Thursday, April 24, 2014

Most of the Households in the Bottom 20 Percent Have Nobody Working

By Thomas Sowell

Income inequality has long been one of the liberals' favorite issues. So there is nothing surprising about its being pushed hard this election year.

If nothing else, it is a much-needed distraction from the disasters of ObamaCare and the various IRS, Benghazi and other Obama administration scandals.

Like so many other favorite liberal issues, income inequality is seldom discussed in terms of the actual consequences of liberal policies. When you turn from eloquent rhetoric to hard facts, the hardest of those facts is that
income inequality has actually increased during five years of Barack Obama's leftist policies.

This is not as surprising as some might think. When you make it unnecessary for many people to work, fewer people work. Unprecedented numbers of Americans are on the food stamp program. Unprecedented numbers are also living off government "disability" payments.

There is a sweeping array of other government subsidies, whether in money or in kind, which together allow many people to receive greater benefits than they could earn by working at low-skilled jobs. Is it surprising that the labor force participation rate is lower than it has been in decades?

In short, when people don't have to earn incomes, they are less likely to earn incomes — or, at least, to earn incomes in legal and visible ways that could threaten their government benefits.

Most of the households in the bottom 20 percent of income earners have nobody working. There are more heads of household working full-time and year-round in the top 5 percent than in the bottom 20 percent.

What this means statistically is that liberals can throw around numbers on how many people are living in "poverty" — defined in terms of income received, not in terms of goods and services provided by the government.

Most Americans living in "poverty" have air conditioning, a motor vehicle and other amenities, including more living space than the average person in Europe — not the average poor person in Europe, the average person.

"Poverty" is in the eye of the statisticians — more specifically, the government statisticians who define what constitutes "poverty," and who are unlikely to define it in ways that might jeopardize the massive welfare state that they are part of.

In terms of income statistics that produce liberal outcries about "disparities" and "inequities," millions of people who don't have to earn incomes typically don't.

The more people who are in a non-income-earning mode, the greater the disparities with the incomes of those of us who have to work for a living, and who have to earn more to offset high tax rates. Yet liberals often act as if this is an injustice to those who don't work, rather than an injustice to those who do work, and whose taxes support those who don't.

Actually, the liberal welfare state is an injustice to both, though in different ways.

Despite whatever good intentions some liberals may have had in creating the ever-growing welfare state, practical politicians know that more dependency means more votes for supporters of bigger government.

There are no incentives for either politicians or the bureaucrats who run the welfare state agencies to get people off their dependency on government programs. Moreover, the eligibility rules create a very high cost to individuals who try to rise by getting a job and earning their own money.

It is not uncommon for someone who is receiving multiple government-provided benefits — housing subsidies, food subsidies, etc. — to lose more in benefits than they gain in income, if they decide to take a legitimate and visible job.

If increasing your income by $10,000 a year would cause you to lose $15,000 worth of government benefits, would you do it? That is more than the equivalent of a 100 percent tax rate on income. Even millionaires and billionaires don't pay that high a tax rate.

Liberals don't talk — or perhaps even think — in terms of the actual consequences of their policies, when it is so much more pleasant to think in terms of wonderful goals and lofty rhetoric.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University. He is author of Intellectuals and Raceand Economic Facts and Fallacies.


  1. "Liberals don't talk — or perhaps even think — in terms of the actual consequences of their policies, when it is so much more pleasant to think in terms of wonderful goals and lofty rhetoric."

    The same can be said of conservatives and their foreign policy initiatives. I wonder if Sowell scrutinizes his foreign policy positions in the same light. This is not mean to detract from his argument in any way. I'm only wondering aloud.

    1. Your not the only one who wonders this, fellow libertarians that I talk to both in regular everyday life and on the internet are sometimes baffled. With the very intelligent arguments Sowell makes against the welfare state and for actual free market that he sometimes comes off as embracing the warfare state. Even though Ron Paul, Lew Rockwell and others have pointed out that both are destructive and both warfare and welfare states have no place in a truly free society.

    2. I don't think he was making an argument that one side's policies are better than the other. He was only addressing the latest fraudulent argument being asserted by the dominant political group to cram their ideology down our throats.

      I often wonder how anyone that cares for the poor can support the state run welfare model when you look at how many people are completely dependent on the government for their survival, and not for a brief period, but in many cases for a life time. The state welfare system creates an unhealthy dependency on the political establishment to look after their needs. In the US, these people have become the "paid" vote for the Democratic party and the price for this is a lifetime of dependency on the Democratic party-- A party that is often at odds with the best interests of the poor (Extreme environmentalism (anti business and makes products more expensive), union support at the expense of all other workers, immigration reform that creates more people competing for limited resources given to the poor, wage laws that exclude the least skilled and drive businesses towards automation, regulation that acts as a disincentive for businesses to create the jobs or limits their ability to work the hours they want ). How can a democracy exist when so many of the people that vote are beholden to the generosity of the politicians and the politicians are beholden to these voters to provide them more wealth that they demand?

