Paul L. Caron

Sunday, June 8, 2014

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."

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"this appears to be a correlation vs. causation issue?"

With 25 years of data, they can see programs beginning and which direction the gap moves in response, so they can establish causitive direction.

Posted by: Ben | Jun 8, 2014 7:51:37 PM

Perhaps if the federal tax revenue from the blue states wasn't being channelled into the red states through military spending, the blue states could do more to help their own poor.

Posted by: Anon | Jun 8, 2014 7:25:33 PM

The blue states also have higher average and median disposable income per capita, longer life expectancy, lower divorce and single motherhood rates, higher levels of educational attainment, and lower obesity rates.

Presumably higher visible inequality triggers increased demand for social services, and more generous social welfare policies attract the poor from other states.

It's probably a lot better to be homeless in Santa Monica than in Houston.

Posted by: Anon | Jun 8, 2014 7:20:47 PM

Capital is on strike until Captain Uncertainty retires. No capital, no growth, no jobs, static middle class. Who really gives a flip about the top and bottom 5%?

Posted by: Bat Chain Puller | Jun 8, 2014 4:02:16 PM

This would be a lot more interesting if you lopped off the top and bottom two income deciles and then renormalized the Gini coefficient. I'm not worried about the super-rich vs. the super-poor, but I'm very worried about what's happening to the middle class. I doubt that blue-state policies are doing much there, either, but it would be interesting to know for sure.

Posted by: TheRadicalModerate | Jun 8, 2014 3:12:48 PM

At first glance, this appears to be a correlation vs. causation issue, no?

Posted by: No, breh | Jun 8, 2014 11:26:23 AM

This is true, although the cause and effect is unclear. Places like New York do indeed have more inequality than the Red States. But would Red State policies make that better or worse? It's uncertain.

Posted by: michael livingston | Jun 8, 2014 3:11:57 AM