An Economy of Illusions

Recently Mark Perry and Don Boudreaux published an article in the Wall Street Journal challenging "The Myth of a Stagnant Middle Class." They point out that the middle class is better off than nominal measures of income might suggest, because "Household spending on food, housing, utilities, etc. has fallen from 53% of disposable income in 1950 to 32% today." This is exactly how economic progress works in a free society: it is not merely that wages go up, but that the same wages buy more as innovation drives down the cost of production.

As interesting as that article is, I found the response to it on the left to be even more interesting, because it reveals an important point about the real priorities of the welfare state and its defenders.

To his credit, Thomas Edsall at the New York Times accurately summarizes the argument put forward by Boudreaux and Perry (and others).

"Even with stagnant or modestly growing incomes, the poor and middle class benefit from the fact that a stable or declining share of income is now required for basic necessities, leaving more money for discretionary spending. According to this theory, consumption inequality--the disparity between the amount of money spent on goods and services by the rich, the middle class and the poor--remains relatively unchanged, even while income inequality worsens."

Well, not quite accurately. Edsall's concern is only with equality, while Perry and Boudreaux are concerned with whether the middle class is better off in absolute terms.

"While we believe that consumption inequality has in fact declined, our larger, more central, and most important point is that middle-class Americans are today far better off economically than they were 30 or 40 years ago, regardless of how their well-being today compares to that of rich Americans."

The point is to show that the middle class still benefits from--and has a stake in--the vitality of the private economy.

Equality is a false and second-handed measure of economic well-being. In fact, it ends up perversely punishing a society for its prosperity and for the scope and reach of its economy. The greater the prosperity of a nation, and of the world, the more we should expect inequality to grow, not because the poor become worse off but because the highest upper limit for the achievement of wealth expands enormously.

Think of it this way. If you're the richest guy in a small town, drawing only from the economy of that small town, this might mean that you've made a million dollars. If you're the richest guy in a big city, maybe you've made hundreds of millions. If you're one of the richest guys in a $16 trillion national economy, you might be a billionaire. But if your wealth has been earned by connecting to the entire global economy, you can make a fortune on the scale of $100 billion. The point is that the difference between minimum wage and the top of the pyramid keeps expanding, not because more people are driven to the bottom of the pyramid, but because the pyramid gets so much larger.

We need this context to understand the meaning of Edsall's counter-argument.

"You've heard the case from the right. What says the left?

"Here are three charts from the Economic Policy Institute, a liberal think tank. When you look at the level of poverty in the United States compare with other developed countries, it is not pretty."

The first chart ranks countries on a rather rubbery definition of "relative poverty": "the share of people living in households with income below half of household-size-adjusted median income." Once again this is rigged to make big, prosperous economies look bad. The Slovak Republic, for example, ranks well above the US for having conquered "relative poverty"--but simply because the bar has been set so much lower for the Slovaks. I couldn't find statistics for median income in Slovakia, but GDP per capita is a rough stand-in, and at $23,600 it's about half that of the US. So a worker living well below the American poverty line wouldn't be counted as "relatively poor" in Slovakia, simply because everyone is poor, relative to the US.

What really opened my eyes was the third chart Esdall presents. He asks, "how much of an investment does the United States government make in reducing poverty, compared with other Organization for Economic Cooperation and Development countries?" He then presents a chart that measures "the extent to which taxes and transfer programs reduce the relative poverty rate." Again, the US ranks poorly.

But notice how poverty is being "reduced," according to this chart. These countries have not ensured that their citizens have better skills, better jobs, higher productivity, and more earning potential in a more vibrant economy. Quite the opposite. Instead, "relative poverty" has been reduced through taxes--i.e., by impoverishing those who are better off--and through "transfer programs," i.e., welfare handouts.

These countries have not actually made people less poor. They have simply used welfare handouts to hide the outward symptoms of poverty.

Mortimer Zuckerman recently described how something similar is being done here in the US to hide the fact that we're in a depression.

"If you went out this morning and saw hundreds of people lining up at soup kitchens, you'd think you were in a time machine, transported back to the Great Depression of the '30s, or the victim of a hallucination incubated by powerful images of those times. In fact, it is the absence of such images that is the illusion. We believe we live in more normal times--and we do not. Millions of people today are experiencing exactly the same struggle as the millions did in the Great Depression. They can't find work. They depend on government and philanthropy. They live on hope denied.

"The big difference: Today millions are assisted by checks from Social Security and by food stamps."

If someone is dependent on government, from food stamps to subsidized housing to unemployment or disability payments, he may not look destitute from the outside--but he actually is. Government has not solved the cause of his poverty, which is his inability to find productive work. It has merely ameliorated the symptoms.

Apparently, that is all that matters to the left. Hence, folks like Edsall tout handouts to the poor as evidence of the nonexistence of poverty. Or they point to a diminution in overall prosperity by 50%--the difference between living in America and living in Slovakia--as a cure for the scourge of "relative poverty."

Or they produce this rationalization for government "stimulus" spending.

"But the stimulus did far more than stimulate: it protected the most vulnerable from the recession's heavy winds. Of the act's $840 billion final cost, $1.5 billion went to rent subsidies and emergency housing that kept 1.2 million people under roofs. (That's why the recession didn't produce rampant homelessness.) It increased spending on food stamps, unemployment benefits and Medicaid, keeping at least seven million Americans from falling below the poverty line."

But this last claim is surely wrong. These people did fall below the poverty line, as measured by their actual earned income. But they were able to keep consuming at a level above the poverty line, thanks to government subsidies.

The theory behind government stimulus spending was that it was supposed to, well, stimulate the private economy, and this newly stimulated activity was supposed to become self-sustaining, so that the private economy would continue to grow vigorously after the stimulus ended. Instead, the stimulus replaced private economic activity, offsetting the contraction of the private economy with the growth of government spending. This is why the moment anticipated federal spending decreased--as it did in the last quarter of 2012--the economy contracted.

And we're about to see this same phenomenon happen again. A new government report estimates that under ObamaCare, the cheapest health insurance plan for a family of four will cost $20,000 per year, which prices an awful lot of families out of the market. Not to worry, we're told, because as ObamaCare fully kicks in, this astronomical cost will be offset by government subsidies. But that doesn't mean that ObamaCare will actually reduce the cost of health insurance to make it affordable. It merely means that government will hide the cost of health insurance so that we're less likely to notice that it is unaffordable.

Those of us on the right have long suspected that the real purpose of the left's agenda is to allow the prosperous, college-educated upper middle class to feel good about themselves--as opposed to actually improving the lives of the poor. Our current policies match those goals perfectly. They don't make it possible for people to raise themselves up out of poverty. They just make sure that the rest of us don't have to see them lining up at the soup kitchens. They make sure that the left will not have to confront the uncomfortable reality of the consequences of their economic creed.

It is a great disappearing act in which a decade of economic calamity is being hidden from view in an economy of illusions.