Reducing inequality: expand and improve public services

by lane on April 17, 2009

How do we boost the incomes of Americans in the lower half (or two-thirds) of the distribution? I’ve discussed what I think are some helpful and some probably-not-so-helpful proposals. But our focus shouldn’t be exclusively on income. The well-being of lower- and middle-class Americans can be improved markedly by enhanced provision of government services.

Service use (consumption) doesn’t show up in income statistics. But services matter for living standards. If I have two kids in a public school that spends about $10,000 per year per child, I’m receiving the equivalent of a government transfer of $20,000. Other public services and public spaces—health care, child care, policing, transportation, roads, parks, libraries, and so on—have the same property. So too does free time funded or mandated by government via holidays and paid parental leave.

When provided by government at little or no cost to users, these services are akin to a transfer given in equal dollar amounts to all individuals or households. Our tax system is roughly flat: households at different points in the income distribution pay approximately the same share of their market (pretransfer-pretax) income in taxes. But a flat tax rate means those with high incomes pay many more dollars in taxes than do poor households. If the value of the government services the rich and poor use is roughly the same in dollars, then the tax-services system overall is quite redistributive. Here’s a way to see this, using tax payment data for 2004 and hypothetical data for consumption of public services:

Some services charge user fees that are structured progressively; those with higher incomes pay more. This makes the tax-services system even more redistributive. Financial aid means this is true for public (and many private) colleges here in the U.S., though we could go much farther. In Denmark and Sweden, fees for child care are scaled according to household income.

Imagine an America in which high-quality public services raise the consumption floor to a high level: most citizens can put their kids in high-quality child care followed by good public schooling and affordable access to a good college; they have access to good health care throughout life; they can get to or near work on clean and efficient public transportation or roads with limited congestion; they enjoy clean and safe neighborhoods, parks, roads, museums, libraries, and other public spaces; they have low-cost access to information, communication, and entertainment via reliable high-speed broadband; they have four weeks of paid vacation each year, an additional week or so of paid sickness leave, and a year of paid family leave to care for a child or other needy relative. Even if the degree of income inequality were no less than today and we still had CEOs, financiers, and entertainers raking in tens or hundreds of millions of dollars in a single year, that society would be markedly less unequal than our current one.

It’s worth emphasizing that markets too boost the consumption floor. New technologies and consumer products—indoor plumbing, cars, air conditioning, cell phones, ipods, and many others—have eventually become affordable for even the least well-off, and in doing so they reduce inequality of living standards. But markets haven’t, and likely won’t, bring us affordability coupled with high quality in health care, education, child care, safety, and mass ground transportation. In these and other areas, government is needed.

The United States provides less in the way of public services than many other rich countries, but we nevertheless have a rich history here, from universal elementary and secondary education to the interstate highway system to the internet. There’s a legacy to build on, and good reason to do so.

{ 33 comments }

1

gordon 04.17.09 at 5:36 am

Bulletin! The Social Wage has been rediscovered!

Maybe soon somebody will rediscover the Accord!

“[The US] has a rich history here…”. Really? Nothing like as rich as the history Australia had and has now forgotten.

2

Bob McGrew 04.17.09 at 6:10 am

I work at a start-up in Silicon Valley, and, since I’m trying to build something important, I don’t take a lot of vacation. I don’t really want four weeks of paid vacation a year – I’m much happier with my higher salary/equity and the sense that I’m working with people who really care about what they are doing.

While I realize that this is an atypical situation, my sense is that Americans generally prefer to take compensation as wages rather than as vacation, at least at the margin we are discussing. (Note the number of companies who cut back on costs by forcing employees to take vacation time.) If that’s so, what’s the advantage of forcing compensation to come in the form of a fixed amount of vacation rather than income? Is merely reducing inequality (in a way that doesn’t help the worst-off) worth it?

3

Tracy W 04.17.09 at 8:32 am

But markets haven’t, and likely won’t, bring us affordability coupled with high quality in health care, education, child care, safety, and mass ground transportation. In these and other areas, government is needed.

