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Income Inequality: The Complete Picture and Its Implications

6/23/2016

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Recently, we reviewed the records of the last eight presidents on income growth and inequality. Reagan, Clinton and Nixon/Ford had the best overall records and Obama the worst. Income inequality increased most under Obama and least for George W. Bush.
But what does income inequality really mean?
Itys standard measure is the Gini coefficient, named for Corrado Gini, the Italian statistician who invented it 100 years ago. The Gini coefficient is a value between 0 and 1, showing how balanced the income distribution is across the population. Zero means everyone has the same income and 1 means one person gets everything. The higher the coefficient, the more unequal are incomes; the lower its value, the more equal they are.
This number has risen in the United States since the 1970s. The Gini approach, however, misses a key point: Real incomes of low-earner households have remained steady over time, but incomes have grown for high earners. So, contrary to the notion that economics is a zero-sum deal, high incomes of the well-off are not achieved at the expense of the poor.
Also, there are many points of subjectivity and ambiguity about Gini scores.
First, two nations could have vastly different income distributions and still have identical Gini scores – for example, an oligarchy and a real market economy with great income variation.
Second, the Gini coefficient is calculated using the data source most easily available: household income on a pretax basis, as reported by income-tax filers. But pretax income levels mean little in real life, since those aren't the amounts households actually spend.
In 2015, federal transfer payments – government payments to people, usually those with lower incomes -- totaled $1960 billion, up from $773 billion in 2000 and just $56 billion in 1970. Combined with progressive tax rates, this growth in transfer payments has almost completely offset the impact of rising pretax income inequality. So, we should compare households' consumption rather than their pretax income.
The Bureau of Labor Statistics conducts household expenditure surveys. In 1984, the first year for which data is available, average consumption by households in the top income quintile was 3.84 times that of households in the bottom quintile and 2.15 times that of households in the middle quintile. By 2014, those ratios had increased only slightly, to 4.40 and 2.30, respectively. So, taxes paid by high-income households funded subsidies that significantly increased low-income households' consumption, even though pretax inequality increased.
Third, changes in the characteristics and composition of households affect Gini scores over time, causing them to misrepresent trends in the actual well-being of individuals. For instance, more people are living alone, and this growth of single-person tax-filers is unsurprisingly concentrated in lower household income brackets. In 1999, 57.2 percent of the lowest quintile were single persons, rising to 61.0 percent by 2013.
Filers in the bottom quintile are also increasingly less likely to hold a job. In 1999, 53.8 percent of those households had no income earners. By 2013, that ratio grew to 61.5 percent. By contrast, 77.7 percent of households in the top quintile had multiple earners in 1999, which fell only to 76.0 percent by 2013. As more people live alone or remain jobless, Gini scores rise.
Understanding these limitations of this measure of inequality is vital in drawing policy lessons. Leftists wrongly use pretax Gini scores to infer rising inequality that they try to address with wage controls and other regulations. They ignore the equalizing force taxes and transfers already play and they overlook that part of the increase is explained by people's decisions about living arrangements and their work status.
Even more fundamental is the role of income mobility. Most people and households move from one quintile to another over time. As we noted previously, income mobility in the United States is not only robust, but increasing.
Considering all this, we still believe the primary public policy goal should be to facilitate a dynamic and growing economy in which individuals are freely mobile. This means no price or wage controls, fewer regulations that suppress entrepreneurship, and no special deals for cronies.
Human wellbeing is best promoted through individual liberty and free enterprise, plus helping folks who are not productive become so.
Ron Knecht is Nevada State Controller. Geoffrey Lawrence is Assistant Controller


Ron Knecht
Economist &
Nevada Controller
775-882-2935
775-684-5777

www.RonKnecht.com



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Voters Didn’t Get Fooled Again – and They Won’t Next Time, Either

