David R. Henderson  

DeLong on How Income Has Grown in all Quintiles

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In a post entitled "Material Well Being in America Since 1979," Brad DeLong points out that average real income in all quintiles has grown since 1979. He quotes data from the Congressional Budget Office. Here's his quote:

[American] real after-tax income for the lowest quintile [was] 49 percent higher in 2010 than in 1979 (see Figure 9). Income growth averaged 1.3% annually for that group over the period. After-tax income for the middle three quintiles in 2010 was 40 percent higher than in 1979--equivalent to an average annual growth rate of 1.1% for the period. Households in the 81st to 99th percentiles... [saw] after-tax income... 64 percent above its level in 1979.... In 2010, household income for the top 1% was 201 percent above the mark for 1979, representing an average annual growth rate of 3.6%, far ahead of any other income group...

Comments Brad:
But real income gains of 1.3% per year for those bottom-quintile slots in the American income distribution are not chopped liver, are they? The gap with the 1.6% per year real American GDP per capita growth rate is small, isn't it?

But Brad digs beneath the gross data to look at the components of income growth for the bottom quintile. He writes:
But when you look at the 1.3% per year growth rate of after-tax real income that the CBO calculates for the bottom quintile, 0.9%-points per year of that comes from the growth of the health-care financing programs: Medicare, Medicaid, SCHIP. CBO counts all of that growth as an increase in the after-tax real incomes of America's poor.

What's wrong with that? Brad argues:
But that is not money that America's poor can spend, so some haircut should be applied. Moreover, only half of those expenditures show up as more health care received by program beneficiaries-the other half flow into the general American health-care financing system and cover care that was previously uncompensated. And America's health care financing system is uniquely inefficient: it really does look like other OECD countries get more bang in terms of health and healthcare services from $1 of spending then America gets $2. Apply all of those haircuts, and it seems to me that a better estimate of the contribution of expanded American public health-care programs to the material well-being of the American poor is not 0.9%-points per year but 0.2%-points per year.

Notice that part of Brad's argument is similar to an argument that Dwight Lee made in 1997 and that many critics of government spending make: a dollar spent by the government on you will be typically be less valuable to you than a dollar that you spend on yourself.

Brad ends with an on-the-one-hand and on-the-other-hand story about how valuable this health care spending is for lower-income people.

By the way, if you want to note in the comments that, taking Brad's optimistic estimates of the value of health care, the main contributor to their increase in real income was government at various levels, go ahead. Be aware, though, that you are implicitly assuming that none of these government programs affected their other income. Given the degree of means testing in these programs, especially Medicaid, that is highly implausible. Medicaid, by discouraging earnings, makes earnings lower than otherwise.

HT to Mark Thoma.


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COMMENTS (14 to date)
Tom Nagle writes:

I think it is pretty obvious why poor people are more harmed by the increase in health care costs than higher income people are. Much of the increase is a result of increases in mandated coverage for things like psychological counselling, birth control products, in-vitro fertilization, "lifestyle drugs", and very high cost treatments that merely delay death from a terminal illness. These are all things that a high income person might likely purchase (outright or via insurance) without a government mandate, but that a lower income person might be more likely to forego in order to have more income to spend on other things. The widespread satisfaction with health care among people in the UK and even Canada, despite the things not covered in the public healthcare system, is one indicator that the majority of people in developed countries would prefer to pay for less health care than government requires people to buy in this country. If it were legal in America to sell coverage equal to the Canadian system's coverage at the Canadian system's cost, I suspect it would quickly win the largest market share.

Lee Waaks writes:

Economist George Reisman makes the more general point (although it would apply to welfare spending specifically) that government spending is consumption of funds that would have been invested in capital. This capital consumption retards growth and makes us all poorer, especially the most vulnerable.

David R. Henderson writes:

Well said, Tom. In a speech I gave on health care once, I said, “I don’t want to mandate Canadian style health care for the United States; I want to allow it."

cassander writes:

considering that the vast majority of those below the poverty line in the US are either unemployed or students, how would their incomes rise besides an increase in government transfers?

Andrew_FL writes:

@Cassander-By getting jobs or graduating and then getting jobs.

People don't-mostly-remain unemployed indefinitely and people eventually graduate.

So obviously those who don't do either of those two things, won't see their incomes rise except from transfers.

But, the thing is that for some people, those transfers are a reason not to do either of those things.

cassander writes:

@Andrew

I agree, but then those people are no longer poor, and get replaced with new people who are poor or students. I agree that there is a lot of turnover, but story that people like delong like to tell is about a permanent inescapable lower class rotting in poverty, not that most people spend their 20s poor then get over it.

ThomasH writes:

The takeaway seems to be that efficiency in redistribution, as with most things, matters. The less efficient it is (both because we redistribute specific goods instead of cash and because redistribution may discourage earning other income) the more we have to do to get the same results.

The search for more efficient redistribution ought to be a project that Libertarians could join Liberals on.

Tom West writes:

The widespread satisfaction with health care among people in the UK and even Canada, despite the things not covered in the public healthcare system, is one indicator that the majority of people in developed countries would prefer to pay for less health care than government requires people to buy in this country.

I have to say that Canadian's satisfaction with their healthcare system is at least somewhat based on the fact that there isn't any obvious choice. When the doctor's say "there's nothing more that can be done" to save your child, there isn't the patient in the next bed getting some incredibly expensive, highly-likely-to-fail treatment, whose existence will torture you for the rest of your life.

(And yes, the USA is next door, but for most, it's not "real" enough to be a real option one must consider.)

liberty writes:

"The search for more efficient redistribution ought to be a project that Libertarians could join Liberals on."

Indeed - like a Basic Income, which doesn't discourage work nor misallocate resources, and is generally not wasteful.

Andujar Cedeno writes:

Why isn't anyone pointing out that De Long treats the income groups as unchanging monoliths. No where in his entire piece does he recognize the massive change in membership in the economic categories he uses. The IRS data from 2000 to 2010 showed a massive turnover in the top 1% of income earners, over 50% weren't present in the previous census. This massive mobility isn't accounted for by Brad in any meaningful way. The top 20% showed this kind of remarkable social mobility as well. He also didn't account for the massive influx of immigration that occurred in the period with those new arrivals almost all going into the bottom quintile. Our nation absorbed tens of millions in the period without incomes going down. A feat that Brad De Long doesn't acknowledge.

Yancey Ward writes:
The search for more efficient redistribution ought to be a project that Libertarians could join Liberals on.

Honestly, Thomas, who should actually join who on this one?

David R. Henderson writes:

@Andujar Cedeno,
You’re right. Good catch. I should have pointed this out, as I have elsewhere. I was just pleased to see Brad make the point he did make.

R Richard Schweitzer writes:
Moreover, only half of those expenditures show up as more health care received by program beneficiaries-the other half flow into the general American health-care financing system and cover care that was previously uncompensated.

Perhaps uncompensated by those who received it, but the costs certainly were covered from incomes of others (or borrowing?).

Floccina writes:

You could go further and say lower income people would mostly prefer to take more risk with say, less educated providers and so the system of licencing in the USA states is excessive.

http://un-thought.blogspot.com/2014/11/on-healthcare-spending-consuming-most.html

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