Some of the rich are getting poorer, and some of the poor are getting richer.

The Des Moines Sunday Register published a lead article (Page 1) titled, “The rich keep getting richer”.  (See link below.)  Included were a number of misleading statistics or misleading conclusions based on the statistics.  For example, according the think tank, Iowa Policy Project, the median hourly wage in 2016 was $16.04 per hour.  37 years ago, the average wage, adjusted for inflation, which is fair, was $15.91.  The Register concluded, “This means a typical wage earner  working 40 hours per week for a full year would have seen a real increase of $270.40 over a 37 year span.”  While the statistics are technically true, you cannot logically conclude and that any specific person or group of people did not move themselves from a lower wage to a significantly higher wage.  I’m sure it is true some people moved down while some people moved up.  An interesting study would be to see how wages correlate to the number of years in the employment market.  It would be interesting to know the median starting hourly rate for a young inexperienced worker versus and an experienced worker who has been in the labor market to 30 years.  The fact that the average stays about the same my be a problem, but almost no one stays at the average wage for 37 years.

Another statistic was that the number of people who earned $1 million or more during specific years increased from 5,031 in 2010 to 8,325 in 2015.  Their “slice” of the state’s total adjusted gross income grew 37%.  Meanwhile, the number of Iowans claiming gross incomes of $40,000 to $99,999 climbed by 23%  while their slice of the state’s total adjusted gross income fell 2%.  First, I would venture to guess that a significant majority of the $1 million+ earners are people who sold their businesses or had other one-time income.  So, again,there is no logical reason to presume that the $1 million+ club is made up of the same people year-after-year.  At the same time, from 2010 to 2015 the Iowa economy was generally continuing to improve, so values and prices of businesses likely climbed.  Also, in the case of an “expanding pie”, the fact that any group gets a smaller percentage of the total does not mean that their real income is not increasing.

Finally, the Register reported that their analysis of U.S. Census data showed that the bottom fifth of earners saw practically no growth in household income – going from $13,798 in 2006 to $13,848 in 2016, again adjusted for inflation.  Here again, there is no logical reason to believe that the specific group of people who were in the bottom 20% in 2006 are the same people who were in the bottom 20% 10 years later.  It would be interesting to know what percent of the people in the bottom 20% in 2006 were still in the bottom 20% 10 years later.   My guess is there would be some, but not a majority.

As a society we need to make sure we don’t put hurdles in front of people who are trying to improve their lot in life.  In many cases this means removing government created regulatory barriers to entry into certain jobs.  The Register has done very good work exposing job licensing regulations that are in place more to protect existing businesses from competition and to protect the profits of licensing education businesses, than to protect the public.  Yet, the Iowa Legislature has done precious little to address this real problem for low income workers who are trying to work their way up in our economy.

Link to Register article:  https://www.desmoinesregister.com/story/money/business/2017/11/25/most-iowa-wages-have-stagnated-but-rich-keep-getting-richer/818770001/

 

Social Security – don’t end the cap on taxable wages.

Recently, more people have called for an end to the cap on wages that are subject to the social security tax.  (For 2015, only the first $118,500 of wages are taxable, no social security tax is paid on wages above that amount.)  I think that would be the wrong way to go.  Social Security was sold to the public as a retirement plan where the amount of benefit received had some relationship to the amount paid in. It was not sold as a welfare program where the rich subsidize the poor. The benefits paid under Social Security are limited.  That is why taxable wages are limited.  Social Security is was intended to cover only a portion of a person’s needs during later years.  People should expect to continue to work throughout their lifetimes unless they save enough for their own retirement.  Unless, of course, we want to change over to a welfare system, where benefits are determined by politics rather than the amount you pay in.

Income inequality is not the problem.

Income inequality is not a problem in and of itself.  As long a people earn their income through honest, peaceful and voluntary exchange, then there is no moral reason for our government to redistribute that wealth.  What is a problem is when government places its thumb on the scale and unfairly helps the rich to get richer, or hurts the poor and makes them poorer.  To the extent that a person gains wealth by unequal preferential treatment by government, it is morally correct for government to use its force to take away that wealth.

One good example of the many unfair government policies that wrongly favor the rich is the special low income tax rate on “carried interest” income earned by hedge fund managers.  They call it carried interest, but it is nothing more than a bonus based on performance.   In any other situation, this type of income is taxed at regular income tax rates. Somehow, hedge fund managers have sold politicians on the idea that carried interest is a special kind of income that should be taxed at lower rates.  Another example is the Oil Depletion Allowance for oil companies.  Another is farm subsidies for rich farmers.  We do not need to raise tax rates on ordinary income, we do need to do away with the unfair preferences, tax breaks, and subsidies that go mostly to the wealthy.

A good example of government policy that hurts poor people is that of keeping interest rates low in order to prop up housing prices.  If housing prices had been allowed to fall to their free market levels, housing would be much more affordable for poor people.  Instead, our government tries to fix the problem that it helped to create (unaffordable housing) by giving rent subsidies to the poor – creating more dependency on government, but not fixing the underlying causes of the problem.

To misquote Walter Scott, “Oh what a tangled web we weave when first we practice to use our government to achieve social goals.”  The solution to many of our economic problems today is to reduce the size and scope of our government.  Many unfair crony capitalist subsidies and tax breaks exist because our government has expanded far beyond its Constitutionally limited powers.  The primary just powers of government are to protect our lives, liberty and property; and to resolve disputes.  The scope and powers of our current federal government are clearly way beyond the limited government that our founding fathers created.  Lets start by closing unfair tax breaks and lowering spending to match.

Register report on Iowan’s incomes is misleading.

The Sunday Register’s extensive report on income trends of Iowa families was interesting and accurate.  (See “Iowans lose ground on income” 8/12/2012)  But, the report was incomplete and misleading because it did not discuss income mobility.  Income mobility is the movement of families up and down within the various levels of income.   For example, one key statistic was reported this way:, “Iowa’s low-income earners, the bottom 30 percent, saw their median income fall 18 percent to $15,377 over the decade.”  This incorrectly implies that families who were in the lowest 30% in 2000 were the same families earning less money ten years later.  It is true that whichever families were in the lowest 30% in 2010 were doing worse than whichever families were in the lowest 30% ten years earlier.  It is also likely that many families who were in the lowest 30% in 2000 moved up to the middle 40% or highest 30% by 2010.  Similarly, it is likely that a large portion of the the lowest 30% in 2010 were not even in the workforce 10 years earlier because they were too young.

It is correct to say that families with incomes in the lowest 30% in 2010 are doing worse than families who were in the lowest 30% 10 years earlier, so there is reason for concern.  As reported, “There was real wage growth during the middle of the decade in Iowa, but we lost it in the recession, and it’s slowly coming back.”  Whatever government can stop doing to help speed up our recovery would be a good thing.