I used Labor Day to write my biweekly column for the Hoover Institution’s online publication Defined concepts. Hey, that’s why it’s called Labor Day, right? So can we work hard?
Here’s my Labor Day post, a day late.
Start with this quote by Phil Gramm and John Earley, “Income equality, not inequality, is the problem,” The Wall Street JournalAugust 29, 2022. (30 August print edition.):
Real government cash transfers to the bottom 20% of household earners increased by 269% between 1967 and 2017, while middle-income households saw their real income after tax increases rise by just 154% over the same period. This essentially equalized the income of the bottom 60% of Americans. This government-created equalization led to a decline in labor-force participation rates among working-age people in low-income families and unleashed a populist realignment that has been unraveling the coalition that has dominated American politics since the 1930s.
Our most significant finding from the revisions to census income calculations was not excessive disparity between top and bottom earners. There was remarkable income equality among the bottom 60% of American households, regardless of employment status. In 2017, among working-age households, the bottom 20% earned an average of just $6,941, and only 36% were employed. But after transfer payments and taxes, that household’s average income was $48,806. The median working household income in the second quintile was $31,811 and 85% of them were employed. But after transfers and taxes, their income was $50,492, just 3.5% higher than the bottom quintile. The middle quintile earned $66,453 and 92% were employed. But after taxes and transfers, they kept just $61,350 — just 26% more than the bottom quintile.
I haven’t checked the gram and starting numbers but they seem well-sourced.
The bottom line is that the welfare state in the United States is now so vast that for the bottom 60 percent, work pays marginally at best. We need to pay better. Not by setting high wages; We know the problems with it. But the welfare state is defeated.
Disagree: One thing I wonder about their numbers is how they account for spending on government welfare programs like Medicaid. Finkelstein, Hendren, and Lutmer found that Medicaid recipients were only worth 20 to 40 cents per dollar of Medicaid spent on them. If Gramm and Early valued Medicaid by $1 per recipient for a $1 benefit to the recipient, they would overstate the incomes of the bottom 20 percent. This means that the income gap between the bottom quintile and the next two quintiles will be greater than their numbers show. However, it should be noted that one reason Finkelstein et al found such low rates is that “the uninsured pay a smaller share of their medical costs. Put differently, if there were [sic] Without Medicaid, this population would still receive some health care and pay only a fraction of its costs, perhaps because of the large amount of uncompensated care provided by hospitals.” So we can go back roughly to the dollar for dollar value of Medicaid costs, which I suspect is rural and primarily used, I Not as big a problem as I first thought. Without Medicaid, they would still receive substantial amounts of treatment without working and without being covered by health insurance.
The graph above is from their WSJ article.