Oxfam is reluctant to consider a troubling question: What if global poverty declined because economic inequality increased?
This past week, at the invitation of a dear friend (Christopher Wolfe —no, wait: this guy), I visited the University of Dallas. On some accounts it’s the ugliest campus in America. On all accounts it’s among the most amazing: where else would you find students who sit in rapt attention for a six-hour (!) debate on inequality (featuring William Galston, Ross Douthat, and yours truly)?
Pending the webilcation of the entire event, herewith my opening remarks. I’m way out of my league here but what the heck:
Inequality, we have it on presidential authority, is “the defining challenge of our time.” Arguably it’s the (or at least a) defining challenge of all times—a profound question that invites deep reflection. Jerusalem had one answer; Athens had another. Hobbes and Machiavelli had different answers yet. A bit closer to home, this country was famously founded on the “self-evident” truth that all men are created equal.
The raging contemporary debate, for good or ill, has nothing to do with any of that. It is limited to income inequality, and it says that r is greater than g: the returns to capital will exceed the economic growth rate and so the rich get richer and the poor get poorer over time. That’s not quite inevitable, or always true. The post-War era experienced a “great compression.” But income inequality has increased dramatically since the 1980s and especially after the 2008-2009 financial crisis: all the gains from growth have gone to the 10 percent or the one percent or whatever. Surely we should do something about that.
(Professor Picketty’s work has been read in this country as a clarion call for greater redistribution. Actually his charts look the same over centuries and over countries that are very different, including countries that tried very hard to confiscate private gains. If you believe the analysis it’s capital itself that’s the problem. Not that Mrs. Clinton or even Bernie Sanders would let you know that.)
Here’s the perplexity I want to explore: no country in history, on the planet, has thought more seriously about equality than this country. But what the chattering class would now have us do is to trash that proud (though often tragic) legacy down to a politics of resentment. “Inequality” is not a problem. It is a slogan—and a very nasty one at that. Once you cut through the high-minded burble there’s nothing left but envy, which is harmful to your soul and to social cohesion. (You can look that up in the Bible. Don’t covet your neighbor’s cow; get your own damn cow. You can call that supply-side economics if you like but it’s the Lord’s economics.) But the inequality obsession is harmful in other ways.
First, it distracts from things that are important and interesting about America and the world, including many things that have gone right.
Second, it diverts attention from real-world problems that we should and maybe even can do something about–the condition of the truly destitute; the collapse of our public institutions; and the triumph of luxury goods over the ordinary concerns of citizens.
Let me start on the stuff that has gone right. It helps to keep income inequality in perspective, and it teaches some insights along the way.
What Has Gone Right—and Liberals Have Forgotten
Forget philosophy and religion and all the big guns who have thought and taught us about equality over the ages—Aristotle, or Locke, or Marx, or Lincoln, or for that matter Jesus Christ. You’re just a bleeding heart. You see injustice and you hate to see people get hurt. What might you worry about?
I’d start with global inequality. The story here is actually quite good: by most measures, such as life expectancy, mortality, schooling, or abject poverty, worldwide inequality has decreased over the past decades. Undoubtedly, there’s still way too much misery. But there’s reason for confidence, and we by and large know what works. Be of tolerably good cheer.
Next, you could be concerned about equal citizenship and the rights that go with it. Surely, though, we’ve made huge strides at that front. The past two decades have brought a stupendous transformation in record time: gay rights, including marriage. Think of that what you will: it’s hard to complain about lack of progress on equal rights. We are awash in them.
Finally, you could worry about social stratification—that is, an un-American class society. Charles Murray worries about that. The rich, he says, are sorting themselves into “Superzip” enclaves. They get married and go to church and raise children in stable families—and they don’t have any idea of the real America. For example, they can’t name a single NASCAR driver. There’s something silly about this: the amazing thing to me is how class-less we’ve become. The enemy of class is commodification—the mass marketing and sale of what were once luxury goods for the few. We’ve had that in spades. Donald Trump has no more class than his supporters; he just has more money. I think that’s actually a problem—but not for the advertised reasons. If the preferences are the same up and down the income chain and if there’s nothing that you cannot have with more money, you’re looking at a class-less society. In more than one sense.
None of this is to say that income inequality is entirely inconsequential. It is to say, though, that the single-minded obsession with it screens out broader truths. And it is to say that the people who peddle a politics of inequality blend it out—not because things have gone so right that we need no longer worry, but because their worldview demands it.
For developing countries, prosperity is tied to free trade. (The truly wretched countries on the planet are the ones that are cut off from global trade, or run by the Clinton Foundation, or both.) Liberals are against free trade, at least so far as the U.S. is concerned. Likewise, poor countries need two things to escape their wretched condition: clean water, and cheap energy. Liberals are against cheap energy, anywhere on the globe.
