Look at spending for measure of equality

By JEFF PANTAGESMay 12, 2012 

First of two parts

The professor gets a "C." And that's only because I'm a soft grader. I'm talking about Steve Haycox's recent column on income inequality and capitalism ("Inequality's roots deep in U.S. history," May 4).

I took the History of Alaska class from the professor a while back. He does a terrific job when sticking within his field of expertise. But as most college students know, professors often indulge themselves and lose their judgment when they go off on a political rant.

Professor Haycox is correct. Income inequality in the United States is historically high. It is hard to argue otherwise. But that's not the important part of the story. Our standard of living is way above most other nations.' Even the poor in the United States live quite a bit better than the average person elsewhere in the world. And we have quite a safety net.

In fact, a better way of looking at inequality is looking at data on spending (including safety net transfers), not on income. It is a better measure of standard of living.

Diana Furchtgott-Roth of the Manhattan Institute does just that and notes, "The effective purchasing power of those with the least cash income is augmented by food stamps, rent supplements, Medicaid-funded health care, subsidized school lunches and other social programs."

She argues that measuring income on an after-tax basis and including these transfers substantially reduces inequality. Specifically:

"Government data on individual spending patterns show that the ratio of spending between the top and bottom 20 percent of the income distribution, measured on a per person basis, was essentially unchanged between 1985 and 2010. In 1985 people in the top quintile had spending that was 2.5 times that of people in the bottom quintile. By 2010 that ratio was 2.4."

In other words, economic inequality has diminished slightly since 1985.

Andy Kessler has another take on the inequality debate. Writing in The Wall Street Journal he looks at "The Rise of Consumption Equality." He argues that because of changes in technology, these days the wealthy can't enjoy much more that what the middle class does.

He notes: "Luxury suites at the Super Bowl? Why bother? You can recline at home on your massaging lounger and flip on the ultra-thin, high-def, 55-inch LCD TV you got for $700 -- and not only have a better view from two dozen cameras and fun commercials, but can hit the pause button to take nature break."

It used to be that only the rich could afford cellphones. Remember those two-pound clunkers the size of a shoe that cost a fortune and had limited range? Now practically everyone has a cellphone with a camera in it. Plus, you can fly almost anywhere in the world for $1,000 and use it.

Still, the notion that income inequality is unfair and can cause social disharmony has some traction, as Occupy Wall Street demonstrates. Perhaps this is what President Obama was thinking when he told ABC News that he would raise capital gains taxes even if he knew it would result in less revenue to the government. He would do it "for purposes of fairness."

Notions of income inequality and fairness go way back to ancient Greek times and probably before. Aristotle favored just prices and worried about inequality leading to civil unrest. But as another UAA professor (Lee Huskey in Economics) would remind students, "context matters." Athens was surrounded by enemies, so internal cohesion was important for survival. Best not to show off and create bickering and distrust at home.

The other fact Aristotle was dealing with was a fixed pie. Up until the 1700s world economic growth was anemic, practically zero. It wasn't until the industrial revolution and rise of capitalism that growth really accelerated.

When the pie is fixed, the only way to get a bigger slice is to take it from someone else. That isn't the case these days, but that was Aristotle's world and influenced his thinking. It was a zero sum world. That hardly describes America today. Yet that is the mindset of many liberals.


Jeff Pantages is an investment adviser. He lives in Anchorage. The second part of this Compass will appear Monday on the Opinion page.

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