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Dealing with Wealth Inequality
“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” — Milton Friedman
Wealth inequality is the crux of modern progressivism and democratic socialism. They contend that free-market capitalism moves wealth to the top — leaving the rest at a loss for cash — and that the government must intervene to redistribute wealth from the bloated top to the destitute bottom. This is for good reason: It lends itself to scary-looking graphics such as this:
Inequality is inherent to the capitalist system, but that doesn’t necessarily explain why it’s such a big topic for the Left. After all, most people expect wealth inequality, and think it a good trade off for better standards of living. The reason the Left uses wealth inequality is that the differences are enormous. When people see graphics like the one above, they are swayed into believing that the benefits aren’t worth the costs. If the rich are really that rich, what possible “unintended consequence” could outweigh the gains to be had in plundering them and distributing their fortunes?
The typical capitalist argument — that a smaller slice of a bigger pie is still more pie — is a good explanation, but still grates against people’s sense of justice when the numbers are this skewed. A further explanation is required.
How Should We Respond to Wealth Inequality?
It’s less a matter of there being a single, definitive answer, than a combination of them. The first thing to tackle is what these graphics leave out: primarily, social mobility. While skewed distributions can make it seem that all the wealth is in the hands of a few one-percenters, it neglects to show the shifting of whom those one-percenters are, and how people shift across the wealth distribution through time. For instance, a study by the University of Michigan — discussed here by the Dallas Fed — showed that 95 percent of households that were in the bottom quintile of income in 1975 had moved up by 1991. Over time, most people see an increase in their absolute wealth, and the bottom of the distribution is filled by young people and immigrants whose fortunates almost always improve with time. This mobility cannot be ignored.
In a free market, this makes sense. Most people start their economic lives poor and often take out loans, giving them a negative net worth. However, as people acquire assets over time, they move up the distribution. There are a few elites, but — by the nature of the free market — their success comes from providing benefits to others, so tearing them down to the “normal” level costs everyone else. Keep at that long enough, and there’s soon no one left to plunder.
This explains why the skew might be more than one would initially expect, but not why it would be what is often claimed. There is some credibility to the claim of increasing inequality, but the culprit here isn’t capitalism, but the march toward socialism.
This cuts to the core of the Left’s dogma. How can socialism — the darling of equality — cause inequality? Indeed, socialists are so enamored with equality, that they have essentially made it axiomatic that socialism creates equality. But why would this necessarily be so? Have they never bothered to put two trends together: i.e., a trend towards greater inequality in the last 40 years, and a concurrent trend towards socialism?
To understand why socialism has created inequality, you have to understand how workers gain more income. In a market economy, a worker’s income increases with the demand for his skills among potential employers biding for his labor. Eventually, the wage reaches an equilibrium where the highest offer isn’t in excess of the value he would add.
Socialism, however, gets in the way of this. Taxes, tariffs, and regulations all make business more difficult and reduce the number of companies who can stay afloat. With fewer potential employers competing for our worker’s labor, he’s more likely to get stuck with the first (and lowest) offer he receives. Multiply that across an economy, and you get inequality and mobility stagnation.
The irony is that socialists’ main argument against capitalism — that free markets allow powerful monopolies and oligopolies to form — applies at least as powerfully to their own preferred solution. That is, as regulations and government interference increase, the only companies able to survive are those with the size, political influence, and legal budget to get by. And so we end up with a few one-percent companies courtesy of socialism, and significantly less competition in the labor market.
In short, the increasing extremes of wealth inequality can be correlated to the socialism in our system. In contrast, the moderately strong inequality of the typical free market reflects social mobility, which is a reasonable trade-off given the increase in absolute wealth it creates.
So will electing Sen. Bernie Sanders result in an explosion of wealth inequality? Probably not. If the government chooses to go after wealth inequality directly, they will find a way of strangling even the wealthiest, best-connected companies, which would damage production.
The lesson to be learned is that wealth inequality is a by-product of the mix of socialism with capitalism. There is enough socialism to destroy competition, but enough capitalism for there to be wealth left to accumulate. Furthermore, wealth inequality — despite the ramblings of Senator Sanders — is not our biggest issue and is not causing chronic problems. Rather, it is a symptom of the many complications that result from a mixed-economy.
Published in General
That sounds like a matter for the creator and the monetizer to negotiate between themselves. It’s not for me to judge the deals that others make between themselves.
Only if it’s eventually sold. Until then, it’s simply taking up space and costing money to store.
Grocery stores have to pay to have unsold produce trucked to the landfill. Atari had to rent a truck when they buried their unsold E.T. cartridges in the desert.
– The LORD your God
Yep! And for a suggested solution see:
http://www.usatoday.com/story/opinion/2016/01/18/glenn-reynolds-constitution-amendments-convention-greg-abbott-column/78933518/
How do you figure this?
