The Rich Get Richer ...

"A Bigger Economic Pie, but a Smaller Slice for Half of the U.S.," says an important article in today's New York Times. Patricia Cohen's article cites a just-published study by economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman that shows U.S. income inequality has risen apace since 1980:

The incomes of those in the bottom half of the economy have basically flatlined. Those of the top 1% concurrently ballooned:

Why this has happened is a contentious subject. Sure, wages for wage-earners have stagnated, jobs have disappeared. The top 1% get their incomes mostly from investment income, and the economy has grown in such a huge way, overall, as to generate a lot of that.

The economic growth has reflected successful entrepreneurship in Silicon valley and elsewhere. Entrepreneurship is the driving force behind investment income.

In an earlier era, the growth would have been shared by those in the lower half. That hasn't been happening for quite a long time.

Why not? Cohen writes:

N. Gregory Mankiw, an economist at Harvard who is familiar with the new research ... argues that large disparities in income more often than not accurately reflect widely varying economic contributions.

The entrepreneurs and their investors, in other words, now contribute a lot more to economic growth than do the ordinary folks in the bottom 50 percent. "That is a switch from the 1980s and 1990s," writes Cohen, "when gains in income were primarily generated by working."

In short, working at ordinary jobs isn't paying off as much as it used to.

The new study, unlike earlier ones about income inequality, takes into account the value of public benefits like Medicaid and the Affordable Care Act ("Obamacare"). People in the lower half of the economy (see here) pay tiny amounts of income tax ... if any at all. So various governmental programs combine with the progressiveness of income taxes to redistribute income downward. Still, the bottom half have been flatlining.

This is one of the defining issues of our time.

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My question is — and it's an irreverent one for a liberal — how can this be happening, given the capaciousness of the safety net?

The bottom graph above suggests the flatlining began as early as 1960, before the arrival of the Great Society of President Lyndon Johnson. True, the share taken by the top 1% also remained about the same from 1960 to 1980. Only after the Reagan Revolution which began in 1980 did the take of the top percentile begin to soar. So one might contend that massive income inequality began with Reagan.

But copious income redistribution downward began with the Kennedy-Johnson era. Why hasn't it offset the immense gains at the top better than it has?

The redistributive government policies of the past 50-plus years have kept the ordinary folks below the midline from losing ground in terms of their real average pre-tax income. But neither have they gained. Is the widening disparity entirely explained, then, by trends that have boosted the fortunes of the wealthiest among us?

Clearly, there have been such trends, and we liberals are right to decry them. But are they the whole of the story?

Conservatives say no, that the various forms of government aid and "welfare" make for a disincentive to work. Cohen:

[Republican House Speaker Paul] Ryan argues that aid to the poor is ultimately counterproductive because it undermines the incentive to work.

One reads the same thought in the words of J.D. Vance in the bestselling book Hillbilly Elegy. He writes (italics mine):

Mamaw [Vance's grandmother, who mainly raised him] listened intently to my experiences at Dillman’s [grocery store]. We began to view much of our fellow working class with mistrust. Most of us were struggling to get by, but we made do, worked hard, and hoped for a better life. But a large minority was content to live off the dole. Every two weeks, I’d get a small paycheck and notice the line where federal and state income taxes were deducted from my wages. At least as often, our drug-addict neighbor would buy T-bone steaks, which I was too poor to buy for myself but was forced by Uncle Sam to buy for someone else. This was my mind-set when I was seventeen, and though I’m far less angry today than I was then, it was my first indication that the policies of Mamaw’s “party of the working man”— the Democrats— weren’t all they were cracked up to be.

Vance is writing about his life and upbringing as a "hillbilly" transplant from the coal-mining area of Kentucky to a city in Ohio where his family had moved to get work. He tells of much dysfunctional behavior, but also of the less frequently found opposite. Many of the so-called "hillbillies" of whose community he was part were decent and hardworking, while some were "content to live off the dole."

So to what extent is it true that "the dole" actually hurts those in the bottom half of the economy? What would be the result if we phased out most income-redistribution policies? Would things get better rather than worse?