Blue State Policies Increase Income Inequality

Wall Street Journal op-ed: The Blue-State Path to Inequality, by Stephen Moore (Heritage Foundation) & Richard Vedder (Ohio University):

For those in Washington obsessed with reducing income inequality, the standard prescription involves raising taxes on the well-to-do, increasing the minimum wage, and generally expanding government benefits—the policies characterizing liberal, blue-state governance. If only America took a more "progressive" approach, the thinking goes, leaving behind conservative, red-state priorities like keeping taxes low and encouraging business, fairness would sprout across the land.

Among the problems with that view, one is particularly surprising: The income gap between rich and poor tends to be wider in blue states than in red states. Our state-by-state analysis finds that the more liberal states whose policies are supposed to promote fairness have a bigger gap between higher and lower incomes than do states that have more conservative, pro-growth policies.

The Gini coefficient, a standard measure of income inequality, calculates the ratio of income at the top of the income scale relative to the income of those at the bottom. The higher the ratio, the more inequality. A Gini coefficient of zero means perfect equality of income and a Gini coefficient of one represents perfect inequality, such as if one person has all the income. ...

According to 2012 Census Bureau data (the latest available figures), the District of Columbia, New York, Connecticut, Mississippi and Louisiana have the highest measure of income inequality of all the states; Wyoming, Alaska, Utah, Hawaii and New Hampshire have the lowest Gini coefficients. The three places that are most unequal—Washington, D.C., New York and Connecticut—are dominated by liberal policies and politicians. Four of the five states with the lowest Gini coefficients—Wyoming, Alaska, Utah and New Hampshire—are generally red states.

In the Northeast, the state with the lowest Gini coefficient is New Hampshire (.430), which has no income tax and a lower overall state tax burden than that of its much more liberal neighbors Massachusetts (Gini coefficient .480) and Vermont (.439). Texas is often regarded as an unregulated Wild West of winner-take-all-capitalism, while California is held up as the model of progressive government. Yet Texas has a lower Gini coefficient (.477) and a lower poverty rate (20.5%) than California (Gini coefficient .482, poverty rate 25.8%). ...

The two of us have spent more than 25 years examining why some states grow much faster than others. The conclusion is nearly inescapable that liberal policy prescriptions—especially high income-tax rates and the lack of a right-to-work law—make states less prosperous because they chase away workers, businesses and capital. ...

When politicians get fixated on closing income gaps rather than creating an overall climate conducive to prosperity, middle- and lower-income groups suffer most and income inequality rises. The past five years are a case in point. Though a raft of President Obama's policies—such as expanding the earned-income tax credit and food stamps, and extending unemployment benefits—have been designed to more fairly distribute wealth, inequality has unambiguously risen on his watch. Those at the top have seen gains, especially from the booming stock market, while middle-class real incomes have fallen by about $1,800 since the recovery started in June 2009.

This is a reversal from the 1980s and '90s when almost all income groups enjoyed gains. The Gini coefficient for the United States has risen in each of the last three years and was higher in 2012 (.476) than when George W. Bush left office (.469 in 2008), though Mr. Bush was denounced for economic policies, especially on taxes, that allegedly favored "the rich."