money! And then their efforts would pay off in more general societal prosperity, making life better for everyone! And we could . . . Naaaah.

Posted by Cassandra at March 28, 2009 09:05 AM

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Comments

His performance has been weaker than those who endorsed his candidacy, including this newspaper, had hoped.

We have a dictum in the Aviation Safety biz: "Hope Is Not A Method."

Many of his strongest supporters—liberal columnists, prominent donors, Democratic Party stalwarts—have started to question him.

Okay, at least the Change half of HopenChange is kicking in...

Posted by: Spoilsport Helicopter Pilot at March 28, 2009 01:49 PM

The Obama plan for economic recovery, in a nutshell: find the levers that move the economy... and then break them.

Gee, exactly what Obie's mentor, Saul Alinsky, proposed as the most effective means of implementing socialism in the US.

Ya think?

Posted by: BillT at March 28, 2009 02:02 PM

"...it's hard to argue that punishing stable families who have figured out how to create and hold onto wealth encourages fiscally responsible decision making."
But, but, but I One, Treasury Secretary, Lord Dark Helmet and the Congressional Gang-O-Weasels are not making that argument. Instead, the argument seems to begin and end somewhere around the seize income and assets from the wicked achievers right on down the economic ladder, as needed, and redistribute to poor unfortunates who have been unfairly treated by The Fates.

Amazingly enough, almost a third of the voting age population in the nation bought the Robin Hood ruse. Sham-WOW!

Oh yeah, use the seized wealth to build a power base of those on the receiving end of the magic money relocation pipe, thus establish a permanent Politburo of the Powerful.

Funny thing is that I ONE & 111thCongressionalWeasels - RepoMen LLC. are having such a struggle getting the hang of manipulating any levers such that Hugo, Jimmy's buddy, declares I One to be ignorant... Of Latin American in this case, but in the broader context, if the loafers fit, or the foo bird...

Posted by: Dr. Joseph Guillotine at March 28, 2009 02:51 PM

I think that the "Spoilsport Helicopter Pilot" and BillT are the same person. Don't you?

But in observing Mr. Obama after this interval of time (a little over a year now), I have come to one general conclusion.
He is not as smart as he thinks he is.

He subscribes to all the standard liberal intellectual bromides and "self-evident" truths that are widely accepted in academia, and among all the smarter people that read the entire Sunday New York Times before 2 pm on Sunday. They all congratulate each other on being so bright. And, of course, they are bright people.

But no one is omniscient. One man, or even a small group of men and women (such as Congress, the appointed people in the Executive, or the faculty of Harvard University), cannot know enough to manage the economy of the United States.
It is simply too big.
Most of these people have not even shown talent for managing a medium to large size organization or business.
The economy works well (when it does) because millions of people make informed decisions every day as to their own economic and social well being.
Where to live. Where to work. What to take in school. How many kids should we have? Should I get married? And on, and on, and on. The invisible hand of the market place.

The government cannot manage all these personal micro choices. And the sum total of hundreds of millions of these sorts of choices drive businesses and the economy. As the Obama administration seeks to "change the rules" (and become a more visible giant hand in the market place) and make them more complicated for many (taxes, deductions, etc.), they will start to change the sort of choices that millions of free people make every day.
And then they will be surprised at the unexpected outcomes, and make some more funny rule changes.

Imagine that.

Posted by: Don Brouhaha at March 28, 2009 03:02 PM

"And then they will be surprised at the unexpected outcomes..."
Indeed.

Posted by: David Byrne at March 28, 2009 03:09 PM

The gullible, naive fools who put Obama in office are just that: gullible, naive fools.

Posted by: camojack at March 29, 2009 01:12 AM

I wish I were but half as smart as teh One, his omnificent, but I don't think I want to have my brain removed....

Posted by: Kbob in Katy at March 29, 2009 12:46 PM

The problem is not and never has been income inequality. It's inequality of *opportunity*. There will be no improvement in inequality of opportunity while we have crappy schools that stay crappy because they're closed to competition as a result of government edict.

Posted by: anon at August 6, 2009 09:15 PM

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