If you’re worried about the equal dignity of all persons, you should worry about persons who are stuck, for a few more days, in their mothers’ wombs; and about future generations, whom we’ve loaded up with debt. Liberalism’s answer is that these persons and their preferences count for nothing. Liberalism is against the future, because it has to feed constituents now.
And if you’re worried about class stratification, you ought to worry about the fraying of social norms. The rich have a million ways and dollars to compensate; the poor don’t. Liberalism isn’t very fond of shoring up our mores.
In short: liberalism isn’t committed to extending our notion of equality. It depends on constricting our territorial horizon, and our time horizon, and our concern over who counts in the larger universe. It puts all that aside and then screams, “what about the Gini coeffient?”
You should not let these people do math, or economics. Because even within this constricted universe, the “let’s fix inequality” agenda is wildly implausible.
As a first cut, you have to be for income inequality. Karl Marx had this right: the root of inequality is the division of labor. Without that we’d be way more equal—equally miserable. It’s when we specialize, and exchange stuff, and make use of our comparative and competitive advantages, that good things happen and prosperity breaks out. As a first cut, then, we ought to let people earn their marginal product; and because people have different endowments, that means inequality. There may be reasons to redistribute some portion of the gains, or (under some circumstances) to let people earn more or less than their marginal product. But you can’t get any of this right unless you get the baseline right.
The baseline is, income inequality is good. Or at least, it cannot be bad in and of itself. Imagine a society in which everyone has enough not just to get by, but enough to lead a meaningful life. Would we care if that society had gazillionaires? If the Gini coefficient went into the stratosphere? Nope. Conversely, we could reduce inequality by making America more like Denmark—or like Bangladesh. Absolute poverty is one thing: it’s bad no matter what. Inequality is another. If it is bad, it has to be on account of its consequences. And even if that is true you still have to figure out whether government can do anything about it—realistically, and without making matters worse.
This is actually common ground, across the entire spectrum of political opinion. Even the most ardent apostles of reducing inequality—the Krugmans and Stiglitzes of this world—don’t propose to eliminate it. They never tell you how much would be acceptable; they just say, too much of it is harmful—and we’ve crossed that threshold. How do we know that? They don’t say.
So why might economic inequality be bad? There are theories to the effect that it retards economic growth, or that it impedes social mobility. That would be distressing if it were true; but the evidence on both points is mixed, at best. There is, however, a connection that strikes me as real and deeply troublesome: between inequality, and the collapse of public institutions. I emphasize connection: I don’t know which way the causal arrows run. But I think the subject merits discussion.
Here’s one way to look at it: economic inequality (above some point) endangers democratic stability because the rich just buy themselves politicians and public institutions, which enhance their returns even further. Sooner or later there’ll be riots and upheaval. Some scholars have made a very plausible case along these lines. The glitch is that their evidence comes from developing countries; it’s hard to transpose to the United States. A second glitch is massive endogeneity: maybe the political system went bad or was bad first and the rich were better able to seize on it. I’ll come back to that.
Here’s another perspective: maybe people’s marginal products range from practically zero to near-infinity, with very little in-between; and you can’t run a decent society with a distribution like that. Even under conditions of perfect mobility—rags to riches, riches to rags in an instant—it isn’t going to work. The entire point of a liberal society is to reduce the risk of asymptotic outcomes (like, sudden and violent death). The basic idea is risk aversion: why doesn’t that commitment carry through to income?
These are serious questions, posed by serious people. Here’s the first, on the connection between political institutions and inequality. The author is moping about a sprawling, “mutable” government, and the
unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the few, not for the many.
This guy has watched way too much Fox News. But actually it’s James Madison. And note the way he runs the argument. It’s not that a rich elite starts buying itself its very own government. It’s that public institutions reward the rich, or rather those who want to feed on the rest of us. There’s no way to contain this except to limit government output and to enhance its capacity for deliberation, as opposed to naked rent-seeking. Which (he says) the Constitution will accomplish.
As for the second argument: I’ll spare you the quotes, because they’re from Hegel (the Philosophy of Right). Free commercial exchange, he says, is the name of the game in a modern society; and there is real freedom in it. But the returns, or lack thereof, might be so extravagantly unequal that citizens might no longer recognize themselves in the government that superintends society. They become alienated. Hegel’s theory of the modern state is too involved for present purposes. Suffice it to note that he proposes antidotes to a class society and alienation. Among them are poor relief, and a sizeable class of government employees with middle-class incomes.
