Has U.S. Income Inequality Really Increased?

There are frequent complaints that U.S. income inequality has increased in recent decades. Estimates of rising inequality that are widely cited in the media are often based on federal income tax return data. Those data appear to show that the share of U.S. income going to the top 1 percent has increased substantially since the 1970s. A new study by Cato scholar Alan Reynolds shows that these claims are wrong in both their premises and their conclusions. In “Has U.S. Income Inequality Really Increased?,” Reynolds concludes, “There is no clear evidence of a significant and sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth since the late 1980s.” Cato will also host an event on income inequality on January 11.

Some Quick Links on Farm Policy Reform

Cato’s Center for Trade Policy Studies is putting together its ideas for a sensible farm policy (the current farm bill comes up for renewal later this year). Needless to say, the Cato plan will look substantially different from the anachronistic, interventionist pork-fest that was the 2002 Farm Bill.

In the meantime, those interested in U.S. farm policy might like to check out the following links: today’s editorial in the Washington Post and an article by Jonathan Rauch in Friday’s National Journal. Both contain plenty of arguments for what is wrong with U.S. agricultural policy today and are best read on an empty stomach. For a good overview of the farm bill debate, this article by Catherine Richert (Congressional Quarterly) is a pretty good bet.

Napoleon’s Educational Dynamite

When Reagan education secretary Bill Bennett and the NEA start singing from the same hymnal, it’s time for a reality check. Both have now called for the federal government to promote uniform national curriculum standards, but neither has made a compelling case for doing so. Obviously, its important to set high standards for all students, but that does not mean that it’s a good idea to set precisely the same standards for every single child of a given age. Children are not all identical widgets who can be run along an educational conveyor belt and learn every subject at the same pace. The best thing we can do for our kids is to treat them as the individuals they actually are, helping them progress through their studies at the best pace they are capable of – and that pace is not going to be the same for every student.

The idea that the federal government should be dictating a single standard for what every child in America should be learning violates both liberal and conservative ideals. It is at odds with the progressive view that learning should be adapted to and guided by each individual student, and runs contrary to the conservative ideals of limited government and individual liberty.

To find a political tradition that really is compatible with this idea, you have to go back a ways. Hippolyte Fortoul, the education minister of Napoleon III, apparently liked to boast that he could pick up his watch at any time of the day and tell you what every high-school student in France was learning at that moment. So we’re taking our policy cues from 19th century French imperialists now?

More on why federal government education standards are a bad idea here.

Plug-In Pablum

One can’t swing a dead cat in Washington these days without hitting someone who’s ranting about how plug-in hybrid vehicles (part gasoline engine, part battery-powered engine, but rechargeable like a wall appliance) are the wave of the future.  Of course, if they really were the wave of the future, there would be no need for ranting in Washington - automobile manufacturers would be busy making them as we speak.  It’s only when corporate America is cool to an idea that the prophets turn to the taxpayer or the regulator.  This illustrates Taylor’s law - “the commercial merit of any particular technology is inversely related to the degree of political tub-thumping heard in Washington for said technology.”

Which brings us to plug-in hybrids.  Noted automobile engineers James WoolseyFrank Gaffney, and Gal Luft, among others, have been going into overdrive of late to demand federal action to compel the manufacture and sale of these sorts of cars, which they assure us perform so splendidly and can be so wildly profitable for both buyer and seller that only some sort of inexplicable insanity explains their absence from car lots all across America.  This “Neo-Cons for Neo-Cars” alliance is picking up steam and is increasingly embraced by all sorts of smart opinion leaders who can barely program a VCR, much less design an engine.

An invaluable reality check, however, can be found in the Sunday New York Times.  There, reporter Lindsay Brooke notes that, while automobile companies are busily developing plug-in prototypes, there remains one little problem - the battery necessary to make such a car go from here to there has yet to be invented.  While the industry is optimistic that something will come along in the near future, industry executives confess when pressed that the cars would be so expensive to manufacture that they probably wouldn’t sell without government subsidies or consumption mandates.

Why are Neo-cons and other assorted hawks so obsessed with automotive powertrains?  My guess is that they fear U.S. foreign policy is being terribly constrained by our need to import oil.  Plug-in hybrids would liberate the country from worrying about how our actions play on the Arab street, freeing Uncle Sam to act even more uninhibitedly around thew world.

