Dec 06, 2011 at 12:31 pm
Commenter Greg raises a fair point about this sentence from this post:
Remember, and this is important as we move from diagnosis to prescription, the increase in inequality is very much a pretax phenomenon, and it’s neither realistic nor good policy to try to redistribute your way out of it.
To understand where I’m coming from here, let me introduce two concepts: the primary and the secondary distributions of income. The primary distribution represents market outcomes before the government gets into the game with taxes and transfers, like unemployment insurance or the mortgage interest deduction. The secondary distribution is the one that prevails once taxes and transfers are in the system.
Now, I strongly believe—and it’s one of the raison d’êtres of the CBPP—that the secondary distribution should be more equal than the primary one, i.e., that taxes and transfers should be progressive and that their impact should pushback on the inequities embedded in the primary distribution. This is particularly germane regarding blocked opportunities of the type that beset those stuck in low-income families, like access to quality education, safe, secure housing, and health care.
But the factors driving the growth in inequality are embedded in the market outcomes, and while increased progressivity can dull their edges and even counteract their longer term impacts (as just noted re access to opportunities), they cannot go far enough. Just think about the dynamics here: if, in a climate of increasingly income inequality, you punt on the primary distribution, then you will be depending on the largesse of the Congress (!!??##&!) to continuously increase the progressivity of fiscal policy. Good luck with that.
I’ve come to view this as a key point to understanding today’s self-limiting politics. The difference between typical Ds and Rs has diminished to the point where both basically agree that unfettered market outcomes should rip, even if they tear the fabric of society. D’s are just more willing to tinker along the edges of the secondary distribution, while R’s scream bloody murder as to how such tinkering will sink the whole operation. Neither side is much willing to go after the real culprit: the fact that the benefits of growth have become disconnected from the economic well being of most of the people helping to generate that growth.
I wrote about this here and included the figure below which shows how almost all the growth in inequality—measured here as the changes in pre- and posttax income shares—occurs before taxes. From that post:
The fact that the growth in inequality is largely a function of the pretax income distribution doesn’t mean we should make it worse with regressive, supply-side tax cuts—(economist Alan Blinder calls this move “unnecessary roughness”—amplifying pretax inequality with regressive tax cuts). To the contrary, we need balanced tax measures to generate the revenues to support programs that can help push back on this trend—initiatives like Head Start, child nutrition, educational support.
But it also doesn’t mean we can meaningfully correct the problem with tax policy alone. We have be mindful of all the policies that effect the pretax distribution—the distribution of labor and capital earnings before any taxes and transfers kick in…that’s where the real inequality action is.
The post goes on to discuss the kinds of things I think will make a difference in generating more equitable—and more fair—market outcomes. But my point here is that while we need to fight as hard as we can to preserve and strengthen measures to offset the growth of inequality, our fights will be much easier if we address the underlying structural factors driving the increase in market-driven inequality.
Or, to put it another way, you should really use the strongest sun block you can find, but you shouldn’t expect it to turn back global warming.
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