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Bernie Sanders and the Fixed Pie Fallacy by Chelsea German

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since.

Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”

Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.

Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%.

He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.

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In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.

Technology has also become cheaper, improving our lives in unexpected ways. For example, consider the spread of cell phones. There was a time when only the wealthiest Americans could afford one. Today, over 98% of Americans have a cellular subscription, and the rise of smart phones has made these devices more useful than ever.

Unfortunately, progress has been uneven. In those areas of the economy where competition is hobbled, such as education, housing, and healthcare, prices continue to increase.

Still, the percentage of the population classified as living in relative poverty has decreased over time. Why then do three quarters of Americans, including Senator Sanders, believe that the poor are “getting poorer?”

A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer.

Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Poverty remains a pressing issue, but Senator Sanders is incorrect when he says that the poor are becoming poorer. In the words of HumanProgress.org advisory board member Professor Deirdre McCloskey,

The rich got richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travelrights for womenlower child mortalityadequate nutrition, taller bodies, doubled life expectancyschooling for their kids, newspapers, a vote, a shot at university, and respect.

This post first appeared at HumanProgress.org.

Chelsea German

Chelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Marriage and the (Forgotten) Middle Class Welfare State by Daniel Bier

Jason Kuznicki, in his wonderful post on marriage and the state, included this baffling chart of how the marriage penalty/bonus affects couples jointly filing tax returns:

Kuznicki points out that the penalty/bonus part is just an inevitable artifact of the progressive income tax system. The math just works out that way.

But, my friend Sean J. Rosenthal points out, the chart also shows Director’s Law: “Public expenditures are made for the primary benefit of the middle classes, and financed with taxes which are borne in considerable part by the poor and the rich.”

George Stigler, channeling the work of the great Chicago economist Aaron Director, coined the term in a 1970 article in the Journal of Law and Economics.

The logic of Director’s Law is:

Government has coercive power, which allows it to engage in acts (above all, the taking of resources) which could not be performed by voluntary agreement of the members of a society.

Any portion of the society which can secure control of the state’s machinery will employ the machinery to improve its own position.

Under a set of conditions… this dominant group will be the middle income classes.

Stigler went on to describe the Public Choice calculus for a wealthy modern democracy. In a society like ours, with our electoral institutions, the interests of the middle class will always have the biggest sway on public policy, since most people fall in the middle of the income distribution, rather than at bottom or the top.

Politicians will (and must) try to gratify the middle’s desires and shift the costs somewhere else — i.e., the rich and the poor and future generations, since they have relatively less influence on public policy. (Though this general rule is not to say that there aren’t also policies that primarily benefit the poor or the wealthy.)

This explains a lot of features of public policy that don’t fit with the normal “welfare is all about the poor” or “the rich run everything” paradigms.

For instance, Obamacare’s insurance scheme is basically all a big subsidy for older, relatively wealthier middle class people at the expensive of younger, poorer people. The other half of Obamacare, the Medicaid expansion, increases eligibility for Medicaid up to 400% of the poverty line — that safety net is catching some pretty middling fish at this point.

Medicare and Social Security, the marriage penalty/bonus distribution, college student loans, tax write-offs for mortgage payments and employer-sponsored health insurance, small business favoritism, and a host of other policies are essentially giveaways to the middle class, at the expense of the rich and poor.

Nonetheless, we should expect politicians to continue harping on the plight of the middle class, stroking voters’ fears and concerns about the “shrinking middle,” promising to “rebuild the middle class,” pass “tax cuts for the middle class,” save “Main Street,” and on, and on.

And who could ever be against helping middle class? Nobody. And that’s how we end up being content with a marriage policy that punishes poor (and rich) working couples, even while pundits bemoan the state of marriage.

Update #1: As with many later developments in economics, Frederic Bastiat anticipated Public Choice by more than a hundred years. In his Selected Essays on Political Economy, recently republished by FEE, he wrote,

When, under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices.

Now, is it the most unfortunate who gain in this struggle? Certainly not, but rather the most influential and calculating.

Update #2: I see that Director’s Law was first mentioned in the Freeman, before Stigler published on it in JLE, in John Chamberlain’s coverage of the 1969 Mont Pelerin Society meeting in Venezuela.


Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.