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The essence of the health care legislation

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David Leonhardt argues [2] that the health care changes will work to reverse the inequality of the age of Reagan. (HT: Lauren Landsburg)

For all the political and economic uncertainties about health reform, at least one thing seems clear: The bill that President Obama [3] signed on Tuesday is the federal government’s biggest attack on economic inequality since inequality began rising more than three decades ago.

Over most of that period, government policy and market forces have been moving in the same direction, both increasing inequality. The pretax incomes of the wealthy have soared since the late 1970s, while their tax rates have fallen more [4] than rates for the middle class and poor.

Nearly every major aspect of the health bill pushes in the other direction. This fact helps explain why Mr. Obama was willing to spend so much political capital on the issue, even though it did not appear to be his top priority as a presidential candidate. Beyond the health reform’s effect on the medical system, it is the centerpiece of his deliberate effort to end what historians have [5] called [6] the age of Reagan.

There are two problems with these claims. The first is a conjecture of mine that the rise in inequality is mainly a statistical mirage created by focusing on household income. When the divorce rate rises as it did in the 1970s, any measure of income inequality by households gets distorted. That is why you can observe in the data that changes in inequality or the median household inome are very poor predictors of what has happened to the person who was at the median at the beginning of the sample. The few data sets we have that follow the same people over time show that their incomes are doing very well even though it appears in other data that the “rich” get all the gains and everyone else’s income is stagnant. For example [7]:

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My second thought is that changes in income will work to offset changes in tax rates. We’ll see what happens. Or at least we’ll try to.

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