No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 315 What the critics mean when they make this claim is that income inquality is rising, and to a large degree this is true. While the abolute income of the poor is rising in real terms (adjusted for inflation), the income of the rich is rising even faster. But even this is not as bad as the critics suggest. As economist Steve Horwitz outlines in the article just referenced, there is considerable migration within income groups over time. In other words, comparing the poor to the rich over time is misleading because they are often not the same people . Some that were in the lowest income group will have moved to the top, and vice versa. While that is unusual, it is not unusual to see people move from one income quintile to an adjacent quintile. This happens as the poor gain skills, work, and save. Over time their lives improve, and they leave the poorest class and move toward middle class. They are replaced by young people entering the work force, as well as immigrants, who usually start out at the bottom of the ladder. Likewise, some at the top do not stay there; there is certainly no guarantee that once you become rich you’ll keep your wealth. This is especially true one or two generations downstream from the originally rich. Nevertheless, there are many advocates of government action to redistribute wealth from the top income classes towards the bottom, such as former Secretary of Labor Robert Reich and Speaker of the House Nancy Pelosi. Unfortunately, most income transfers are not from the rich to the poor, but from the politically unorganized to the politically organized. As economist Dwight Lee shows, “the pattern of redistribution appears to be political power, not need. ” Lee notes that only 25% of income transfers are means tested (based on need), and the remaining 75% is independent of income. For example, one of the largest income transfers are for the recipients of social security; the only requirement is be old enough to receive the transfer (no financial need required). Lee also identifies hidden perverse income transfers from the poor to the rich, such as tariffs that benefit wealthy producers which results in poor people paying higher prices for goods, or farm subsidies to millionaire farmers which result in poor people paying higher food prices. In a 2012 series on The Unequal State of America, Reuters also noted the startling rise in benefits to the rich from expanding government. In “Redistributing Up, ” Reuters (authors Deborah Nelson and Himanshu Ojha, 2012) noted, “In the town that launched the War on Poverty 48 years ago [Washington DC], the poor are getting poorer despite the government’s help. And the rich are getting richer because of it. The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 - a ratio of 54 to 1. That gap is up from 39 to 1 two decades ago. It’s wider than in any of the 50 states and all but two major cities. This at a time when income inequality in the United States as a whole has risen to levels last seen in the years before the Great Depression….The federal government does redistribute wealth down to struggling Americans. But in the years since President