More Income Redistribution Will End the Great Recession? It Just Ain't So!

By Pongracic, Ivan | Freeman, December 2010 | Go to article overview

More Income Redistribution Will End the Great Recession? It Just Ain't So!


Pongracic, Ivan, Freeman


With increasingly widespread recognition of the failure of Keynesian economic policies, all the Progressives are left with are claims whose acceptance requires a suspension of one's logical faculties. An excellent example of this is a September 2, 2010 New York Times op-ed by Robert Reich, the Clinton administration secretary of labor and professor of public policy at the University of California, Berkeley (www.tinyurl.com/2bnv7jy) .

In "How to End the Great Recession" (an apparent teaser for his new book, Aftershock: The Next Economy and America's Future), Reich attempts to provide another way to justify forced income equalization as well as Keynesian economics. After lamenting that trillions of dollars spent on standard Keynesian policy prescriptions have failed to end the Great Recession, Reich argues that "structural" problems in the economy prevent aggregate demand from rising enough to bring about a sustained, healthy recovery. More precisely, "[C] onsumers no longer have the purchasing power to buy the goods and services they produce as workers." Reich's primary culprit preventing the middle class from engaging in the "economically necessary" amount of spending is rising income inequality.

The problem, according to him, is that the rich are getting richer much faster than the middle class: "In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation's total income; by 2007, the top 1 percent took in 23.5 percent of total income." (Most sources put the 2007 income share at 19 percent.) Then Reich presents his bottom line: Keynesian policies have been ineffective because of this rising income inequality. The reason is that "the rich spend a much smaller proportion of their incomes than the rest of us ... so when they get a disproportionate share of the total income, the economy is robbed of the demand it needs to keep growing and creating jobs." Quite ingenious! In one fell swoop Reich gets Keynesianism off the hook for its failures of the past two years and promotes more income redistribution, a key goal of Progressives.

Let's apply data and logic to Reich's argument.

Income inequality is an issue the left usually presents in a highly disingenuous way. The focus is on income statistics, which inevitably show a great deal of inequality. What they fail to point out is that income statistics are by their nature static and hide temporal movement of individuals between income groups. Dynamic studies have shown a remarkable amount of income mobility. Most people start off their working lives with small incomes, but as they become more experienced and more valuable to their employers - and, most importantly, to their customers - they move into higher income categories. The important implication is that the richest 10 or 25 percent are often quite different people from year to year. In addition, the people experiencing the greatest fluctuations in income through their lifetimes are entrepreneurs, who in some years may do extremely well, but in other years barely stay afloat - and occasionally even go bankrupt.

There's a more fundamental problem with the Progressive interpretation of static income statistics: It demonstrates a complete lack of understanding of how wealth is created. Reich writes, "The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that's barely moving." He implies that income is distributed in some mysterious, potentially conspiratorial and certainly unfair way - like a fat kid who is constantly taking a bigger piece of the pie from the malnourished orphans through cheating and brute force. There is no recognition that income is the result of effort and creativity. There is no indication that prudent investment and wise allocation of one's resources, including labor, have a great deal of influence on one's income. …

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More Income Redistribution Will End the Great Recession? It Just Ain't So!
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