The Democrats' feckless attacks on income inequality

Reuters

New York Mayor-elect Bill de Blasio (C) speaks to the media next to Lilliam Barrios-Paoli (R), newly appointed Deputy Mayor for Health and Human Services, and Anthony Shorris, First Deputy Mayor, during a news conference in New York, December 12, 2013.

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Article Highlights

  • Most economists agree that a higher minimum wage costs some low-skilled workers their jobs.

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  • Ordinarily extended benefits tend to discourage the unemployed from looking for work.

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  • The Obama Democrats did reduce economic inequality somewhat by raising the top income tax rate back to 39.6 percent.

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As Barack Obama scrambles to eviscerate key sections of his own signature health care law, he and other Democrats are trying to shift voters’ focus to another issue — income inequality.

Unfortunately, the solutions they advocate are pitifully inadequate or painfully perverse.

Start with the minimum wage, which some Democrats see as an election-winning wedge issue in 2014.

True, raising the minimum wage polls well. But does anybody really care much about it? Few minimum wage earners are heads of households; many more are teenagers earning spare cash.

Most economists agree that a higher minimum wage costs some low-skilled workers their jobs. And the economic redistribution it produces, from fast-food consumers to fast-food employees, is pretty minimal.

Another Democratic policy is to continue extending unemployment benefits. The intellectual argument for this is stronger.

Ordinarily, extended benefits tend to discourage the unemployed from looking for work. Their skills atrophy and finding a job later gets harder.

But in the current new-normal economy, with record long-term unemployment, there simply haven’t been enough job openings for many of the unemployed. Many Republicans look open to a compromise on this issue.

In any case the redistributionist effect will be only minor and, if robust economic growth returns, temporary.

One Democrat who argues for greater change is University of Arizona political scientist Lane Kenworthy. He believes the nation is and should be headed to a European-style welfare state, with the government taxing and spending 10 percent more of gross domestic product than at present.

Kenworthy would transform unemployment benefits into wage insurance, would start early education at age one and would vastly expand the Earned Income Tax Credit.

That’s progressive economic redistribution, but with a catch. For as Kenworthy admits, you can’t get the money for this just by raising taxes on very high earners: “The math simply doesn’t work.”

So he looks to a federal consumption tax, like Europe’s value-added taxes. That would mean shifting from the current progressive income tax toward a more regressive European-style tax regime, with middle-income workers subsidizing non-workers.

Other proposals floated by Democrats, like Senator Elizabeth Warren’s call for substantially increased Social Security benefits, would have similarly perverse effects.

Social Security is already on an unsustainable trajectory. Increased benefits would in time require higher taxes on the young, who have negative or minimal wealth, to finance payments to the elderly, who tend to have significant net worth.

This echoes the Obamacare provision that limits premiums on the old and sick to no more than three times the premiums on the young and healthy. Is it really progressive to have the young subsidize the old?

Another left-wing Democrat, incoming New York Mayor Bill de Blasio, wants to raise income tax rates on those earning $500,000 to pay for universal pre-school for the city’s children.

That would certainly amount to economic redistribution, but to whom? Research over the last 50 years shows that Head Start and other publicly financed pre-school programs have no lasting positive effect on learning.

What de Blasio’s proposal would do is to put a lot more unionized teachers on the city payroll. The redistribution here goes from the very rich to the public employee unions and their allies in the Democratic Party.

Liberal pundits are hailing de Blasio and his politics as a harbinger of the political future and a return to the liberal tradition of Franklin Roosevelt and his political ally New York Mayor Fiorello La Guardia.

But in 1944, the heyday of FDR and La Guardia, the five boroughs of New York City cast 7 percent of the nation’s votes. In 2012 they cast only 2 percent of the national vote.

It’s interesting that New York, which has had more liberal and redistributionist public policies than almost anywhere else in the nation over those 68 years, also has one of the nation’s highest rates of income inequality.

High tax rates and high housing costs (exacerbated for many years by rent control) have squeezed middle-class families out of New York. They have migrated in the millions to lower-tax, lower-housing-cost places like Florida and Texas.

The Obama Democrats did reduce economic inequality somewhat by raising the top income tax rate back to 39.6 percent. The proposals they’re talking about now are either small potatoes, or moves to have the working middle-class subsidize non-workers or the young to subsidize the old — redistribution, but not very progressive.

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