Look, if the auto industry wants to make these things and consumers want to buy them, fine with me.  But before we start bossing Detroit or their customers around and turn over automobile manufacturing to the very same crowd that manufactured the war in Iraq, consider yourself warned.     

Solar-Powered Welfare

In the “House & Home” section of yesterday’s New York Times, reporter Gregory Dicum tells what’s obviously intended to be a feel-good story about the rapid growth of roof-top solar energy systems in California homes. Ah-nold, you see, has decreed that 3,000 megawatts of the stuff be installed in California over the next decade — a 20-fold increase over the amount of solar power installed at present — and, gosh darn it, those Golden Staters are apparently on pace to do the governor proud. Interviews with enthusiastic manufacturers, installers, and homeowners follow, and not one discouraging word finds its way into a happy, by-golly feature piece that might as well have been written by Ned Flanders.

But there are plenty of facts that wander out of the mouths of these enthusiasts, and they should have given the reporter a reason to pause. For instance, a Mr. Nicky Gonzalez Yuen tells us that he spent $16,000 on his “modest, 3 kilowatt” solar energy system, but that it would have been $26,000 without a generous federal tax credit and state rebate check. A Dr. William Leininger tells the reporter that he spent $39,000 on a solar energy system for his 2,400 square foot home, but that it would have cost $63,000 without those federal and state rebates and tax credits. And then there’s a Mr. Robert Fenton, who tells the reporter that he spent $225,000 on a solar energy system to cut back on his $2,500 a month (!) electricity bills, but that federal and state taxpayer generously pitched in to relieve Mr. Fenton of the extra $134,000 that his system would have cost without government help.

Now, I have nothing against solar power or photovoltaic panels. But if they are such a great investment, why do we need to subsidize them? 

The decision a homeowner is asked to make when considering a residential solar energy system is a very common one in the business world; to whit, whether to invest an initial sum of money in a project that reduces annual costs over a long period of time. Take Mr. Fenton’s case, for example. He could invest $225,000 in a solar energy system that reduces his electricity costs (now at a staggering $2,500 a month) for the next 30 years, or he could invest the $225,000 somewhere else and use the principal and returns on that money over the same time period to pay his monthly electricity bills. 

Which is the better decision in strict financial terms? The amount of money he would need to invest now to pay electricity bills at the rate of $30,000 a year for the next 30 years is $434,571 [a calculation that assumes investment in a mixture of securities and bonds that earned 7% per year, but 5.53% after federal taxes (15%) and California state taxes (9%, reduced to 6% after the federal deduction for state tax payments)]. To achieve the same result through a residential solar energy system, Mr. Fenton only has to invest $359,000, of which taxpayers pay $134,000. Thus, the solar system makes financial sense for Mr. Fenton without the subsidies. The $134,000 subsidy is simply a gift from taxpayers to the obviously very wealthy Mr. Fenton.

Mr. Fenton’s result should not surprise. He noted in the article that because California has a tired rate system that charges large users more, his rates are triple the rates for modest residential use. If electricity rates are high enough and they reflect the real costs rather than a tax on large users to subsidize small users, then fine — alternatives to conventional sources of electricity might well make perfect economic sense.

In the case of Dr. Leininger, a more typical residential user, the economic case for the solar investment is doubtful even with the subsidy. His system, remember, cost $39,000 with the subsidy and $63,000 without. He is quoted in the article as saying it would “pay for itself in a dozen years.” I interpret that to mean a savings in electricity costs of $3,250 a year for 12 years. Again, what sum of money would someone have to invest today to yield $3,250 a year for the next 12 years? At an after-tax return of 5.53% (calculated as before), someone would need to invest just under $28,000. Because this is less than the alternative way of achieving the same result (investing $39,000 in a solar system), the solar investment doesn’t make strict financial sense even with the subsidy … and certainly doesn’t without.

If people want to spend their money foolishly — or, put another way, spend their money on environmental status symbols — then fine. But they don’t have a right to force other people to underwrite their extravagant indulgences. While I’m not aware of any data telling us what the average household income is for buyers of this stuff, I’ll bet you a roof-top solar energy system that it’s a heck of a lot more than the household income of the average or mean taxpayer. Simply put, federal and state solar energy subsidies amount to little more than welfare for the trendy well-to-do.

