Redistribution

THE EXPERIENCE OF the Great Depression in the United States and Europe brought about renewed thinking about the need for redistributive programs to remedy severe imbalances in monetary and material holdings between wealthy individuals and the poor. What would appear to be a rather straightforward effort to redistribute wealth from the “haves” to the “havenots” has proven to be difficult proposition, one that has been argued by economists and others on a number of levels.

One of the major sticking points is embedded in the controversy over the manner in which poverty can be reduced, and wealth in its many forms can be redistributed: should poverty reduction be accomplished through increased economic growth or direct redistribution?

The argument for economic growth specifies the “trickle down” outcome, which states that increases in wealth in the overall economy, through business expansion, will result in more wealth tricking down to lower-income families and will reduce levels of poverty. Programs of redistribution, on the other hand, use a more direct transfer method, rather than waiting for increases in wealth within the economic system to activate the trickle-down mechanism.

The historical record indicates that during the period from 1960 through the end of the 1970s, the trickle-down effect was positive. In 1960, prior to the War on Poverty, soon to be initiated in the Lyndon Johnson presidency, the poverty rate in the United States was 18.1 percent. By the middle of the 1970s, the rate had fallen to less than nine percent. However, by 1980 the rate began a steady rise, which continued into the new millennium. In 1990, the poverty rate had risen to 10.7 percent and in 2004 the poverty rate for individuals was 12.7 percent.

[Page 903]Although there have been some notable successes in redistribution efforts in the United States over the past several decades, it cannot be said that the goals of the War on Poverty have been met. Significant differences in the poverty rate can be seen within subgroups in the United States in 2005. The white population had a 10.8 percent rate, while the rate for the blacks was over twice as high at 24.7 percent. The Hispanic population was not far behind at 21.9 percent. Even more disturbing is the disparity between the rates for children under 18 (17.8 percent) and those 65 years of age and older (9.8 percent).

The rate for the older population cohort was partially explained by the accumulation of greater wealth through a lifetime of employment for most of them. However, the high poverty rate for children under 18 is distressing and reflects a shortfall in the trickle-down effect, already documented, and the inadequacy of the existing redistribution system. Allowing a high rate of poverty within the young people of the United States does not bode well for the future economic strength of the country.

The redistribution system in Europe is much more effective. There are a number of “safety nets” in place in European countries that disallow the development of extreme inequities. For example, government expenditures on social programs in the United States average approximately 30 percent of the Gross Domestic Product (GDP), while in European countries social spending is at 45 percent or higher. The difference is indicative of Europe's greater expenditure on social welfare programs, which effectively shift money from the wealthy to the poor.

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