The Rising Tide: Whose Boats Benefit

Income and wealth disparity has emerged as a critical economic and political issue for the US. At its core, it is a discussion of how we measure whether the economy is increasing or decreasing the well-being of Americans as a whole. Traditional measures like GDP growth, the stock market and even unemployment rates do not capture the circumstances of today’s economy. Two articles yesterday, one in the Wall Street Journal and one in the New York Times, lay out the debate in stark terms. The Wall Street Journal Op/Ed piece is a misleading and dangerous example of simplistic conservative polemic by economists from the Heritage Foundation and Ohio University. The New York Times article points out a disturbing attribute of the modern economy based on sound logic.

Income and wealth disparity can be shown as a snapshot that compares the level of income and wealth across percentiles if all households. There is simply no doubt that the differences are very high today, in an historical context. But that provides an insufficient picture. Far more illuminating is movement of income and wealth over time and across the spectrum of income and wealth.

The Wall Street Journal piece completely ignores the real significance of income disparity. The authors use the Gini Index, which measures high and low income differences. It concludes that certain states that pursue relatively progressive policies, such as New York, Connecticut and California, have greater disparity than other states that do not, like Wyoming, Alaska, Utah, Hawaii and New Hampshire, suggesting a causal relationship. They conveniently leave out Texas and Florida, each of which has a Gini Index almost the same as California, but which are hardly known for progressive policies. In fact here are the top ten states (plus the District of Columbia) in terms of Gini Index-measured disparity as of 2011 as calculated by the Census:

District of Columbia

New York

New Mexico

Connecticut

Louisiana

California (Tie with Florida)

Florida (Tie with California)

Georgia (Tie with Texas)

Mississippi

Do you see the pattern that the authors assert? Me neither. In fact, it seems like the list consists of places in which there are large concentrations of either very wealthy people (finance, energy, wealthy retirees, entertainment) or very poor people (immigrants, minorities, rural populations) or both.

Aside from omitting the second and fourth largest states in the union, this simple minded linkage of disparity with progressive policies is totally misleading. For one thing, it ignores that disparity can be a function of a concentration of the super rich. But, of course, there are many other flaws in their argument. The simplistic measurement of absolute disparity tells us nothing useful about the dynamics of the economy unless all income groups move in lock step with growth of the overall economy.

As mentioned in both articles, John F. Kennedy said that a rising tide lifts all boats. Paul Ryan seems to be echoing this thought: “The federal government needs to remember that the best anti-poverty program is economic growth.” Kennedy was correct when he made his observation (though he probably would say that it was only part of his broader view). Ryan is wrong when he says it now.

The rising tide concept suggests that increasing income and wealth of the highest percentiles is not a bad thing because all lower percentiles will increase as well. That is simply not the case now. The upper 10% grows while the rest of the public stagnates. This is even more extreme when the split is the 1% vs. the 99%. And it is most extreme when the 0.1% and the 99.9% are compared. In recent years almost all of the benefits of growth of the economy have gone to the highest percentiles.

Unlike the early 1960’s, the rising tide lifts 1 boat out of 100.

This is most painful and disheartening for the very poor. As the Times article points out, since the late 1970’s GDP growth no longer reduces poverty. The physics of Kennedy’s rising tide stopped working.

This march toward inequality is unsustainable. Thomas Piketty’s best-selling book, Capital in the 21st Century, warns that this can lead to dynastic wealth accumulation in a class of super-wealthy that has grave consequences for the political system. Wealth is translated into political power that protects and increases wealth; and the vast majority of people just gets by and owns almost nothing. Piketty sees this as an inherent flaw in capitalism in which “the past devours the future.” Others believe that it is a consequence of policy choices over time. Both probably have elements of truth. Regardless, the situation must be rectified if we are to prosper.

The important question, which the Wall Street Journal piece seems to intend to obscure, is why was Kennedy right in the early ‘60s and why is Ryan wrong now. Fundamental changes to the system of labor and capital and the distorted financial system that have emerged since 1980 hold the answers. They are not to be found in progressive policies, which have by no means been marching forward in recent decades.

The authors of the Wall Street Journal piece eventually mention Texas by praising its laissez faire policies. They describe how Texas has attracted businesses from places like California by offering minimal regulation and low taxes as if this were a good thing.

The right way to see this policy is that it encourages a race to the bottom by abdicating government’s responsibility for the general well-being of its citizens. By omitting the Gini Index data on Texas, the authors hope to skate by the obvious consequences of the wild-west policies of the Lonestar State: letting business run free and not taxing the wealthy makes the rich richer and the poor poorer and less secure.