Shocking inequality

  Браян Каплан*

I have just finished the unpublished collection Inequality and Economic Policy: Essays in Honor of Gary Becker, edited by Tom Church, Chris Miller, and John Taylor. For me, the most remarkable part of the text is John Korhane’s on inequality:

" The most mysterious thing is why left-wing critics focus on the one percent in the US, given that we live in an era of unprecedented upheaval?"

As Kevin Murphy recently reminded us, the income gap between men and women has narrowed dramatically. Inequality between countries and between people everywhere in the world has also declined dramatically, even as income inequality among residents of developed countries has increased. A billion Chinese were saved from the misery of totalitarianism, an equal number of Indians were saved from the British Raj-socialism. These are incredible events in human development, and by coincidence for global inequality. Certainly, developing countries still have many political and economic problems, but the notion that “everything is going to hell” is simply not true...

Look at Versailles. No one, not even Bill Gates, lives like Marie Antoinette. And no one in the United States lives like her serfs. In 1960, Mao Zedong waved his hand and 20 million died. So did Joseph Stalin in 1935. No one declared large incomes to institutions so that economists could then calculate “inequality.” It defies all logic to claim that the people of Ferguson, Missouri, for all their problems, live in greater inequality than they did in 1950 or 1850.

"Why does it matter so much to a vegetable picker in Fresno or an unemployed teenager in Chicago whether 10 out of 100 hedge fund managers in Greenwich own their own planes? How do they even know how many of them fly private jets? They have hard lives and a lot of problems, but how much of that is caused by that top 1 percent?"

Korhein continues:

"I read Piketty, Saez, Krugman, Stiglitz, the editorial pages of the New York Times for answers. They all understand that inequality in itself is not a compelling problem, so they have to convince us that the latter is at the root of some other social or economic evil."

Here's one. Economists at Standard and Poor's recently published a report on inequality, I guess as a form of self-education, because of the downgrade of US government bonds.

"As income inequality increased before the crisis, American households took on more and more debt to catch up with their neighbors..."

In Vanity Fair, Joe Stiglitz writes similarly that inequality is a problem because it causes:

"a well-documented effect on lifestyle - people outside the one percent are increasingly living beyond their means."

Aha! Our Fresno vegetable picker hears that the number of hedge fund managers in Greenwich with private jets has doubled, so he buys a pickup truck he can't afford. So, Stiglitz tells us, we should crush inequality with a confiscation tax on wealth... to encourage thrift among the lower classes?

If the argument made sense, wouldn't a ban on "Keeping Up with the Kardashians" be far more effective? (Or better yet, a ban on rap videos!). If the problem for low-income American families is indeed overspending, can't we come up with a more direct solution? For example, can't we eliminate the huge tax on savings through social programs?

Another example. The Standard & Poor's report tells a different story: Inequality is such a big problem because the rich save a large portion of their income, and the poor don't. So by transferring money from the rich to the poor, we will increase aggregate consumption and avoid "secular stagnation."

I understand, now the problem turns out to be too much saving, not too much consumption.

We must forcibly redistribute from rich to poor to overcome the paradox of austerity.

I may be making the simple complicated, but let’s look at a few reasons why this is inconsistent. If Keynesian “spending” and “aggregate demand” are the problems behind long-term low economic growth (and that’s a big “if”), then the standard Keynesian answers are much easier solutions than wealth taxation and redistribution. That’s why the followers of this school talk about monetary and fiscal reforms rather than confiscation to reduce inequality, until the latter became politically popular recently.

In a series of recent posts, Paul Krugman presents evidence that people don't realize how wealthy the rich are, laments the fact that they live separate lives, and calls for tax confiscation to eliminate the "harmful effects" of overconsumption. Well, I'm glad that logical consistency hasn't stood in the way of these arguments.

A little wise cynicism in the spirit of Gordon Tullock:

“The most common argument is that we need to reduce income inequality to avoid political instability. If we don’t redistribute wealth, the poor will rise up and do it themselves. As a causal account of human activity, this is dubious and amateur political science, especially unprofessional for historians at the Hoover Institution. Perhaps the poor should rise up and overthrow the rich, but so far that hasn’t happened. Inequality was particularly bad on Thomas Jefferson’s farm, but he started a revolution, not his slaves.”

* The original article can be found HERE - translation by Ivo Kolarov

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