Governments have been providing education for over 100 years. If they haven’t provided high-quality education on average by now, what makes you think they will in the future? (I am very skeptical about the average quality of education at private schools too for ancedotal reasons, and I’ve never seen convincing evidence that they do better on average than would be accounted for purely by the sorts of students they get. )
In NZ, the publicly-funded health care system is chewing up more and more money each year, growing faster than the rate of GDP, without any noticable benefits in health outcomes for the general population, and placing pressure on funding for other services. Plus the more remote hospitals really struggle with quality.
Safety – Cave Creek disaster. NZ’s Department of Conservation built a platform that collapsed, killing 14 people. The platform was only attached by nails to its support, not bolts.

4

Henri Vieuxtemps 04.17.09 at 8:34 am

Unlike other rich countries, the US government can’t provide adequate services, because of its massive spending on military and military-related matters; maintaining an empire is expensive.

To provide the usual services (medical care, higher education, public transportation, vocational training, decent unemployment benefits, etc.), the US government would probably have to at least double the tax rates.

Hey, you can’t have it all: it’s either medical care or fighting the commies and islamofascists a half world away.

5

StevenAttewell 04.17.09 at 8:35 am

I generally agree with the case for public services; my only question is whether an economy with the kind of maldistribution of pre-tax income will generate enough purchasing power to drive economic growth to create the surplus to pay for this – public services aren’t exactly the same thing as income transfers, especially when it comes to consumption of market goods.

6

Mikhail 04.17.09 at 8:47 am

The “hypothetical data for consumption of public services” is fantastic!

Considering that people with high incomes tend to work up to 3-4 times more than low earners (investment bankers NORMALLY have 100-hour weeks, btw!), and that richer people actually use public services much less (private health, education, what have you!), then it’s obvious that the “hypothetical” 20% applies to everyone equally!

The graph for consumption of public services should be inversed to tax paid – now, let’s see you talk about equality and fairness…? :-)

7

Henri Vieuxtemps 04.17.09 at 9:23 am

While some interns and recent college grads may sometimes have to work 80 (or more) hours/week, they aren’t really people with high incomes. They are people with low incomes exploited by people with high incomes. I mean, if there is 80 hours worth of work to do, why not hire two people instead of one?

8

Mikhail 04.17.09 at 9:34 am

Henri Vieuxtemps:

If you dont know how it is, don’t pretend. I do not mean low level associates in IB. I fully and with personal knowledge include everyone up to MD level who spend nights in the office on a regular basis. While this is hardly the most efficient way of doing things, this is corporate culture and also a lot of self-selection of the types of people who work there – work drives them. As to why not just hire more people? How about because it’s hard to find qualified good people, because the more people are involved the harder it is to manage the syncing of work, because in the end you pay one person less than two but can require the same amount of work! So, please, don’t tell me that people with high incomes don’t deserve them – first go and try to work in such environments youself. Consider it “hazard pay”… :-)

9

Mikhail 04.17.09 at 9:36 am

P.S. I’m glad you consider people on a starting salary of over $100K out of school “people with low incomes exploited by people with high incomes”… ;)

10

Henri Vieuxtemps 04.17.09 at 9:55 am

If work drives them, why are they paid so much (or at all)? That’s a waste of money, just buy them pizzas and coffee, and they can sleep on the office floor or chairs in the lobby. See, I just saved you millions of dollars, where is my share?

$100K with 100hr work week doesn’t sound like a great deal me. It’s $20/hr, not high income by any standard. Minimum wage in Denmark.

11

Mikhail 04.17.09 at 10:10 am

Ok, for those who do not understand…

If work drives you, it doesn’t mean you’re gonna do it for free. Obviously! It means you’ll find what to do NOT for free and then do it passionately. It’s about passion, not compensation.

Compensation-wise, isn’t it obvious that the reason you’re working 100 hours a week is because it’s an investment into your future earnings which will grow to over 500K within 5-6 years? Besides, I’m sorry, but have you ever tried to earn over 100K? This is a job that lets you do it. Try it with anything else! Sure, you can do 2 jobs, but what’s the point in that if you arrive at the same outcome?

