Lunchtime Must Read: Jonathan Chait: Yellen Mentions Inequality; Right Scandalized
Afternoon Must-Watch: Emmanuel Saez and Laura Tyson: Income Inequality in the Twenty-First Century

Over at Project Syndicate: Material Well-Being in America since 1979

Material Well-Being in America since 1979

J. Bradford DeLong

Over at Project Syndicate: Over at Project Syndicate:

The story goes: since 1979, the peak of the last business cycle before the inauguration of Ronald Reagan, economic growth in America has been overwhelmingly a rich-only phenomenon. America's poor and the middle class, it is often said, have at best only trivially higher inflation-adjusted real wages, incomes, and living standards send their predecessors who occupy the same slots in the income distribution back in 1979. While real GDP per capita in America has grown from $29 thousand per year to $50 thousand per year in 2009-value prices--total growth of 72%, or 1.6% per year--all or almost all of this growth has gone to those who now occupy the rich slots in the American income distribution.

How true is this, really? The answer appears to be: true--with perhaps a very few caveats, but important caveats:


One important caveat is found in the Congressional Budget Office's Distribution of Household Income and Federal Taxes:

[American] real after-tax income for the lowest quintile [was] 49 percent higher in 2010 than in 1979 (see Figure 9). Income growth averaged 1.3% annually for that group over the period. After-tax income for the middle three quintiles in 2010 was 40 percent higher than in 1979—equivalent to an average annual growth rate of 1.1% for the period. Households in the 81st to 99th percentiles... [saw] after-tax income... 64 percent above its level in 1979.... In 2010, household income for the top 1% was 201 percent above the mark for 1979, representing an average annual growth rate of 3.6%, far ahead of any other income group...

And, by now, with the recovery concentrated among the rich as well, the top 1% of Americans are highly likely to be back to a cumulative 300% gain since 1979.

But real income gains of 1.3% per year for those bottom-quintile slots in the American income distribution are not chopped liver, are they? The gap with the 1.6% per year real American GDP per capita growth rate is small, isn't it?

Well, yes and no.

You can say that market income has become grossly more unequal since 1979 with the slots in the bottom half of the income distribution losing absolute ground in real income, and with taxation becoming less progressive, but that while this increase inequality has not been fully offset it has been substantially moderated by the growth of the social insurance state.

But when you look at the 1.3% per year growth rate of after-tax real income that the CBO calculates for the bottom quintile, 0.9%-points per year of that comes from the growth of the health-care financing programs: Medicare, Medicaid, SCHIP. CBO counts all of that growth as an increase in the after-tax real incomes of America's poor. But that is not money that America's poor can spend, so some haircut should be applied. Moreover, only half of those expenditures show up as more health care received by program beneficiaries--the other half flow into the general American health-care financing system and cover care that was previously uncompensated. And America's health care financing system is uniquely inefficient: it really does look like other OECD countries get more bang in terms of health and healthcare services from $1 of spending then America gets $2. Apply all of those haircuts, and it seems to me that a better estimate of the contribution of expanded American public health-care programs to the material well-being of the American poor is not 0.9%-points per year but 0.2%-points per year.

Hence the necessity of something like RomneyCare, or ObamaCare, or biting the single-payer bullet, so that America gets something like normal OECD value out of its enormous health-care expenditures.

Depending on whether the day is odd or even, I come down in two different places on this issue of the interaction of growing government health-care financing programs and inequality. On odd days, my bottom line is that material well-being since 1979 has grown at 0.5% per year for America's poor compared to 4.0% per year for America's rich (and 6.0% per year for America's super-rich) because most of the expansion is not the equivalent a greater income for America's poor in any reasonable sense, and because America's broken health-care financing system seems that America gets relatively little health well-being bang out of it's typical health care financing buck. On odd days, my bottom line is that healthcare for and the health of America's poor in 1979 lagged so far behind that achieved in a normal OECD social democracy that even though each extra $1 produced only $0.25 of real health-care services delivered, poor health status meant that that $0.25 was Worth about one dollar to the poor in terms of material well-being. On this reading, the expansion of the health-care programs has kept the properly-measured material well-being of America's poor improving since 1979 at a rate not too much less then that of real GDP per capita. But that the healthcare coverage and financing gaps that existed in America in 1979 made it then a much more unequal place then the income dollar-share numbers then showed.

Graph Real disposable personal income Per capita FRED St Louis Fed

Www cbo gov sites default files 44604 AverageTaxRates pdf

Www cbo gov sites default files 44604 AverageTaxRates pdf

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