Today’s Economist: Uwe E. Reinhardt: Redistribution of Wealth in America

Uwe E. Reinhardt is an economics professor at Princeton.

A recent article in The Washington Post and an audio clip accompanying it on the Web featured an excerpt from a speech in 1998 by Barack Obama, then an Illinois state senator, at Loyola University Chicago.

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In that speech he remarked, “I actually believe in redistribution, at least at a certain level, to make sure that everybody’s got a shot.”

The article then quotes Mitt Romney: “I know there are some who believe that if you simply take from some and give to others then we’ll all be better off. It’s known as redistribution. It’s never been a characteristic of America.”

Really?

Aside from hard-core libertarians, who view the sanctity of justly begotten private property as the overarching social value and any form of coerced redistribution as unjust, how many Americans on the left and right of the political spectrum would disagree with Mr. Obama’s very general and cautiously phrased statement?

In fact, I wonder whether even Governor Romney actually disagrees with that general statement, aside from some dispute over “the certain level” at which redistribution takes place. After all, he has promised elderly voters to protect the highly redistributive Medicare program, which would remain highly redistributive, or become more so, under proposals by his running mate, Representative Paul D. Ryan, for restructuring Medicare.

The fact is that redistributive government policy — mainly through benefits-in-kind programs, agricultural policy and the like — has been very much a characteristic of American life, just as it has been in every economically developed nation, albeit at different levels.

Start at the local level. Through property taxes, local governments all over the United States routinely take from high-income Americans living in expensive houses to subsidize the education of children from lower-income families. It is the American way, based on the widespread belief that doing so will make society as a whole better off. Is there a significantly large constituency for abolishing this form of redistribution at the local level and instead letting every family fend for itself, with its own budget, in a private market for education?

The same can be said, at the local level, for fire and police protection. One could imagine a world in which every family cuts a deal with private contractors to provide fire and police protection — leaving poor neighborhoods to fend for themselves — but that is just not an American characteristic. Is there a sizable constituency in America for completely privatizing local fire and police protection?

At the state level, consider Medicaid. By design, Medicaid is purely redistributive. It takes from higher-income people at the state and federal levels and pays fully for the health care of low-income people. Is there a strong constituency for abolishing Medicaid and letting the poor, when they are ill, fend for themselves in the market for health care?

Or take public colleges and universities. Although tuition has increased in past years, these institutions are still heavily supported by the states and charge tuition much below the full cost of the education they impart.

At the federal level, Social Security and Medicare were deliberately structured by their designers to be in part redistributive. As Eugene Steuerle and Adam Carasso of the Urban Institute’s Retirement Project have reported, both programs redistribute from retirees who had been high-income earners in their work years to those who had been low-income earners.

Would elimination of this redistributive feature inherent in Social Security and especially in Medicare have much of a political constituency today? Would any politician dare propose openly — and I stress openly — that Medicare beneficiaries who had been high-income earners in their work years should have a health care experience superior to those who had low incomes in their work years? Would that proposal be a winner this year?

By the way their benefits and the financing of these benefits are structured, Social Security and Medicare also redistribute income from the current working population collectively to the currently retired population collectively. Is that fair?

In thinking about this issue, keep in mind that a young generation about to enter the workplace has, for a fifth to a quarter of a century, been the beneficiary of huge transfers of human and nonhuman capital. Overwhelmingly, they have taken from society and not contributed to it.

By human capital economists mean the education and training that foster in the young marketable skills that can be traded for cash at the workplace. Although, unlike students in many other countries, American students do contribute significantly to the financing of their human capital — at the college and postgraduate levels — the production of their human capital remains very heavily subsidized by the preceding generational cohorts. Charge the total value of that transfer to an intergenerational account.

Charge to it next the nonhuman capital transferred to the young. This includes the vast array of physical structures built and largely financed by preceding generations, transferred virtually free of charge to the younger generation for its use, along with the scientific knowledge and the blueprints for applied technology developed and financed by previous generations but available, again largely free of charge, as an economic platform for the younger generation.

I believe the designers of Social Security and Medicare were mindful of this vast redistribution of assets to the young when they embedded in these programs a social contract creating a reverse redistribution from the young to the old during the latter’s retirement years.

These designers seem also to have kept in mind that future generations benefit greatly from the secular increase in overall productivity in the economy. It can reasonably be assumed that future long-run growth in real gross domestic product per capita will be 1 to 2 percent a year. At only 1 percent, real G.D.P. per capita in 2050 will be about 46 percent larger than it is today. At 2 percent growth, it will be more than twice as large.

At issue between the two political camps in this election season, then, is not redistribution per se, which is as American as apple pie. Rather, at issue is the “certain level” to which that redistribution is to be pushed. An honest and thoughtful debate on that would certainly be useful at this time. It would be useful at any time.

To be respectful to voters, such a debate should proceed at a level concrete enough to allow voters — or at least researchers and news organizations — to estimate fairly precisely how different families would fare under the different visions of that “certain level.”

It is the minimum voters ought to expect from political candidates.

Article source: http://economix.blogs.nytimes.com/2012/09/28/redistribution-of-wealth-in-america/?partner=rss&emc=rss