Democrats, modern liberals and progressives often say they’re concerned about income inequality. So, they propose more redistribution: higher taxes on the well-off and higher public subsidies for others.
Adding subsidy increases to their ever-growing regulatory system and other public spending drove total government spending relative to our economy to record post-WWII levels under President Obama. Yet they still want more.
With their electoral triumphs after the Great Recession, have their policies made average Americans better off? If not, what’s the flaw in their thinking? And what can we do to improve things?
As shown by government data, the net effect of their policies as implemented over decades, and especially in the Obama administration’s blowout on them, has been to damage the middle- and lower-income folks about whom they claim to be concerned. Net incomes – market income plus government subsidies less tax payments – for the bottom 60 percent actually declined a bit after accounting for inflation.
Folks in that 60 percent (the middle and lower classes) as a group got more in subsidies than they paid in taxes. However, lost jobs and reduced market incomes more than offset their net gain from redistribution.
There are at least two flaws in leftist thinking. First, they believe essentially that people don’t much change their behavior in response to taxes and subsidies. However, the main reason for our current record-slow recovery has been the fact that government spending, taxing and regulation have been high and growing for so long. Thus, investment that makes labor productive and the economy grow has been depressed by high taxes. And incentives to work have been reduced by both high taxes on working and by high subsidies.
Nonetheless, Obama and other left-wing statists strut, posture and preen about the compassion allegedly intended in their policies. They get away with it as long as most folks don’t notice that the net effect of their policies is to damage the economy and society so much that even the people they claim to want to help are being damaged by the totality of those policies.
But there’s another more subtle flaw in their thinking. As a primary candidate in 2008, Obama said he favored higher taxes in the name of equity, regardless of the effect of those taxes on the economy or even government revenues.
This claim of “equity” is usually based on a world view that, even in a mostly market economy, people with high income and wealth levels don’t really deserve what they’ve acquired and folks who’ve acquired less are entitled to just as much as those who have prospered. To a great extent, this reflects the false view that those who prosper are somehow taking advantage of those who don’t.
For example, they claim that employers are “exploiting” employees when they pay what their labor is actually worth if that level is less than some arbitrarily set minimum wage. Such claims ignore the fact that in market systems employers can’t compel anyone to work at the pay being offered and the employees voluntarily accept the job and pay.
In addition, in markets, people get income and accumulate wealth mainly in proportion to the value they deliver to others. (In economics jargon: Exchange happens when there’s both a consumer surplus and a producer surplus.) Instead of predation, success in market systems generally measures a person or firm’s net contributions to society. Government, being coercive, enables predation.
The remedy? Most folks may not know the technical details, but they know when the total package isn’t working. So, last month they turned out left-wingers, giving limited-government conservatives a chance. That’s a start.
Ron Knecht, an economist, law school graduate, and Nevada higher education regent is state Controller-elect.