When Income Disparity Matters

Typically, when I hear President Obama use loaded terms like ‘income inequality’ and ‘social justice’, I get nauseous and immediately tune out.  Income inequality is just political speak because it presumes some desirable level of fairness that should drive public policy.  Of course, that is a ridiculous notion.  The imposition of someone’s idea of ‘income equality’ would be socialistic at best and tyrannical at worst.

Income disparity on the other hand, has a more concrete meaning because it refers to income differences that are measurable in real terms.  Whether or not it is important is another matter.  I would argue that traditionally, income disparity in the United States has not mattered.  Income mobility, which refers to the speed, ease and frequency with which individuals can move up the income ladder has been, and should be considered far more important.  It is the hallmark of a robust free market economy.  

How income disparity is measured and analyzed can be problematic.  The left will often report such disparities in dollar terms rather than in terms of their proportionality and they usually do not include factors affecting net outcomes such as welfare and taxation.  Nevertheless, such disparity should not matter so long as income mobility remains high.

Prior to the end of the Bush era and the beginning of Obama’s Presidency, I would have said that income disparity was a non-issue.  However, that disparity has widened despite the imposition of big government policies aimed at among other things, wealth redistribution.  This suggests that such policies are not leveling the paying field, but are instead enriching insiders and curbing opportunities for upward mobility.  

A healthy growing economy will naturally have income disparity, but it should also exhibit rising wages at all income levels.  That is not happening for a number of reasons.  First, the real unemployment rate remains very high.  It is important to remember that the official rate only measures the percentage of active job seekers who are without a job.  This is what is referred to as the ‘labor participation rate’.  Thus, the official number does not capture those who have given up on finding employment or those who are working part-time, but would prefer full-time employment.  The labor participation rate is at a historic low.  Chronic long-term unemployment  will only serve to widen income disparity in the future because the income potential of these individuals is being eroded every day that they are on the sidelines not gaining necessary skills and experience.

So, what the big impediment to hiring?  To put it succinctly, the government has not allowed wages to bottom out.  This requires some explanation.  Access to cheaper labor is needed in the short-term during a recession or slowdown in order to return to full employment.  This is because when excess labor exists, the laws of supply and demand reduce market wages, which in turn reduces the cost of new investment and helps kickstart recovery.  Wages begin to climb again when hiring expands and there is more competition for available labor.  The government has prevented wages from bottoming out by increasing the net cost of hiring with onerous taxes and regulations like Obamacare, which function as a de facto minimum wage hike.  The administration has also enabled the unemployed to opt out of taking lower paying jobs by repeatedly extending unemployment benefits.

The unemployment rate does not explain income growth at the top of the economic scale.  That has to do primarily with the Federal Reserve’s monetary policy.  Despite the lack of economic growth, the equity markets are at record highs.  This is primarily due to the devaluation of our currency through quantitative easing, which is essentially digital money printing that inflates the price of assets.  It will eventually lead to price inflation elsewhere if it hasn’t already.  Inflation is basically a hidden tax on the poor and middle classes because their wages rarely keep pace and that makes it difficult for them to build wealth through savings and investment. Contrast that to those whose wealth is already established.  They are less affected since the value of their existing assets will usually keep pace with inflation.  The other reason that inflation should be understood as a tax is that it is always the result of governments spending more money than they actually have.

The United States has also been in dire need of comprehensive tax reform for some time.  The tax code is far too complex, which has all sorts of unintended consequences.  Corporate taxes are basically middle and lower class taxes because they suppress wages and limit hiring.  They also discourage the repatriation of profits earned overseas, which limits the amount of capital that is available domestically.  Rather than embrace reform that is focused on growth, this administration has maintained ideological rigidity by pushing for higher taxes on businesses, individuals and investment.  They have also made the tax code more convoluted by utilizing it as a social engineering tool.  The IRS is now charged with doling out Obamacare subsidies based on income.  This has the potential to create perverse incentives such as voluntarily capping one’s own income or avoiding marriage in order to qualify.  The administration has also sought special tax breaks for pet industries such as solar power and electric vehicles, which rewards insiders at the expense of others.  All of this puts downward pressure on opportunity and income mobility.  

It is also worth mentioning that a complex tax code advantages those with the knowledge, resources and connections to take full advantage of it.  The same thing happens with regulation that is supposed to protect the individual.   The largest companies use their influence to ensure that the rules enshrine their business models, which limits competition.  This is all at the expense of the individual tax payer and consumer.

Finally, expanding access to means-tested entitlement programs like welfare and food stamps exacerbates social problems such as long-term unemployment, government dependency and single parenthood.  All of these problems impede upward income mobility.  Few people realize that the stimulus bill significantly reduced the eligibility requirements for food stamps.  President Obama also used executive authority to eliminate most of the welfare work requirements.

The cumulative affect of this shift toward larger and more intrusive government is the start of a very dangerous long-term trend whereby individual initiative is constantly curtailed and whereby wealth is increasingly created and protected not through free market competition, but rather through cronyism.  This will result in a lower standard of living as well as the decline of income mobility.  Under that sort of system, income disparity can become dangerous by leading to either instability or authoritarianism.

