The Real Casualty of Rising Income Inequality is the Middle Class
The Meltzer-Roth model of the median voter theorem has long held that the median voter effectively chooses the size of the government. This is because according to their formulation the greater the distance between the median voter’s income and the average income of society, the more inequality there is in income. The remedy to inequality is to have redistribution. Therefore, the greater the skew between the two, the more likely is the median voter to choose redistributive programs and policies.
In doing so, the median voter, which really means the majority of voters earning around the median will choose a higher tax rate to pay for these programs. Hence the median voter is choosing bigger government. At the same time, the literature on congressional representation and responsiveness to constituents is replete with studies that show members to only be responsive to more affluent voters. In other words, they aren’t responsive to the median voter at all. One wonders, then, whether it is really true that the median voter chooses the size of government.
There would appear to be a contradiction here: rising inequality, it is assumed, should lead to greater redistribution, if for no other reason than to prevent civil unrest that could become violent. But if public officials are only responsive to the affluent, and less so the poor and those in the middle, which is precisely where the median voter is, then why would they support redistribution, which is against the economic interests of the affluent?
Let’s return for a moment to the Anthony Downs’s public choice model in An Economic Theory of Democracy where he maintains that public officials seek to serve their own interests, which include remaining in power. Therefore, they will cater to those who can help them the most, i.e, affluent voters who are also large donors. But at the same time, public officials will purchase the quiescence of poor voters with programs that will increase their money utility. Of course, the goal is to keep the poor quiet so that public officials are free to cater to the interests of the more affluent.
In this vein, Downs is on the same page as Meltzer and Roth, and they are all ironically parroting Marx who referred to the welfare state as throwing the dog a bone. Still, more recent studies call this into question. And this is precisely why rising income inequality poses a threat to democratic institutions. As inequality increases, public officials are even less likely to be responsive to the poor and those in the middle of the distribution. On the contrary, those at the top are in a better position to obtain policies that serve their interests at the expense of the larger public good.
The reason why rising income inequality is so problematic is not because one group necessarily has more than another, but because when it rises it signifies the disappearance of the middle class. If the middle class can effectively be defined as a large population around that median voter, then there is clearly reason to be responsive. But if the median voter now stands apart from a larger swath of voters whose mean incomes place them among the affluent, it is no longer the case that the median voter is choosing the size of the government. Rather, it is the affluent that is choosing the size of the government.
Why, then, would this newly affluent group support some limited policies that will increase the money utility of he poor? Because rising income inequality creates a distribution with two peaks at either end, with one representing those at the bottom and one representing those at the top. There are still enough at the bottom who could engage in social unrest and threaten the position of those at the top. Which is to say, the affluent are not being supportive of redistributive policies and/or programs because they are altruistic. They are still motivated by naked self-interest, which in this case is preserving their privileged position.
Still, we have a problem here. Were there still a vibrant middle class, the income distribution would represent more of a bell curve, in which case there would be less distance between the median voter’s income and the average income of society. Put another way, redistributive policies in response to rising income inequality does nothing to restore the middle class. Rather it purchases the quiescence of those at the bottom. But they could still derive greater benefit if more steps were taken to restore the middle class. Rising tides, after all, still lift all boats.
Maintaining a strong democracy requires the maintenance of a strong middle class, precisely so that there will be a large enough population to force politicians to govern from the middle. It reduces the undue influence of the wealthy. Rising inequality threatens democracy precisely because it threatens the poor. And yet, our politicians continue to think that the only recourse are the tired policies of redistribution which accomplish little more than fanning the flames of class warfare.
The response to rising income inequality ought to be a program aimed at restoring the middle class. Here the place to begin would be to strengthen labor market institutions and bolster wages from the bottom. A wage policy that can raise wages throughout the distribution will reduce inequality because the rate of increase for those at the bottom will be greater than for those at the top. All redistribution does is increases taxes on the top so that their after-tax income will be less, in which case the ratio of the top to the bottom will be narrowed.
Although this does reduce inequality, higher taxes on the wealthy is no guarantee that new programs will be created that would increase the material benefit of those at the bottom. People at the bottom do not need more programs; they need more income. The crisis of the middle class is that their wages have been stagnant for several decades. If anything, more inefficient programs that add to employers’ cost of doing business make it less likely that wages will increase.
As I write this, the $1.9 trillion Covid Relief bill has passed the Senate and is now likely to pass the House and be signed into law. There is little in this bill that really addresses the inequalities exposed by Covid. The new bill no longer contains a $15.00 an hour minimum wage, nor was this the proper place for it. Still, there should be an increase in the minimum wage, albeit a smaller increase to start so as not to shock the system. Then it should be indexed to inflation.
Through wage contour effects, there will be benefits that ripple upwards to the middle class. Progressives often have a difficult time with this because they have embraced the narrative that it is to help the poor. But when the Congressional Budget Office (CBO) says that many more people will get pay increases despite fewer jobs, it is tacitly acknowledging the contour effects. Although this is a topic for a different discussion, it needs to be stressed that there is a difference between lower employment due to a disemployment effect and lower employment due to fewer jobs (and low-wage jobs) being created in the future.
The next step to take for the benefit of the middle class is to bolster wages by strengthening the labor movement. Signing executive orders that eliminate union jobs sends the wrong message that public officials really don’t care about the middle class. And lastly, big companies need to be broken up so that their monopsony power which suppresses wages will be broken.
Of course, if no one is willing to take these steps, we can only conclude that our elected officials are indeed being more responsive to the more affluent and monied interests. And all this talk of concern over rising inequality is nothing more than just talk. Moreover, it is precisely because of this reality that inequality threatens are democracy, for which redistribution is not an adequate remedy.