Hillary Clinton Doubles Down on Redistribution

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Hillary Clinton appears to be following President Obama's lead and doubling down in support of an increased minimum wage and revised overtime policies that would cover an additional ten million or more salaried workers making up to $50,000 per year. All the Democrats running for president also support the estate tax and higher taxes on the rich. Governor Cuomo (D-NY) is proposing a $15 per hour minimum wage for New York state fast food workers. What these policy choices show is that Democrats continue to prefer policies that redistribute income and wealth ex post rather than policies that would work to equalize opportunity ex ante, replacing the need for redistribution later.

At the simplest level, there are two methods of reducing income inequality. Option one: take from the rich and give to the poor. Option two: increase the human capital of and opportunities for the poor so they can earn more on their own. Popular support for option two is generally higher; affirmative action and Head Start early childhood education programs are examples of option two policies. Progressive taxation, estate taxes, refundable tax credits, and welfare programs are examples of option one policies. These policies enjoy less public support than option two policies, with Americans close to 50-50 in support of option one and results varying depending on the framing of the question.

Redistributive policies lower national income (GDP) through two mechanisms. First, taking money away from the higher earners lowers the incentive for them to work hard and earn money in the first place. Second, giving the money to other people lowers their incentive to work hard and earn money because their needs are being taken care of by the government. Thus, while redistribution does reduce inequality, it also makes a country poorer.

Increasing human capital and opportunities raises national income. People with a better education can be more productive, and producing more is the first step toward becoming wealthier (both for the individual and for the country). Policies to accomplish these goals are also generally more cost effective because people gaining skills do not need continued help over time as they become more capable of earning money on their own.

These two policies are not mutually exclusive; the U.S. currently uses a mix of both. Head Start, Pell Grants to help low-income students pay for college, school vouchers, and job training programs are all examples of option two policies in use today. Meanwhile, redistributive policies such as welfare programs, progressive income taxes, and subsidized health insurance (both Medicaid and Obamacare) are option one policies unlikely to go away any time soon.

Democrats seem fixated on increasing the number of redistributive policies we have. With Obamacare now in place, President Obama is now moving ahead with free broadband internet access in public housing projects, while continuing support for a higher minimum wage and stricter overtime regulations.

Republicans have struggled in their attempts to increase the number of self-sufficiency-increasing policies because Democrats immediately accuse them of being cold-hearted and favoring the rich since Republican proposals have often been tied to a reduction in the amount of redistribution undertaken. However, improving our policy set in order to increase option two policies need not come all by replacing option one policies. While proving the advantages of increasing productivity and self-sufficiency, conservatives who favor such policies could leave the current amount of redistribution in place.

Such an approach has two advantages. One, it will make passing such proposals easier. Two, even if Democrats resist rolling back redistributional policies after self-sufficiency polices are shown to work, successful programs will automatically reduce redistribution as there will be fewer poor people who qualify for means-tested benefits.

What human capital/opportunity policies might conservatives try implementing? School choice/school voucher programs are a great place to start. Identifying effective job training programs to expand while eliminating ineffective ones is a good idea. Slowing the phase out of the earned income tax credit to stop penalizing recipients who earn more money could have a huge payoff and is a change that both parties likely would overwhelmingly support. Programs that pay moving expenses for unemployed people taking new jobs or low-income employed people with an opportunity to significantly increase their income have proven successful in other countries.

There are many options for policies that would place the government more in the role of helping people succeed on their own. They would all be big improvements over policies that, intentionally or not, work in a manner that encourages continued dependency on government handouts. As the old proverb says, if you give a man a fish, you feed him for a day; show him how to catch fish, and you feed him for a lifetime. This saying wasn't focused on the cost-effectiveness of the two options; however, not only is the saying true, but helping someone to be self-sufficient is much cheaper for the taxpayer.

 

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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