      I'm not against the idea of safety nets, but I cannot conceive of any way that the government is capable of running them in any kind of helpful honest fashion.

    3. As a Libertarian, what do you mean "conservative" warfare policies. I battle with chairBorne Rangers from both sides of the aisle regularly. When a "conservative" is in office, conservatives cheer their warfare support ... when a liberal is in office, people back them (Syria, Pakistan, Egypt, Yemen, NOT bringing the troops home as promised, Libya, ...). I have been antiWar ... when GWB was president I was called left wing, now I'm called right wing. So I agree warfare policies are destructive, but viewing them as an issue of the right is barrel-vision. The right is indeed worse, but the gap is shrinking.

  2. Long live crony capitalism.

    White House Former Chief Of Staff Joins Hedge Fund Launched By Former JPM Prop Traders

  3. Sowell's living in a contrived fantasy....and the top .01 earn their income?

    Piketty’s Wealth Gap Wake Up
    The other thing that is left out of the income tax statistics is of course how fortunes are really made, and that’s crime and fraud.

    Michael: You’re right. He’s started the discussion by showing the fact of vast inequality. What needs to be done now is to explain how did this inequality come about and what do you do about it? And as you and I have talked on this show before, the solution of simply taxing fortunes, which is very hard to do, is a very broad hammer. And you and I have spoken about particular kinds of wealth and particular kinds of making fortunes are predatory, and that’s namely economic rent, whether it’s land rent, natural resource rent, monopoly rent or the kind of money that the financial sector makes. So Piketty’s book, large as it is, didn’t discuss this except at the end to say “Well, you need to somehow tax the wealth away”. Well, that’s true, but that’s for another book in the future. How do you tax it away? What’s the best kind of tax to make economies grow?

    One of the things that Piketty does not discuss when it comes to making fortunes is the role of debt, that most of these fortunes that have taken off since 1980 have taken off because of the increased debt leverage. As interest rates have fallen since 1980, you’ve had more and more bank credit going in to just bid up real estate prices, stock prices, bond prices, every kind of price, not to mention fine arts trophies that have gone with this. So, just as you’ve had the rising ratio of wealth to income of the 1%, you also have a rising ratio of debt to income. And so this indebtedness and the net worth again is very unequally distributed. Most peoples’ families, the major asset they have is in their home but these homes are also very heavily mortgaged and the mortgage payments they make, basically the 99% makes interest payments to the 1%.

    And what to me really has been accelerating wealth at the very top is the financial sector, is the ability of the 1% to get the other 99% in debt to them by saying “Look, we’re controlling the access point to buying a home, to buying basic needs, in America to getting an education, and you can’t afford to buy a home or get an education or even a car without borrowing money. And we’re going to charge you enough interest so that everything you earn in effect you’re going to be paying us for interest”. And that’s the same thing that is leading the corporate raiders and the activist shareholders to try to raid corporations and say “Pay up more of your money as dividends”.

    So you’ve actually had a dismantling of tangible wealth and an increase in what used to be called fictitious capital or fictitious wealth, which is all basically debt leveraged wealth.

    1. So, Fed and the crony banks print money and give it to the 1%. Film at 11. If you actually bothered to read this site, you'd know that already without that overhyped Marx plagiarist Piketty.

      How does it make Sowell's statements invalid?

    2. 1) It is true that our crony fascist system is corrupt and rigged to favor entrenched interests, but why would anyone imagine that a government-run "wealth tax" would somehow cleanse the system and bring about "fairness" for all? It would simply be another pretense for the ruling class to seize more money from the non-ruling class and further empower the entrenched interests.

      2) The concern about whether income is "earned" vs brought in through investment or rent is misplaced and irrelevant. There is nothing inherently superior, nobler, or more moral about "earning" your income, rather than receiving it as dividends, interest or rent payments.

      Capital accumulation, investment in the businesses of others, assumption of risk that others are unwilling to take--these are all legitimate and valuable functions (divisions of labor, in a way) in a large enough economy. Those are think otherwise are dangerously under-informed.

      3) If you resent paying interest to others, then don't borrow the money in the first place. Do you think that other people should work hard, sacrifice enough of their own needs and wants to amass some savings for their own future, and then simply lend it to you for absolutely no reason, no return, no benefit to themselves? Why would anyone forgo their own wants and desires to save up the money to lend to you for nothing in return?

      Interest payments are not some conspiracy to keep you in servitude. They are the fair and reasonable price you voluntarily agree to pay to purchase something that, for whatever reason, you have not saved up enough to buy without anyone else's assistance.

      Biting the hand that feeds you (or lends to you) is not a long-term "sustainable" strategy.

      4) Other people being rich does not necessarily make you poorer, although if you have a strong case that someone has robbed, defrauded or otherwise harmed you, that's what the courts are for. But they'll want something solid, not vague suspicions of mistreatment arising out of a complete lack of knowledge about how an economy works.