If you do not understand why some people are doing something (which doesn’t affect you), it’s not a good reason to sneer at it and try to prevent them from doing it! (Oh, and don’t give me that line about them creating this crisis – THEY did not do it – the SYSTEM did!)

12

sanbikinoraion 04.17.09 at 10:25 am

Mikhail – on the other hand, the top quintile is far more likely to benefit from the government’s vast spending on military goods since they are the owners of the businesses that are taking the orders. So I’m not sure that it’s clear-cut either way.

13

Mikhail 04.17.09 at 10:54 am

I agree, but how is that relevant here? The point I was trying to make is about whether or not people who actually work for their money deserve the high pay.

In your example, with the businesses, the flip side is that these businesses create jobs. So, while the owners obviously benefit more, everyone wins to some extent. It comes back to the isue of whether the Western world is exploting the third world countries by paying miniscule wages or whether it actually provides work and income which otherwise wouldn’t exist…

14

Stuart 04.17.09 at 12:26 pm

Obviously before globalisation and demand from western countries, the entire population of all third world countries were just sitting there unemployed waiting for their great-grandchildren to get a job and finally for an economy to exist.

15

Mikhail 04.17.09 at 1:33 pm

If we’re talking “before plantation period” – when food started to be grown in huge plantations in the third world for export due to cheap labour costs and warm climate, then yeah, pretty much. :) “Employment” was primarily to feed oneselves which can hardly be called “employment” – it’s kind of a necessity.

16

Miracle Max 04.17.09 at 2:26 pm

N.B. “The strategy of equality: Redistribution and the Social Services,” Julian LeGrand.

Bottom line: there is less to the strategy than we would hope for.

17

matt 04.17.09 at 2:39 pm

Also, more government provision would (or could) improve jobs in the service sector. A lot of terrible jobs are in things like child care and health care. Raising the quality of the service provides a rationale to make those jobs better. And if there were fewer terrible jobs, there’d also be less inequality.

And I imagine you’d create a lot of new good jobs, too. More infrastructure and mass transit means more accessible jobs for low-income people, if the right training programs and job standards are in place. See this recent EPI report for an example: http://epi.3cdn.net/c3b007692d5f2d665d_zam6b984i.pdf

18

Tracy W 04.17.09 at 2:50 pm

Mikhail – what are you talking about when you say “before plantation period”? Which countries? And what proportion of the world population were they?

My understanding is that settled farming developed in Ancient China and the Middle East long before large-scale export routes developed. The Chinese apparently were farming millet about 7000 BC. The Indus Valley Civilisation dates back to about 2500 BC. Evidence of large building projects in Egypt dates back to about 3000 BC. If you’re building cities this requires farmers to be working long enough to not only feed themselves but to feed the city builders. The Roman Empire transferred massive amounts of grain to feed the people in Rome and its armies. The Chinese and Roman Empires traded with each other, and then the silk and spice routes continued into medieval times, eventually driving the Age of Exploration by the Europeans as they tried to find routes to Asia outside Muslim control. I understand that sub-Saharan Africa has turned up the ruins of many cities dating before European colonisation. And I am a bit suspicious that the Incas managed to build those massive cities and collect all that gold if the bulk of the population was working primarily to feed themselves.
Not to mention the large scale armies that many of these civilisations fielded.
As I understand it in these civilisations the bulk of the population was still engaged in agriculture – and I guess if it takes 10 farming families to support 1 city family then you could say that “employment” was primarily to feed oneself, but this strikes me as the result of low farm productivity, not people just working enough to feed themselves and then enjoying leisure time. Some people had to build all those Egyptian pyramids and European cathedrals and Roman amphitheatres and Muslim schools and Buddist temples and Easter Island statues and those people had to be fed and their raw materials supplied and armies had to be fed and supplied with weapons and so forth.

The difference the Industrial Revolution made was the take-off in ordinary people’s incomes, many countries around the world had developed cities long before then and I don’t see how you can do that with the bulk of the population just working for themselves.

