Stone Pigs

Posted By Alan Partis on March 14, 2009

President Obama has recently published, through the U.S. Government Printing Office, his latest book titled A New Era of Responsibility: Renewing America’s Promise. The President’s Budget and Fiscal Preview.  This book amounts to his budget agenda.  I have not read it because I’m not willing to spend $26 for its 141 pages.  It has, however, been distributed freely to credentialed press.  I’m not sure why electronic versions cannot be downloaded for free so those who are interested in such things can get a full first-hand review.  It does bother me to a certain degree that it cannot.

My exposure to its content is therefore filtered and limited to what some of the credentialed press have written.  Specifically, I first read about it here: The Obama Rosetta Stone, an article in the Wall Street Journal, written by deputy editor Daniel Henninger.

I’d like to focus on the chart that is included in the book on page 11 that is titled, “Top One Percent of Earners Have Been Increasing Their Share” and shown here.  This chart, and the data behind it, are used as much of the basis for the argument to redistribute wealth as Obama himself espoused during his campaign for the Presidency, most noteably, and directly, in response to a question from “Joe the Plumber.”

I want to examine what this graph does, and does not, show.

It shows that from 1980 to 1988, Ronald Reagan’s term, the share of total income brought in by the Top 1% (we’ll call them TOP for short) went up from 10% to about 14% after having peaked near 16% in 1986 and dropped again to 13%.  It would be interesting to see this graph extended back at least to 1950, if not 1900, to obtain a more complete historical frame of reference, but it doesn’t, so we can only work with what we have.  I think it is safe to assume that the data prior to 1980 does not support Obama’s thesis, otherwise he would have seen to it that it was included.

From 1988 to 1992, George H. W. Bush’s term, the TOP share remained fairly constant at just under 15%.

From 1992, the start of Bill Clinton’s term, to 1995, it continued to remain flat under 15%, but then shot up to 21% by the end of his second term in 2000.

In 2000 a sharp decrease ensued, coincidental with the start of George W. Bush’s first term, dropping nearly to levels that were last seen with regularity in his father’s term.  Then from 2003 to 2006, the end of the graph, the trend reversed and the TOP share went back up to over 22%.  Again, I think it is safe to assume that more recent data (which is surely available to the authors and President Obama) does not support Obama’s thesis since it was not included.

Clearly, the President who’s policies held the TOP share steadiest was the first President Bush.  President Clinton presided over the biggest increase.  George W. Bush’s term was a bit of a seesaw with the large reversal at the beginning of his term when Republicans controlled Congress and the White House, followed by a return to Clinton levels as Democrats gained more power in Congress.

That’s what the chart DOES tell us.

There are many things it doesn’t tell us.  Chief among them is whether this is a good thing or a bad thing.  It doesn’t put it into context with much history, nor does it compare the TOP in the U.S. with the TOP in Europe, Asia, Australia, South America, the Middle East, or Africa.  My gut tells me that the income distribution in much of the rest of the world is MUCH more pronounced.  My gut also tells me that given how the TOP performed during the Clinton years, it will not be much different during the Obama years.  The big question in all readers’ minds should be, “Why?”

This data also doesn’t show the income share of any other strata in the U.S.  It doesn’t show the total income.  If total income went from, let’s say, $2 trillion to $10 trillion, then middle class income might well have gone from $1.8 trillion to $8 trillion.  Income in the bottom 1% might have held steady, but the number of people in that category might have decreased, thus increasing their income per capita.  There is no way to know whether any of this is true so there is no context within which to judge the value of Obama’s chart and thus nothing to provide real support for his argument.  The problem is, Obama is using this as the basis for his tax and redistribution agenda.  He’s using this to whip up uneducated popular support and he’s doing so while providing limited information.  So, to the extent that there may be more critical thinkers out here, the data we’re working with is incomplete and purposely misleading.  Or is it?

Are there other conclusions that can be drawn?  What does the chart say about what types of tax policies have what kind of effect?  Let’s take a look.  Immediately following George W. Bush’s famous tax cuts in 2000 the TOP share dropped precipitously (the opposite of liberal thought) and increased the most after Clinton’s then biggest tax increases in American history.  In response to Reagan’s major tax reform in 1986, which dropped top marginal income tax rates by over 50%, the TOP share dropped sharply.  Empirical evidence tells the astute reader that when Republican Presidents enact tax cuts that get characterized by the opposition as tax cuts primarily for the wealthy, the income share of the TOP drops the most.  Conversely, when Democrat Presidents enact big tax increases, the TOP’s income share goes up.

I don’t have to make this up, and I’m not drawing any conclusions that are not supported by the data Obama is providing.  The part that pulls this all together is a part that Obama leaves out — the share of total income brought in by the lower and middle classes over the same periods.  It’s logical to conclude (and fully supported by Milton Friedman’s conservative school of free market economics) that tax increases on the wealthy, for example, those implemented by Clinton in 1994, do more to decrease the income of the lower and middle classes than anything else.  In other words,  the TOP got a bigger share of income simply because the lower and middle classes were hurt more by either a heavier tax burden, or loss of jobs and investment activity by the targeted TOP.

Conclusion: raising taxes does more to hurt the middle class than cutting taxes does to help the wealthy.

And THAT is how the rich got richer.

Category: Conservatism and Liberalism, Economics
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