Inequality fact: The rising tide stopped lifting all boats in 1970

Reliable conservative Stephen Moore of the Heritage Foundation purported to discover an embarrassing fact about income inequality last week: inequality was greater in “blue” states than in “red” states.

Hastening into print at the Wall Street Journal, Moore and his co-author, Richard Vedder of Ohio University, underlined the irony: “The more liberal states whose policies are supposed to promote fairness have a bigger gap between higher and lower incomes than do states that have more conservative, pro-growth policies.”

They further blame President Obama (you’re surprised?), whose ostensibly redistributive policies haven’t kept inequality from rising during his tenure. “This is a reversal from the 1980s and ‘90s,” they write, “when almost all income groups enjoyed gains.”

Not so fast, responds Carter Price, chief mathematician of the Washington Center for Equitable Growth. Price points out three “fundamental flaws” in the Moore/Vedder analysis.

For one thing, the Gini coefficient they cite as an index of income inequality does not count the effects of taxes or government transfers. “Thus, the measure they are using explicitly misses the impact of the policies that they claim are ineffective,” he observes.

Second, he says, they’ve omitted the key variable of population density. “More populous areas also tend to have higher inequality, at least in part because higher density allows for higher incomes. ... They fundamentally misunderstand (or at the very least ignore) the relationship between inequality and population density.”

That’s not all Moore and Vedder ignore, one might add. Although they acknowledge that the Gini coefficient naturally rises as the entire economy gets richer, they gloss over that fact. It’s no surprising why: three of the highest-Gini jurisdictions they cite — the District of Columbia, Connecticut and New York — are among the country’s richest, ranking first, third and fifth. (They’re also among the densest by population.)

Moore and Vedder also assume, for some reason, that blue states invariably have liberal economic policies. One wonders where they get that idea. For example, California may be blue, but until very recently economic policymaking in Sacramento was hamstrung by the strong veto held by conservative Republicans in the Legislature.

Finally, Price contradicts their assertion that “John F. Kennedy had it right that a rising tide lifts all boats.” This may have been correct when Kennedy said it, but it changed shortly after his presidency. As is shown by the chart above, first compiled by the Economic Policy Institute and updated and reproduced by Price, average wages started diverging from productivity gains in 1970. The gap has grown inexorably in the four decades since.

This divergence is a well-known phenomenon, reflected in all income segments except the very top, as has been documented by Emmanuel Saez of UC Berkeley and by Dean Baker and Will Kimball of the Center for Economic and Policy Research for the minimum wage. (See accompanying charts.)

The truth is that if wages did keep pace with economic growth — if the rising tide did lift all boats — then growth would be much stronger overall. Its concentration at the top echelons is, in fact, suppressing growth, because it’s suppressing consumer spending everywhere except at the top.

The hallmark of analyses like Moore’s and Vedder’s is that they steadfastly refuse to recognize that phenomenon, rather than conjuring up shallow and inaccurate statistics to justify it. They write, “It would be better for low- and middle-income Americans if growth and not equality became the driving policy goal in the states and in Washington, D.C.”

What they refuse to acknowledge is that growth and equality are inextricably entwined; you can’t have one without the other, and the reason we haven’t had more of the first is that we have less and less of the second.