Inequality Worriers Aren't Entitled To Their Own Facts
Thomas Edsall of the New York Times recently opined on income inequality, and how in his opinion we would be so much better off if income were allocated more evenly. Everyone is entitled to an opinion, but not to their own facts. And the facts are that we would be worse off in two ways if government tried to allocate income more evenly.
First, income is personal property just as much as one's house, car, or investments. Taxation by the government to pay for public goods of benefit to society is fine, and the taxation can even be in the form of a progressive tax system with the rich paying a larger share of the burden. However, simply redistributing money to achieve a particular, subjective view of how income should be divided up is government-sponsored and sanctioned theft (can you tell I am libertarian?).
You may admire Robin Hood, but what he did was still theft. Now, our government has the legal right to redistribute income according to court rulings, but that does not make it moral. More importantly from an economic point of view, redistributing income creates a disincentive to earning the income in the first place. And this is not a small part of your taxes; transfer payments (meaning redistribution of income) now make up about two-thirds of federal government spending.
When people know their income will be taxed, that is equivalent to lowering their pay. Lower take home pay provides less of an incentive to work harder, since the rewards of that work are smaller. In fact, I suspect the disincentive of taxes is higher when the worker knows the money is going to someone who did not earn it compared to if a person knows the money taken in taxes is going to provide valued public goods such as parks, libraries, or schools.
Second, redistribution of income may seem great for those on the receiving end of the deal, and it may make people who believe in promoting a more equal income distribution feel better, but we will all pay a high price in the long run in the form of new inventions and advancements that we will never enjoy.
A quick perusal of the Forbes billionaires list suggests income inequality has been greatly increased thanks to people who gave us personal computers (Hewlett, Packard, Dell), the software to make them useful (Microsoft-Gates, Allen, Ballmer; Oracle-Ellison; Google-Page, Brin, Schmidt; Facebook-Zuckerberg), Apple's many consumer products (Jobs), domestic energy production and pipelines, affordable clothes with some fashion sense (H&M-Persson, Zara-Ortega Mera); mass-market athletic equipment (Nike-Knight), and discounted shopping (Walmart-Walton; Amazon-Bezos).
These people may have accumulated incredible wealth, but it was not particularly at the expense of the poor. In fact, many of these famous companies clearly have provided huge real income gains for the poor. Walmart and Amazon save people lots of money; eBay (which created billionaire Pierre Omidyar) both saves people money and allows them to earn some by selling their stuff or running small home businesses. Without Richard Kinder's pipelines, our energy bills would be higher. Without the multi-billionaire Mars family we would not have M&Ms, Snickers bars, or Milky Ways, so we would all be much poorer. A number of billionaires made their fortunes in generic drugs, a great benefit to the poor and middle class.
Deciding to remove much of the financial incentive from innovation and hard work means that we will have much less of those things in the future. That is fine if you are satisfied with the technology and products we have today. However, if you would like future technological and productivity improvements, telling people that their success will be rewarded with the seizing of their income and/or wealth is not a very good plan.
The fascinating thing about Edsall's column is that he lists a lot of economic problems that we currently suffer from, but none are problems that income and wealth redistribution could fix. He correctly points out that labor participation is falling, but transferring money around will surely either leave that unaffected or lower it further by reducing the incentive to work among the wealthy and the need to work among the poor.
He mentions the slowdown in productivity growth and the halt in high-skill job growth. Clearly, increasing the amount of income redistribution in the economy can neither increase productivity nor create high-skill jobs. He worries about the role of globalization in both income inequality and the fall in median household incomes, but neither of those trends can be impacted through income redistribution (unless we are going to be redistributing income to a majority of all Americans).
People worried about the fact that our current economy seems to be helping some boats rise much faster than others need to understand that pulling down the fast-rising boats does not make the nation wealthier or help the lagging boats to rise. We need policies that make as many boats as possible rise on their own.
Such policies do exist. Education (particularly training in high-technology, modern manufacturing, and skilled trades) can still provide a good standard of living. Making business formation easier would be a great step toward more job creation. Business formation is declining and new businesses are historically at the forefront of job creation. We need to make it cheaper, quicker, and more regulation-free to start small businesses. We can implement policies that reduce friction in the labor market. For example, rather than extending unemployment for two years, we might have paid moving expenses for unemployed people who found jobs in other locations.
Inequality is a problem that can be solved in two ways: punishing the successful or aiding the unfortunate. Liberals need to realize that the first is at best a temporary measure and one that makes us worse off as a nation. Let's be smarter about this and find policies that help all Americans to thrive and move forward together.