6/16/2016

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Nevada Republican voters spoke loudly last night. Again.
They spoke loudly in November 2014, voting down a proposed gross receipts tax (GRT) 4-to-1 and sweeping Republicans into control of Nevada’s executive and legislative branches for the first time in generations.
That was a mandate to hold the line on taxes, reform collective bargaining, stop the bleeding in the Public Employees Retirement System, improve schools through choice and other reforms, and especially to oppose the kind of tax 79 percent of voters rejected.
Others saw things differently.
Gov. Brian Sandoval and his allies interpreted voters' overwhelming rejection of a GRT to mean they really wanted the same tax with just a few minor tweaks. Sandoval sent two versions of the tax to the legislature the following spring and devoted great energy to its eventual passage.
By law, he had to convince two-thirds of the members in each house to vote for a new tax. A GRT has long been a goal of Nevada Democrats, Republicans-in-name-only (RINOs), and large gaming companies. Democrats and RINOs want to spend and gaming wants to shunt the burden of that spending onto retailers, auto mechanics and other small- to medium-sized Nevada businesses – anyone but them. So Sandoval’s task came down to getting Republicans to support the tax.
Republican resistance was minimal in the Senate, which passed both GRT versions with only a few dissenting votes. The only resistance of consequence was in the Assembly where a cadre of Republicans had worked with us to develop a plan to increase spending on public schools without raising taxes.
Our appeal to principle and the broad public interest, though, was not as alluring for some legislators as the governor's promises of future campaign support. So the swing votes went to Sandoval, and the commerce tax version of the GRT passed.
Along the way, Sandoval and legislative leaders killed the most substantive proposals for reforming collective bargaining and pensions, even though several of those proposals came from some of their tax-hiking Republican allies.
All this was a complete betrayal of the voters' trust. Last night the voters defeated some of the people who had betrayed them and the public interest.
Sandoval made good on his promises to campaign for Republicans who supported the tax. In spades. Big gaming, which is mostly exempt from GRTs, showered campaign contributions on tax-hiking Republicans -- well into six figures in some cases.
Meantime, with the help of the Nevada Supreme Court, the governor's allies got our effort to put the commerce tax on the ballot for a referendum thrown out on false grounds.
Sandoval's practiced public persona of (false) moderation has kept him popular in some circles despite his extreme statist policies. But he couldn't transfer that teflon to many legislators he supported.
Although voters won’t be able to vote directly on the commerce tax this fall, they just held their own referendum by voting down many Sandoval-backed legislative candidates, including some non-incumbents, and turning down key tax architect Michael Roberson for Congress.
This sends a strong message about the priorities of Republican voters and once again delivers a mandate not only to accomplish the key policy objectives Sandoval and company whiffed on last time, but also to repeal the pernicious commerce tax.
Some political insiders claim that candidates who actually govern as conservatives cannot win a general election, despite the obvious national and Nevada retreat from the bi-partisan corrupt establishments. But three of the 14 Assembly Republican tax-hikers refused to face voters by running for re-election, three more were defeated this week, and a Libertarian and a Democrat may take out two others in November.
So in the next legislature, roughly half the Assembly Republicans who joined the governor in betraying the voters won’t be back. That’s quite an object lesson. We are especially gratified that Al Kramer, Jim Marchant and Victoria Seaman this week defeated, respectively, Philip O’Neill, Glenn Trowbridge and Erv Nelson, three of the most treacherous turncoats.
We see 2014 as the beginning of a long-term shift away from the bi-partisan, corrupt crony-infested Establisment. But we caution the Republicans headed toward November victory: Do what you promised. Voters are showing increasingly they won’t put up with being fooled again.
Ron Knecht is Nevada State Controller. Geoffrey Lawrence is Assistant Controller.