The Absurdity of having a 'Minimum Wage'

One of the more memorable lessons from my college microeconomics class focused on the effects of minimum wage laws and other price controls.  The professor used a neat and simple graph to quickly prove in mathematical terms that increasing the minimum wage leads to higher unemployment as well as net loss in economic output.  Rather than plagiarize my old textbook, I want to simply focus on the laws’ utter absurdity.

Besides distracting from Obamacare, what is the purpose of increasing the minimum wage?  The most common answer you’re likely to hear revolves around ensuring that workers are paid a ‘livable wage’.  Livable for who?  What does ‘livable’ even mean?  These questions are obviously rhetorical, but there is a point here.  Whatever number is chosen will be completely arbitrary.  Not everyone is seeking the same wage or even the same number of hours.  If jobs were being offered at rates that didn’t enhance someone’s life at some level, there would be no takers and the wage would have to rise.  I would love for someone to clean my apartment for five dollars, but it isn’t going to happen.  Employment is voluntary, so clearly if a wage is being paid, it’s livable for someone.  

As alluded to earlier, a minimum wage is nothing more than a price control or more precisely, a price floor.  Imagine if the government enacted a law tomorrow mandating that no new car be sold for less than $30,000.  What would happen?  It should be pretty obvious that fewer people would buy new cars and those that did wouldn’t buy a stripped-down compact car.  There would also be a ripple effect in the form of more demand for used cars, which would make them more expensive.  That would mean fewer people could own a car at all.  The same phenomenon occurs when you set a minimum wage.  The least skilled and experienced workers get priced out of the labor market entirely and cannot, therefore, gain skills and experience to make more money in the future.  Fewer business models become viable as the price of labor rises.  With fewer people working and lower corporate profits, there is less tax revenue and more welfare spending.

Minimum wage laws are nevertheless, popular.  People must believe that they work and there’s no doubt some get pay increases when the minimum is raised, but those same people will also pay higher prices for essential goods and may end up with reduced employment opportunities.  A grocery store owner cannot fire all his minimum wage employees at the drop of a hat, but over time, he will make adjustments such as filling future openings with experienced workers rather than inexperienced ones as well as raising prices where he can.  This type of behavior is no different than the behavior we adopt as consumers.  When the price of a good goes up, we may not buy it or we may buy less of it.  It seems like common sense, but it isn’t for most people.  They do not regard employers as rational consumers of labor, but instead have a much more marxist view.  Greed is often referenced.  I spoke with a co-worker a couple weeks ago who couldn’t understand why his uncle who owned a business and was wealthy according to him, was going to cut his staff rather than simply pay all of his workers more in the wake of New Jersey raising its minimum wage.  He intuitively believed that his uncle’s wealth and business existed magically and didn’t consider the fact that he has competitors or that a certain rate of return is required to justify putting his own fortune at risk.

In all likelihood, leftists like President Obama know all of this and also know that pushing minimum wage hikes is good politics.  That’s especially true now that his signature law is crashing and burning for all to see.  A distraction was desperately needed and this issue was chosen for a reason.  The Right will never win the minimum wage argument.  Marxist and leftists look at a profitable company and cannot understand why some of those profits cannot simply be transferred to the workers in the form of higher wages.  Unfortunately, the average person is also conditioned to think this way by the media as well as by their own economic illiteracy.  Walmart is a favorite target of the left as well as a useful punching bag despite the fact that so many low income people benefit from its existence.  While it is a very profitable company, it is not a high margin business.  It is volume-driven and requires an enormous amount of capital to bring goods to market at such low prices.  The second that Walmart cannot provide its shareholders with an acceptable rate of return, that capital will flow away from Walmart and toward businesses that don’t pay above-market wages.  If the average person cannot connect the dots between low costs and low prices in the country’s largest and most visible retailer, there really is little hope of turning the majority against minimum wage laws and it would be truly absurd for the right to engage Obama on this issue.  Focus should remain on Obamacare, which is not only unpopular, but is also a massive and hidden minimum wage hike.

Why Obamacare is Doomed

No one should have been surprised when President Obama’s promise that Americans could keep the doctors and healthcare plans they liked proved false.  Only the few people who had actually read the law and the regulations created afterward could have known the extent that these repeated promises represented a willful deception.  However, anyone with experience running a business or a modicum of knowledge about insurance knew that it was a hollow promise to say the least.  That is because healthcare decisions, like all financial decisions, are made at the margins.  Many of the Obamacare provisions, which everyone knew about from the beginning, change the cost equation for insurers, employers, and individuals rather significantly.  Let us consider some examples.

Some of the law’s more prominently touted provisions such as not allowing insurers to impose lifetime limits or deny individuals for pre-existing conditions really should have been among the biggest red flags in terms of knowing that the insurance market was going to undergo dramatic and disruptive changes.  There was very little scrutiny or discussion about how these, and other costly new mandates were going to be funded.  Presumably, that was the case because when poll-tested individually, such provisions were popular.  It should have been obvious that these changes were going to be expensive and significant adjustments would be required at multiple levels in order for the system to absorb those costs.