Consider a distressing hypothesis: we are living Madison’s nightmare, and we have adopted Hegel’s last-ditch and ultimately implausible solution.
Madison’s “mutable government” is plainly ours. And I think his theory—political dysfunction of a certain sort causes inequality—is every bit as plausible as the reverse. You can find examples that look like the truly rich have purchased a government to further enrich themselves. The tax-exempt “carried interest” earned by hedge fund managers is one. But that’s not the general pattern. It is crazy to think that Dodd-Frank (the principal response to the financial crisis) was a corporate conspiracy, foisted upon us by the One Percent. It’s just that it provides infinite opportunities for outsized rents. The income gains since 2008 haven’t just been concentrated in the one percent. They’ve been concentrated in the financial sector—which, per Paul Volcker, hasn’t invented anything of value since the ATM. I can’t think of a purely economic theory to explain this.
And Hegel’s government may be ours—except it’s much more dystopian. In the wake of the financial crisis government employment collapsed. It has never fully recovered. And it is very hard to disentangle that from middle class stagnation and discontent. Government, unlike private enterprise, can afford to pay people more than their marginal product; it can even afford to pay its contractors and hangers-on more than that. Once you cut back on that, you’re decimating the middle class. To an alarming extent (documented by John DiIulio, among others) that class is a product of government, not markets.
In fairness to Professor Hegel: he never thought that public employment could save a liberal society. His first lines of defense were the family and “corporations,” which we call voluntary associations. But those institutions aren’t in terribly good shape, either; and that disintegration has gone along with a grand expansion of government and its economic role. In that respect, too, we are more equal than ever. The poor of this country depend on the government; but then, so do my lawyer friends. And my hedge fund buddies who provide arbitrage in regulated industry equity markets. And I myself, for that matter: behind me stands the full faith and credit of the Commonwealth of Virginia. The rents in these markets aren’t pure waste; they provide some value. But they remain rents, and you have to figure there’s a great deal of sheer deadweight loss. You can’t run a society like that. At least not a prosperous, confident society.
What Can or Should be Done?
Who—apart from the President and progressive pundits—believes that income inequality is the “defining challenge of our time”? Exactly five percent of Americans think it’s a pressing problem. According to the experts, the number is so low because Americans are indelibly stupid and misinformed. (A recent article in the Scientific American, of all places, purports to show just how stupid we are.) Maybe; but you have to run elections with the voters you have, not the ones you’d like. So why do the campaign advisers still tell their candidates to make hay of inequality?
It resonates, I think, not because voters think inequality per se is a bad thing (they don’t) but because it is shorthand for difficulties and discontents that are very real: stagnating middle-class incomes; miserable growth rates; dysfunctional institutions; a loss of confidence. If you ask whether the system is rigged against the middle class and for the few rich, you get close to seventy percent approval—and it’s bipartisan. And for all their stupidity, the voters may have this right.
The obsession with “doing something” about income inequality per se seems counterproductive—especially because we can’t do much about it anyhow, at least not in the short term. (There may be reasons to drive up income taxes for the very wealthy. But reducing inequality is not among them.) Nor can we reverse the secular forces that have increased inequality, such as the rise of an information society and the attendant increased returns to cognitive capacity; or what is euphemistically called the changed family structure. (If you simply plot outcomes against single parenthood, you get a .6 correlation. You don’t get those results from any of the conventional inequality variables.)
What we can do, or at least try to do, is to arrest and ideally reverse some of the things government has done to make things worse. If you could simply stop things like “net neutrality” or the EPA’s clean power and clean water plans, you’d wring a ton of rents out of the system and remove a lot of uncertainty that hangs over the economy.
This may sound like a libertarian or Tea Party program; but it need not be and should not be. We could tax carried interest as income, because that’s what it is. Or limit the mortgage deduction, which benefits wealthy home owners. And so on. The Brookings Institution teems with experts who argue that we should focus on increasing economic growth and income mobility, not inequality; and they have varying proposals to that effect. Steve Teles (Johns Hopkins University) is running a program, sponsored by the Kauffman Foundation, to identify government programs that create pure rents and distribute them upwards. That agenda, the theory goes, should hold appeal even and especially in a polarized political environment. I don’t agree with all the particular policy prescriptions. But they strike me as directionally right.
I harbor no illusions that such a project would be easy. In fact I’m quite skeptical. If we can’t kill the ExIm Bank, what can we get rid of? The central problem isn’t this or that program or give-away; it’s the general state of our institutions—a “mutable government” that saps people’s spirits. (Go read Federalist 62.) But if we could make a small start, that would be worth something. At least we’d be working on the real problem.