December 12, 2015 by Dan Mitchell
I don’t like the inequality debate because it’s a distraction from the far more important issue of how to generate more growth.
Nonetheless, I feel compelled to once again address the topic. Let’s start with a moral observation: There’s nothing wrong with the kind of inequality that results from honest exchange.
Bill Gates earns far more money than me, but his earnings and wealth are the result of voluntary exchange (at least as far as I know). Consumers voluntarily give him money because they value the goods and services produced by Microsoft.
So it would be nothing but self-destructive envy for me to grouse and complain. And it would be immoral for me to steal his money, either acting on my own or using the coercive power of government.
Dennis Prager elaborated on this principle in National Review.
…what most matters…is whether the wealthiest class has attained its wealth honestly or corruptly. If the wealthy have attained their wealth morally and legally, then the income gap is not a moral problem. In a free society, wealth is not a pie — meaning that when a slice of pie is removed, there is less of the pie remaining.
For what it’s worth, I don’t even think it’s wrong that leftists like Michael Bloomberg and Barbara Streisand earn more money in a year than I could earn in 10 lifetimes. So long as they earn their money honestly (i.e., not via government favoritism like some statists), their financial success is admirable.
But I do have the right to complain about the way some leftists spend their money. That’s because they promote and support policies that make it hard for lower-income people to climb the economic ladder.
But I’m not just talking about left-wing support for statist policies that dampen growth and hurt all income classes. In some cases their preferred policies result in the transfer of income and wealth from the poor to the rich.
And that creates the wrong kind of inequality. Not just wrong. Grotesquely unethical.
Let’s look at some examples.
Andrew Lundeen of the Tax Foundation found that the poor are hurt and some rich folks benefit when reviewing the impact of class-warfare taxes.
When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages. Second, because there is less capital available the available capital is more valuable, which causes the return to capital to rise. The effect of this over time is that wage earners make less and capital owners make more. Our current tax code exacerbates this problem significantly through its non-neutral bias towards consumption over future consumption (i.e. saving).
Now let’s look at what Professor Jeffrey Dorfman wrote about the Federal Reserve’s easy-money policy for Forbes.
…the Fed’s low interest rates have been responsible for inflating stock market values. By reducing the returns to savings accounts, certificates of deposit and bonds, the Fed has intentionally driven ordinary investors to increase their investment allocation to the stock market, thereby boosting stock returns. Because people with more wealth tend to own more stock, those higher stock prices have led the rich to gain much more than the poor and middle class. Low interest rates have meant low borrowing costs for large corporations with direct access to capital markets. This low-cost borrowing has boosted corporate profits which also flow mostly to the wealthy.
He’s right. The rich disproportionately benefit from rising asset values, while the rest of us suffer because of low interest rates on our savings accounts (though the rich may regret such policies if the result is a bubble that eventually bursts).
Dorfman also points out that statist policies, broadly speaking, penalize labor relative to capital. And this is not good for workers in general, but it’s especially harmful for low-income workers.
…the low interest rates set by the Fed combined with the additional labor costs thanks to the Obama Administration (Obamacare and its associated taxes) are changing the relative prices of labor and capital. …This also increases economic inequality because the poor and middle class earn most (or all) of their money from labor income, while the rich collect a significant share of their income in various forms of returns to capital (dividends, interest, capital gains and business profits). Purposely tilting the economy in favor of capital and against labor is pretty close to taking from the poor and giving to the rich, the exact reverse of normal government attempts to redistribute income.
Even the left-leaning Urban Institute recognizes the big government sometimes helps the rich at the expense of the poor. Here’s some of what Leigh Franke wrote about land-use restrictions.
Restrictive land-use regulations, including zoning laws, are partially to blame for the stagnant growth… Land-use regulations may be intended to protect the environment or people’s health and safety, and even to enhance the supply of affordable housing, but in excess, they restrict housing supply, drive up home prices, and limit mobility. …More and more zoning restrictions meant less construction, fewer permits, and a restricted housing supply that drove up prices even further. …cities often have stringent zoning laws, a restricted housing supply, and high prices, making it nearly impossible for lower-income residents and newcomers, who would likely benefit most from the opportunities available, to find affordable housing.
The minimum wage is another example of a left-wing policy that causes the wrong type of inequality, as explained by Robert Graboyes of the Mercatus Center.
The $15-an-hour minimum wage is a superb tool if your goal is increasing inequality. To the least-advantaged Americans, its logic is simple: “You lose your jobs and access to jobs so your wealthier neighbors might enjoy small wage increases and greater protection from competitors like you.” …Other than wealthier employees, who benefits from a $15 minimum wage? Income is likely to soar for a CEO whose company builds robots to replace low-wage workers. …instigators and beneficiaries of minimum wages are often labor unions who benefit from eliminating potential competitors…harsh restrictions on job-seekers can do damage that lasts a lifetime. A teenager shut out of employment by an exorbitant minimum wage will fail to learn job skills and establish a track record that impresses future prospective employers. And the effects will not fall evenly: Children of wealth and privilege have many routes to circumvent such restrictions. The inner-city teen, striving for a better life, has no such good fortune.
Spot on. Here’s a must-watch video on the topic.
In the interest of space, that’s enough examples, though I’ll at least mention that the Export-Import Bank is another example of a government policy that transfer money from the poor to the rich, as are agriculture subsidies.
The left’s support for a government monopoly instead of school choice also should be on this list, since the main result is to hurt kids from poor families in order to provide undeserved goodies for unionized teachers.
I could keep adding to that list, but let’s got to today’s lesson: Our friends on the left say they want to help the poor and reduce inequality. But their policies often target the kind of inequality that we shouldn’t worry about while exacerbating the form or inequality that is a problem.
John Goodman explained the consequences in a recent column.
The worst housing shortages, the most homelessness and the worst inequality exist in the cities that are the most Democratic and the most liberal.
P.S. Our leftist friends fail to appreciate that the real goal should be more economic growth, which is what’s really necessary to make life better for the less fortunate.
Actually, to be fair, they want economic growth. They just don’t support the recipe that produces that outcome. I’m not sure why, but maybe Margaret Thatcher was right and they want bad outcomes for the rich (other than their cronies) more than they want good outcomes for the poor.