By Chris Edwards
Monday, August 19, 2019
There are economic storm clouds on the horizon, but for
now wages are rising, jobs are plentiful, and poverty is falling. Democrats
running for president need an economic line of attack, so the solution has been
to focus on wealth inequality. Senator Bernie Sanders claims that there has
been a “massive transfer of wealth from the middle class to the top one
percent.” Senator Elizabeth Warren lambastes America’s “extreme concentration
of wealth.” Even the establishment Joe Biden laments, “This wealth gap that
exists in the United States of America is so profound now.”
Wealth inequality has risen in recent years, but by far
less than the Democrats and many media articles imply. The scarier claims about
inequality usually stem from the flawed data created by French economist Thomas
Piketty and his colleagues. More careful studies by other
economists and the Federal
Reserve Board reveal surprisingly modest changes in wealth inequality given
the huge revolutions in globalization and technology that have occurred.
Are increases in wealth inequality the awful thing that
Democrats claim? It depends on what causes them. Much of the recent modest rise
in wealth inequality stems from innovations in our economy that are pulling
everyone up. Brian Acton and Jan Koum, for example, built huge multibillion
dollar fortunes by creating WhatsApp, which provides free phone service for 1.5
billion users globally.
Acton and Koum’s success may have increased the wealth
owned by the top 1 percent, but their product has created massive consumer
value as well. Most of the wealthiest Americans are entrepreneurs who have
fueled economic growth, which is clear in examining the Forbes 400 list. Wealth created this way is
not the zero-sum struggle that Democrats imagine it is.
That is the good news. The bad news is that the
government itself generates wealth inequality in at least two ways that make us
worse off. First, governments give subsidies, regulatory preferences, and other
crony-capitalist benefits to wealthy insiders. In the recent Fat Leonard
scandal, for example, Leonard Francis gained hundreds of millions of dollars of
government contracts by cozying up to Navy officers and providing them with
gifts, prostitutes, and other favors to get them to do his bidding.
The other way that the government fuels wealth inequality
is a deeper scandal. The expansion of social programs over the decades has
undermined incentives for lower- and middle-income families to save while
reducing their ability to save because of higher taxes. Government programs
have displaced or “crowded out” wealth-building by all American families but
the richest.
Politicians complain loudly about wealth inequality, but
their own policies are generating it. This issue receives too little policy
attention, but it is profoundly important and reveals the hypocrisy of the
political left.
Many Americans have saved little for retirement because
Social Security discourages them doing so, as does the heavy 12.4 percent wage
tax that funds the program. Economist Martin Feldstein found that every dollar
increase in Social Security benefits reduces private savings by about 50 cents.
Social Security accounts for a larger share of retirement
income for the non-rich than for the rich, so this crowd-out effect increases
wealth inequality. In a simulation model, Jagadeesh Gokhale and Laurence
Kotlikoff estimated that Social Security raises the share of overall wealth
held by the top 1 percent of wealth holders by about 80 percent. This occurs
because the program leaves the non-rich with “proportionately less to save,
less reason to save, and a larger share of their old-age resources in a
nonbequeathable form.”
A study by Baris Kaymak and Markus Poschke built a model
of the U.S. economy to estimate the causes of rising wealth inequality. They
found that most of the rise in the top 1 percent share of wealth in recent
decades was caused by technological changes and wage dispersion, but the
expansion of Social Security and Medicare caused about one-quarter of the
increase. They concluded that the “redistributive nature of transfer payments
was instrumental in curbing wealth accumulation for income groups outside the
top 10% and, consequently, amplified wealth concentration in the U.S.”
More government benefits result in less private wealth,
especially for the non-rich. It is not just Social Security and Medicare that
displaces private saving, but also unemployment insurance, welfare, and other
social spending. Some social programs have “asset tests” that deliberately
discourage saving.
Total federal and state social spending as a share of
gross domestic product soared from 6.8 percent in 1970 to 14.3 percent in 2018.
That increase in handouts occurred over the same period that wealth inequality
appears to have increased. Generations of Americans have grown up assuming that
the government will take care of them when they are sick, unemployed, and
retired, so they put too little money aside for future expenses.
Cross-country studies support these conclusions. A 2015
study by Pirmin Fessler and Martin Schurz examined European data and found that
“inequality of wealth is higher in countries with a relatively more developed
welfare state . . . given an increase of welfare state expenditure, wealth
inequality measured by standard relative inequality measures, such as the Gini
coefficient, will increase.”
A study by Credit Suisse found: “Strong social security
programs — good public pensions, free higher education or generous student
loans, unemployment and health insurance — can greatly reduce the need for
personal financial assets. . . . This is one explanation for the high level of
wealth inequality we identify in Denmark, Norway and Sweden: the top groups
continue to accumulate for business and investment purposes, while the middle and
lower classes have a less pressing need for personal saving.”
That is why it is absurd for politicians such as Sanders
and Warren to decry wealth inequality and then turn around and demand
European-style expansions in our social programs. The bigger our welfare state,
the more wealth inequality we will have.
The solution is to transition to savings-based social
programs. Numerous countries have Social Security systems based on private
savings accounts. Chile has unemployment-insurance savings accounts. Martin
Feldstein proposed a savings-based approach to Medicare. The assets in such
savings accounts would be inheritable, unlike the benefits from current U.S.
social programs.
Sanders and Warren are right to criticize crony
capitalism as a cause of wealth inequality. But their big government approaches
to social policy would have the opposite effect on wealth inequality than what
they may believe.
No comments:
Post a Comment