19

MarkUp 04.17.09 at 2:56 pm

“The point I was trying to make is about whether or not people who actually work for their money deserve the high pay.”

Given the current state of affairs those 100 hr/wk folks were overpaid based on the value of the goods produced; or are you saying if I work hard and put in 80 hrs/wk folding paper in to cute geometric animals I deserve 80K, just because?

I would like to see Lane’s chart above also include ownership/wealth values that income doesn’t adequately reflect.

20

Mikhail 04.17.09 at 4:05 pm

Tracy W:

I was talking about the beginning of colonisation period.
Prior to that and in many places nowadays the economy is disjointed – even in ancient China or India you would be hard pressed to make an argument that there was a country-wide economy. Locally – yes, but that means it was based on local resources and needs which are never large to “employ” a lot of people. One off major construction projects by the local king do not count. As for major ancient civilizations, sure, but they are not here anymore. One of the reasons why Europe colonized half the known world is because there were no major powers to oppose it. Only major power can consolidate a country or a people to the extent that a unified economy will develop. Even today, in China, most of it is rural and only supports itself by sending people to work “in the city”.

21

Robert 04.17.09 at 4:14 pm

My name links to a post in which I demonstrate the greater the percentage of GDP spent by the government, the less extreme is income distribution. I wouldn’t mind if Lane were to replicate my results.

22

Salient 04.17.09 at 4:20 pm

The point I was trying to make is about whether or not people who actually work for their money deserve the high pay.

Perhaps a more productive response is to ask what you mean by “actually work” — are you suggesting that, in an ideal system, a person’s pay ought to correspond directly to how hard they work? As measured by number of hours worked? Or, do you view this ideal as limited to those who attain a professional degree?

In other words, what’s the philosophy that’s underlying your statements about what’s fair or unfair? The idea that people deserve what they earn just because they happen to be earning it isn’t very coherent.

23

someguy 04.17.09 at 5:03 pm

I am trying to wrap my mind around the phrase high quality public services. It isn’t working. If you could ever pull that off it would be quite the trick.

The US is already 3 in the world in k-12 per student spending after adjusting for PPP.

We already spend significant amounts of money provisioning most of the public goods and services you mention for the lower decile. Medicaid – Head Start. In general we already spend non trivial amounts of money provisioning the goods and services you mention.

Rasing the minimum wage and expanding the EITC sounds like a pretty good idea.

Requiring those in the bottom decile who for the most part are already working well less than 40 hours a week to trade income for even more time off isn’t a good idea.

Throwing even more money into the money pit called public education isn’t a good idea.

A tax cut is good way to boost the income of those in the lower half of the distribution. Another library isn’t.

24

Mikhail 04.17.09 at 5:05 pm

are you saying if I work hard and put in 80 hrs/wk folding paper in to cute geometric animals I deserve 80K, just because?

To play the devil’s advosate to make a point – yes.
Provided (!) that you were hired to do that and you are doing it well.
The point here being that you don’t choose what to do – the job description does that. Therefore if you do your job well, you should be paid well. It’s easy to say that because you do cr*p, you shouldn’t be earning much, but in reality I do believe that pay should correspond to how well you do what you are hired to do!

25

Righteous Bubba 04.17.09 at 5:19 pm

I am trying to wrap my mind around the phrase high quality public services. It isn’t working. If you could ever pull that off it would be quite the trick.

My father told me about getting his first pair of glasses in high school. The provider was something of a dramatist, gave dad the glasses, flung open the door and said “I give you the world!”

26

MarkUp 04.17.09 at 5:55 pm

I suppose then the definition of “well” becomes critical ant that you’ve posted a letter to Greenberg and Liddy asking for refunds? No, wait, based on their comp plans they performed “well.”

