Promises Honored

Obama promised to do something about rising income inequality. He did. He made matters worse.

Income inequality is up by three different measures, and there is a huge five million jump in households in which no one works at all.

His policies prove that transfer payments reduce incentives to work and lower incomes. Yet, Hillary Clinton and Bernie Sanders promise the same.

How Progressives Drive Income Inequality

The Wall Street Journal comments How Progressives Drive Income Inequality.

The Census Bureau releases annual updates on income distribution in the U.S., publishing three technical statistical measures — the Gini index, the mean logarithmic deviation of income, and the Theil index — each of which represents inequality levels on a scale of 0 to 1. (zero signifies perfect equality and 1 indicates perfect inequality). By all three measures, inequality rose more under Bill Clinton than under Ronald Reagan. And it wasn’t even close.

Barack Obama’s administration follows this pattern, despite the complaints he and his supporters have made about his predecessor.

The Gini index rose more than three times as much under Mr. Obama than under Mr. Bush. When this statistic was released, Mr. Obama had only six years as president compared with Mr. Bush’s eight.

The spin doctors for Messrs. Clinton and Obama may insist that it wasn’t their fault.

But consider their policies. Both Democratic presidents presided over bubble economies fueled by easy monetary policy. There is no better way to make the rich richer than to run policies that push up the price of financial assets. Cheap money is a boon to those who have access to it. Interest rates were also too low under Bush 43, but that bubble was in housing, and the effects were therefore more evenly distributed than under Mr. Clinton’s stock-market bubble or Mr. Obama’s credit bubble.

In 1968, government transfer payments totaled $53 billion or roughly 7% of personal income. By 2014, these had climbed to $2.5 trillion—about 17% of personal income. Despite the redistribution of a sixth of all income, inequality measured by all three of the Census Bureau’s indexes is far higher today than in 1968.

Transfer payments under Mr. Obama increased by $560 billion. By contrast private-sector wages and salaries grew by $1.1 trillion. So for every $2 in extra wages, about $1 was paid out in extra transfer payments—lowering the relative reward to work.

In 2008, during the deepest recession in 75 years, 13.2% of Americans lived below the government’s official poverty line. The Great Recession officially ended in June 2009, but in 2014, after five years of economic expansion, 14.8% of Americans were still in poverty.

Research by the Hamilton Project and the Urban Institute show that when families with children making between $20,000 and $50,000 attempt to have a second earner go back to work, the effective tax rate on the extra earnings—including lost government benefits such as food stamps, the earned-income tax credit, and medical support payments—is between 50% and 80%. This phaseout of the ever increasing array of benefits has created a “working-class trap” instead of a “poverty trap” that is increasing inequality and keeping the income of these households lower than they might otherwise be.

While the number of two-earner households declined during the first six years of the Obama presidency, the number of single-earner households rose by 2.6 million and the number of households with no earners rose by almost five million. In other words, two thirds of the increase in the number of families under Mr. Obama was accounted for by households with no one working. This is the reason the middle class has shrunk, and the reason inequality has increased.

Mish Comments

We need to be fair about this. Aside from appointing a Fed Chair, neither Obama nor Bush is responsible for Fed policy.

Secondly, I have to wonder how many of that increase of 5 million households where no one is working has to do with voluntary retirement.

Of course, we need to ask the same question another way: How much of that increase is due to free handouts, transfer payment policies, and involuntary retirement?

Without a doubt, Obama reduced the incentive to work. But coming up with the actual numbers is a bit more complicated than the article implies.

Mike “Mish” Shedlock