President Obama's Redistributionomics

Posted: Feb 14, 2015 9:00 PM

President Obama's foreign policy interview with received far more attention than its domestic policy counterpart this week, but even though the domestic interview did not break any real news, it did provide Obama a forum to crystallize his case for "middle-class economics," which as the passage below shows, is really just all about government redistribution:

Ezra Klein: To focus a bit on that long-term question, does that put us in a place where redistribution becomes, in a sense, a positive good in and of itself? Do we need the government playing the role not of powering the growth engine — which is a lot of what had to be done after the financial crisis — but of making sure that while that growth engine is running, it is ensuring that enough of the gains and prosperity is shared so that the political support for that fundamental economic model remains strong?

President Obama: That's always been the case. I don't think that's entirely new. The fact of the matter is that relative to our post-war history, taxes now are not particularly high or particularly progressive compared to what they were, say, in the late '50s or the '60s. And there's always been this notion that for a country to thrive there are some things, as Lincoln says, that we can do better together than we can do for ourselves. And whether that's building roads, or setting up effective power grids, or making sure that we've got high-quality public education — that teachers are paid enough — the market will not cover those things. And we've got to do them together.

Notice the narrative that Klein and Obama are advancing here: That the federal government has always been an engine of wealth redistribution and that redistribution has been always been key part of U.S. economic growth. That the federal government used to redistribute far more wealth when taxes were higher in the 50s and 60s, but then President Reagan and the Republicans came along and destroyed all that. That ever since the 80s, only the wealthy have benefited from our growing economy and therefore Obama and the Democratic Party need to raise taxes and and expand government programs so that wealth is better redistributed.

That's the narrative that Obama and Ezra Klein want you to believe. Problem is, there are a few factual errors in their story.

First, on the tax side, while the federal government did have famously high tax rates in the 1950s, thanks to loopholes and deductions, virtually nobody paid those high rates. Second, the federal government consumed less, not more, in taxes in the 50s and 60s than it does today: federal taxes as a percentage of gross domestic product were an average of just 17.25 percent through the 50s and 60s compared to 17.7 percent this year and 18.4 percent next year. And finally, not only does the United States not only have the most progressive tax system in the worldbut that tax system has actually gotten more progressive since 1980 and is on track under current law to only get more progressive in the future.

In other words, if progressive taxation is the solution to slower economic growth and higher income inequality, then we should be experiencing the most equal and robust economic recovery ever. But we're not. Quite the opposite. The Obama recovery is the weakest recovery since World War II and the rich are getting richer.

Obama's facts are just as weak on the spending side. Yes, governments have built roads and schools since the founding of our country. But the vast majority of the financing, construction, and management of those services has always been coordinated by state and local governments and there simply is no evidence that federal government interference has helped improve the provision of those services at all.

The federal government didn't even spend significant amounts of money on K-12 education until the National Defense Education Act of 1958 and even then that spending was negligible until President Carter created the Department of education in 1979. Since then federal spending on K-12 education has nearly tripled while student test scores have been stagnant.

The federal government did play a role in advancing higher education by passing the Morrill Act of 1862 and the Agriculture College Act of 1890, but all the federal government did in these cases is give away federal land! The states did the rest. 

Congress has since increased federal spending on higher education tuition assistance, but it is not at all clear that that spending is making college more affordable. Instead it appears that federal tuition assistance is only fueling higher education costs thus driving more students deeper into debt. 

As far as "roads and bridges" go, state and local governments are responsible for an overwhelming 85 percent of all infrastructure spending nationwide. The federal government does aid state and local infrastructure investments by making the interest from their bonds tax exempt, but direct spending by the federal government is often more of a burden than a benefit. 

Not only is federal government infrastructure speeding subject to the whims and ignorances of Washington bureaucrats and Congress, but it comes with tons of federal restrictions that raise the cost of construction, including Davis-Bacon wage regulations and National Environmental Policy Act (the law Obama is using to delay the Keystone project) law suits.

Obama claims his "middle-class economics" is about growing the economy from "the middle out." But that is just not true. 

Everything about Obama's Redistributionomics is top down. Obama's tax plan redistributes more money from the top to the bottom while skipping the middle class entirely. According to the Tax Policy Center, Obama's tax plan would take money from top 20 percent of income earners and give it all to the bottom 20 percent. The middle 60 percent of Americans would get nothing.

More importantly, Obama's spending plans are all about empowering Washington bureaucrats at the expense of local governments and the private sector. School funding, infrastructure, higher education, labor policy, health care, you name it, Obama wants the federal government playing a larger role in how that sector of the economy is coordinated.

But where is the evidence that more federal government involvement does any good?