Ron Knecht
Economist &
Nevada Controller
775-882-2935
775-684-5777

www.RonKnecht.com

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Classic Rock Showdown: Petty Vs. Eagles

6/8/2016

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Recently, the beautiful Mrs. Lawrence and Geoff saw a show they'd eagerly anticipated in which two talented cover bands squared off and the crowd got to decide which of their namesake bands reigned supreme. It was Tom Petty and the Heartbreakers versus The Eagles.
As two die-hard classic rock fans, Geoff and Jenna went in with their own bias. They're big fans of Pink Floyd, The Who, Styx, and many others, including the Eagles. But they fell in love to the music of Tom Petty.
Speaking with Geoff later, however, Ron argued The Eagles stand were simply one of the greatest bands of all time. Our readers know we love to debate, so here goes:
Ron notes there's a reason why the greatest selling album of the 20th Century was The Eagles' Greatest Hits Vol. 1. They captured something magical in their music that appealed to a broad range of human emotions. Awesome guitar, piano and drum licks, divine harmonies and some of the best lyrics ever written – for example, the lyrics of “Lyin’ Eyes.”
Whether you were living "Life In the Fast Lane" or just seeking that "Peaceful Easy Feeling," there was an Eagles song for every moment. Their music imbued spontaneity, romance, the adventure of youth, and the wisdom of experience. Until Ron married the sainted Kathy, "Desperado" and Jackson Browne’s “Running on Empty” were his theme songs.
The Eagles’ sound was quintessentially western, but attracted a wide audience.
As a band, they went through fits and trials that track the experiences many people have in their own relationships. They rose to success as a close-knit group, then endured a painful breakup, and eventually reunited to great fanfare after years of estrangement. Success in overcoming the difficulties in human relationships endears them to all of us.
Eagles members personify the idealism, struggles, ambitions, and dreams we all have in our lives and families. Don Henley is a thoughtful philanthropist. Joe Walsh overcame addiction. Timothy B. Schmit was the easy-going peacemaker. Glenn Frey was a visionary leader.
Geoff agrees, but says people underestimate what Petty and the Heartbreakers mean to rock and roll. The Eagles rode tall in the late heyday of rock when contemporaries like Led Zeppelin and The Rolling Stones, with whom they toured, were also carving their paths. But Petty and the Heartbreakers almost single-handedly kept rock alive through the late 70s and 80s when listeners started turning to disco and then pop.
Without Petty and the Heartbreakers, there might have been no bridge to 90s rock bands like Pearl Jam or the Red Hot Chili Peppers.
The Eagles produced six great studio albums before breaking up and one after reunion, but Tom Petty has consistently plugged away with solid albums since 1976. Twelve were recorded with the Heartbreakers, three in a solo capacity, two with Petty's original band, Mudcrutch, and a few with the Traveling Wilburys.
Along the way, Petty racked up 10 number one singles -- twice as many as The Eagles.
Petty himself is one of the greatest song writers of all time and has written for and played with many of the greats, including his Wilburys bandmates, Bob Dylan, George Harrison and Roy Orbison.
Moreover, as a native Southerner who eventually moved west, Geoff personally identifies with the life and sound of Petty. Geoff recalls first hearing Petty's unique blend of rock and bluegrass in high school and it resonated immediately.
Later, Geoff met Jenna after moving to Las Vegas and their romance unfolded to a soundtrack of classic rock, but primarily Petty. And their mutual admiration for the man from Gainesville and his lyrics blossomed.
All well and good, says Ron, but are these two bands really in the same league? That difference in perception, though, may be partly due to a nationwide change in radio format around 1980, Ron concedes. At that time, the discretion of local DJs for music content began to be replaced by extended set play lists that favored popular older songs.
So, listeners continued to hear The Eagles through the 80s after their breakup, and newer bands had a harder time breaking into the market.
"I know," says Geoff. "Petty wrote a song about it."
Ron Knecht is Nevada State Controller. Geoffrey Lawrence is Assistant Controller.


Ron Knecht
Economist &
Nevada Controller
775-882-2935
775-684-5777

www.RonKnecht.com
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    *Opinions expressed here may or may not reflect the views of the Lyon County Republican Central Committee. 

    Author

    Ron Knecht has served as Nevada Controller, a higher education regent, legislator and economist. He can be reached at RonKnecht@aol.com.  
     

     

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