27

Britta 04.17.09 at 6:54 pm

Great idea. I grew up in a quasi-socialist American city as the child of government bureaucrats. Even though my parents’ salary was middling by any standards, the wide array of free to cheap public services (top-notch public schools, transportation, subsidized music lessons, sports, and other enrichment activities through the City Parks Dept, $5 symphony tickets for students, etc) plus great health care coverage and a bit of frugality in certain areas meant we could live an upper middle-class lifestyle on a middle/lower-middle class salary. People assumed my family earned far more than they did because of things like trips to Europe, a beach house, debt free higher ed at top tier private universities (nearly free, because of need-based scholarships) etc., but really it was because we managed to live a lifestyle as close as possible to that of citizens in a European social. Makes you realize you really don’t need that much money if all your basics are covered by the government, the rest is just to save for a rainy day/go out and play with.

28

gordon 04.18.09 at 12:10 am

Miracle Max: “Bottom line: there is less to the strategy than we would hope for”.

If the strategy includes support for low-end wages and unions as well as increased provision of public services, it isn’t so bad. Was LeGrand’s criticism of public services as a remedy for inequality based on consideration of public services alone, or as part of a package?

My problem with all this is that we in Australia have been here before, and quite recently, too. But even if Prof. Kenworthy is rediscovering the wheel I have to admit that the wheel is still a good invention. Our problem in Australia is why we threw ours away and went back to packhorses and wooden rollers.

29

Mr Art 04.18.09 at 8:47 am

But markets haven’t, and likely won’t, bring us affordability coupled with high quality in [...] mass ground transportation.

I would dispute that. Trams, for example, used to be affordable as well as profitable. It was only when driving cars became very cheap that all the privately-run mass transit had to be subsidised. One of the reasons for that is that the government in general owns the roads and lets you drive on (most of) them for free, instead of charging a market rate.

30

virgil xenophon 04.18.09 at 8:36 pm

Mr. Art:

People do not drive on roads for free. A large part of gas taxes pay into a transportation fund for const. and maint. Without treadjacking by diversion, might I suggest an excellent site: “The Anti-Planner: @http://ti.org/antiplanner where many academics and professionals specializing in this area debate things such as mass transit, housing, etc.

America’s love affair with the car is as much about convenience, Democracy and freedom to go and come anywhere at all at any time without a rigid schedule and limited , fixed destinations set by some govt. bureaucrat as much as anything.

31

Tracy W 04.20.09 at 8:27 am

Mikhail,
Building large cities, as in China, India, the Middle East, and North Africa strikes me as counting. As do the multiple cathedrals, other medieval churches, and castles across Europe, and equivalents in South-East Asia, there were far more than could be accounted for by one-off projects by the local king. And even the local king’s demands were not merely one-off, consider for example the scale of castle-building embarked on by Edward I in Wales to control that country. That required a lot of builders and people to supply the raw materials and they would all have had to been fed.
As for not being a country-wide economy in Ancient China or India there was more than a country-wide economy, the Ancient Chinese and Indians were even trading with the Romans. So not only was there a country-wide economy, there was an intra-Empire economy. Look up the Silk Route sometime.
Whatever the reasons behind the success of European colonisation, it wasn’t the start of people being employed for reasons that go beyond feeding themselves and their immediate families, which was your orginal argument. (I think Guns, Germs and Steel by Jared Diamond the best explanation I have read of why countries in Eurasia could colonise the rest of the world, taking into account that we only have one datapoint, but I haven’t read a very convincing explanation of why European countries like Britain and France did so and not somewhere in Asia, perhaps chance played a strong role).

32

Miracle Max 04.20.09 at 11:35 am

gordon — LeGrand’s book is about services, as the title indicates. Combining them with other good stuff doesn’t make services any better, in and of themselves. He describes how the benefits of service provision in the U.K. incline toward those with higher incomes. The book is old, so the situation may be different now.

My intuition is that the sheer availability of public goods, relative to their absence, is the prime redistributive factor, not in any quantitative gradient that favors poorer over richer. I’d say that’s the main reason to be left-of-center, as far as economics is concerned.

33

Henri Vieuxtemps 04.20.09 at 1:04 pm

National defense is a public good. Suppose to satisfy the purpose it would be enough to spend $10 bil on national defense; instead you spend $1 tril (100 times more). My intuition is that there’s probably no redistributive factor whatsoever in availability of this public good.

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