The fact that so many people were surprised by premium increases and the loss of individual plans despite what the President promised only serves to highlight what was wrong with the healthcare system even before Obamacare.  That is, too many individuals are divorced from the costs of individual healthcare decisions and have little understanding about how their healthcare is funded.  It is that ignorance which has historically benefitted democrats when healthcare policy was debated.  More people were sympathetic to the left’s notion that healthcare is a ‘right’ because they weren’t aware that the right they sought to confer would have to be funded out of their pockets whether through higher taxes, premiums or deductibles.  

The downfall of Obamacare will not be the result of the pathetic website rollout, but rather key miscalculations on the part of its proponents.  The first and most obvious has to do with the law’s effect on the healthcare marketplace.  Some of the price shocks and cancellations being experienced now that Obamacare is rolling out are life-altering.  Media outlets are also starting to report on the projected loss of group coverage by tens of millions of Americans next year, which should also come as no surprise given the laws onerous provisions.  Politicians are well aware that regulations and mandates have costs, but they typically don’t care so long as their ends are served and they escape blame for the negative consequences.  In the case of Obamacare, the effects are not hidden and incremental, but rather obvious and significant especially given their timing.  One would have to delude themselves into thinking they are the result of anything but the new law because it is the most visible and obvious variable in play.   

Second, the left typically regards the average person as incapable or to put it more bluntly, stupid.  This is a miscalculation because the truth is that most people are ignorant or to put it more politely, misinformed.  That is an important distinction.  Much of the frustration experienced by those including myself who sought to warn others about Obama and later, Obamacare, stems from the fact that the majority of Americans are simply uninformed and apathetic when it comes to politics and public policy.  However, those same people wake up rather quickly when their wallets are impacted and they start to pay much closer attention.  Many  in the media have attributed Obama’s approval rating to the fact that he lied, but this is not the first time he has done so.  It is just the first time that one of his lies has the potential to adversely affect so many.  Now that the law is finally receiving adequate scrutiny more than three years after its passage, Americans are beginning to come to terms with the extent to which they were deceived and what the effects will be.

The final miscalculation was the belief that Obamacare would be received the same way that other national entitlements had been.  Americans are human and can therefore, be bought just like anyone else.  That is why middle-class entitlements like Social Security and Medicare are popular and difficult to reform despite their obvious future insolvency.  Like Obamacare, there was no great call for them prior to their passage.  Most beneficiaries regard them as insurance policies to which they have paid in rather than the transfer payments that they are.  In examining the structure and timeline of Obamacare, the strategy is clear.  The belief was that after people lost their policies by design and were then forced into the exchanges, the subsidies would kick in and the law would become popular as a result of the dependency it created.  Thus, Obamacare would be enshrined just like the great national entitlements which preceded it.  That calculation is proving itself to have been overly simplistic.  Similar to Social Security and Medicaid, Obamacare is compulsory.  There are, however, some key differences.  

First, most Americans accept as a general principle that the elderly and disabled should be cared for, but are far less enthusiastic about subsidizing those they perceive as having made poor life choices.  That is why welfare reform was so popular.  In addition, while one cannot opt out of Social Security, he or she can choose to contribute to a 401K and IRA in order to have a better retirement than those relying solely on entitlements.   While Social Security and Medicare will prove to be a raw deal for most individuals still working, those programs were, or were perceived to be, a good deal for most beneficiaries initially.  Obamacare is already proving that it is not.  It is making the lives of many people worse by raising their costs and depriving them of plans and doctors they once had.  Social Security and Medicare imposed taxes, but otherwise, did not take away other avenues of retirement planning.  Contrast that to Obamacare, which limits the range of policies one can purchase and by all accounts, limits the network of physicians and hospitals that policy holders can access.  It is also far more costly for most individual tax payers.  The notion that eligible Americans will desire subsidies in exchange for reduced choice under Obamacare is a precarious one at best.  Those not eligible for a subsidy are getting a very raw deal no matter how you look at it.

As the title of this article implies, Obamacare is doomed.  Any person knowledgable on the subject could easily fill a book detailing all the reasons why it is a bad law and no doubt many have by now.  However, the simple reality is that the law does not work financially.  Whether healthy thirty year olds will shell out thousands of dollars for overly comprehensive policies with high deductibles is one of the burning topics of discussion in the media, but the answer should be obvious.  The vast majority will not.  Many cannot afford it and many more will recognize what a bad deal it is.  Such high costs are not exaggerated.  The law requires the young to pay very high premiums by capping the disparity that insurance companies may charge their highest and lowest risk policy holders.  This amounts to an age-based tax that is so egregious, most will refuse to participate and that basically eliminates the law’s primary funding mechanism.  

The bottom line is that Obamacare is built on mandates that the market simply cannot withstand.  Once the young and healthy opt out, the price of the policies in the exchanges will spiral out of control very quickly.  The only way to save the program will be to throw significantly more money at it by expanding subsidies, which in all likelihood will be impossible after the 2014 elections.  Democrats will not take the House of Representatives and may even lose the Senate for reasons outlined above.  What comes next is anyone’s guess, but Obamacare as it presently exists, is doomed not just by politics, but by economic reality.