Of course, rich and trendy Californians have a million reasons for why some shmoe at Wal-Mart ought to be underwriting their killer solar energy panels. Mr. Felton, for instance, tells us that “solar is certainly a way to get off foreign oil,” a claim echoed by Dr. Leininger. But only about 3 percent of all the oil used in the United States goes toward generating electricity, heating homes, or what-not. And most of that consumption occurs in the Northeast, not the Pacific coast. So even if every house in America was plastered over with photovoltaic panels, foreign oil imports would continue to increase pretty much as they would under a business-as-usual scenario. Residential solar energy systems will displace domestic coal, natural gas, hydroelectric power, or nuclear energy — but not oil (foreign or otherwise).

But aren’t we reducing our “carbon footprint” and thus saving the planet from global warming? Maybe, maybe not. Manufacturing photovoltaic panels is a very energy intensive process and the materials necessary to put these things together are likewise products of heavy industry. Absent a comprehensive life-cycle analysis of the carbon energy involved, we can’t say for sure. I’m not aware of any such study in the literature.

What we can say for sure, however, is that there are far more cost-effective ways to go about reducing greenhouse gas emissions than putting solar panels on rooftops. If global warming is worth addressing, put a tax on carbon and let consumers decide for themselves how best to live under that regime. Having the government tell us exactly how to go about reducing greenhouse gas emissions is a bad idea.

This brings us back to the article. Did it ever occur to the reporter to ask whether taxpayers should foot the bill to light up, heat, and cool Mr. Fenton’s sprawling, high-tech mansion (the NYT’s picture of his house is really something to behold)? Or to double-check all of the wild claims made about how cost-effective these systems are? Or to double-check the ridiculous claim that solar energy will have any significant impact on foreign oil imports? Did it ever occur to Mr. Fenton’s editor? OK, this was a “House & Home” piece — not a place one might expect rigorous journalism — but the New York Times has a habit of parking stories about solar energy, energy efficiency, and related matters in that section. They deserve to be a cut above something out of People magazine.

Amazing: An Intelligent Article about Oil

As a general rule, don’t believe a word you read in the popular press about the oil market. With the exception of Matthew Wald at the New York Times, reporting on oil-related matters is so badly underinformed that it’s worse than useless to pay any attention to what the major newspapers and magazines are telling us.

That’s why it’s worth stopping for a moment and flagging one of the rare intelligent pieces on oil-related issues. Stop, right now, and go read Leonardo Maugeri’s “What Lies Below?” at Newsweek

Rich and Successful Flee France

Johnny Hallyday, the French singer and actor, has had enough of high taxes in France and decided to move to Switzerland.

According to Hallyday, “Like many people in France, I have had enough of paying these ridiculous taxes we are forced today. That’s it, I’ve made my decision.”

French politicians are reported to be shocked. Jean-François Copé, the Budget Minister, has even said that “Johnny Hallyday was not carrying out his patriotic duty of paying his taxes to his own country.” It appears that no prominent politician in France has even considered the possibility that Hallyday may be right to want to keep more of the money he has earned!

Of course this is not the first time that a French celebrity has opted to live in a country with lower income tax. Some years ago, Laetitia Casta, a French supermodel, got upset over high taxes in her home country and left for London.

There she joined tens of thousands of her compatriots, who find the French taxes too burdensome and job opportunities too scarce. Casta’s flight would have been unremarkable had it not been for the fact that she was cast as the model for the bust of Marianne, symbol of the French Republic, an honor formerly held by Bridgitte Bardot and Catherine Deneuve.

The above stories personify the conflict between the image of France purveyed by the governing elite and the reality. On the one hand, France is portrayed as a strong and confident country, whose people, unlike the Americans, are committed to “social solidarity.” On the other hand, there is the reality of high taxes, high unemployment, uncertainty, and a general feeling of malaise. As more of the young, educated, and successful French move abroad, the welfare state will grow more unsustainable.

The question is, do Nicolas Sarkozy and Segolene Royal recognize the need for deep reforms, or will the victor of this year’s presidential elections turn out to be the younger version of Jacques Chirac?