There, I think you can take a second to reflect on what these stories conceal. In your story–not that I’m blaming you for inventing it–politics is essentially evil, as opposed to something else, which is not.
But you could still say, minority rule is one kid stealing the other two kids’ lunches if you have for whatever reason decided that’s the only scenario or setting you’re interested in-
Indeed, I believe that’s true. The other thing being God.
Great post. I would only add that income disparities also occur when a society makes huge technological advances and many folks are either replaced or do not adapt to changing business trends.
Also, as the Donald notes correctly, the U.S. govt continues to put roadblocks i.e. restrictions, regulations, and corporate taxes on businesses forcing them to manufacture elsewhere. I was recently discussing this issue with a Ford executive and even some of the right to work states in which they have established factories are fraught with costly regulations emanating from the fed level.
God’s not gonna give your kid a lunchbox or lunch money.
& when it comes to property & rights, you’re stuck with politics whether you know the good it does or not. I can see why Christians & Jews might have anti-political ire. When you’re told Cain invented the cities & his kids the arts & crafts… & then there’s Babel… But even God was eventually ok with cities & politicians & rulers.
I sense a bigger problem is the left’s near scientific view of wealth. They assume wealth to have many of the same characteristics of matter. It exists and can neither be created nor (more dangerously) can be destroyed. That someone has wealth means that someone else (lets call them unfortunate) does not. It is all a closed system where Le Chatelier’s principle applies.
It’s called a zero sum game.
That is something of a shallow assumption.
It is possible to believe that the distribution of new wealth is inequitably distributed as well.
Income inequality does drive wealth inequality.
People can accept a good deal of Wealth Inequality given the Trade Off for Absolute Wealth. But if they feel that they could pillage the Rich and get everyone into the Middle Class, they won’t be very perceptive to the idea of a Trade Off.
Can someone put that graph next to one that shows the percentage of taxes each group pays?
I’m curious if that will be instructive by itself or not.
That’s part of the problem, a lot of these studies are based on data before transfer payments.
Looking at the wealth of the “1%”, I can’t help but think,”My, that is a lot of mattresses and game bags hanging from tree limbs just out of the reach of the wretched gathered below”.
My recollection is that the top small percent of income earners pay roughly twice their income percent as their tax percent. So, for example, folks with 20% of the national income pay around 40% of income taxes.
That is correct. But the 1% of earners pay nearly 70% of the tax bill.
And don’t forget that 47% of the population in this country pays no fed income tax at all but are perfectly happy to drive on the freeways and attend college paid by the taxpayers.
We don’t begrudge them that though, ET, do we? Only that they maybe could appreciate what the other 53% contribute a bit more.
Everyone who drives pays for the roads because roads are paid for via gasoline excise taxes.
The income taxpayers are paying for the “loans” to the dried up Highway Trust Fund due to its insolvency. The income taxpayers pay more taxes, but it is at least true that even the 47% who pay no income tax pay 18.4 cents a gallon which is earmarked for the Highway Trust Fund.
And the numbers are a bit different ET:
Top 1% income earners pay ~45% federal taxes with like ~25% of national income
Top 10% pays ~68% of federal taxes with like ~45% of national income
Parents need to take responsibility for the debt their children incur and may never be able to pay back.
I do my fair share by providing college kids with part-time jobs that help pay for tuition. I write endless recommendations for college applications. The local PTA loves my business because we train kids to deal with the real world.
Not true. The majority of infrastructure is paid for by state and local income taxes; gasoline tax provides a minimal contribution.
This number reflects people making $250k a year, not the 1%.
Ok, I’ll accept the number that the top 10 pays 68%; it’s still disgraceful. It removes all incentive for the bottom quartile to move ahead.
Does that mean I win? I was hoping to go a few more rounds with you is all (see back and forth trail above)
When I’ve gotten into arguments about income inequality (which I do only tentatively and tepidly because I’m extremely ignorant in such matters) I point out that we don’t tend to point to Oprah and say “she makes too much money.” My relatives don’t point to me and say “you made too much money on your books,” even if I was pretty well paid for a couple of years there, anyway.
We resent the people doing work we don’t really understand—my relatives understand book writing and even imagine they can empathize with Oprah since she empathizes with us, but we don’t understand what a Venture Capitalist actually does to earn his bazillions. (I come by that extreme ignorance honestly…)
Presumably, they pay him bazillions because he makes bazillions for them, right? So —provided we tax him at some appropriate level— what’s the problem with him making a small fortune doing work that sounds so incredibly boring to most of my family members that we wouldn’t do it for all the money in the world?
Maybe someone else has mentioned this, but it’s extremely deceptive to look at wealth in the richest Americans and then compare it to the wealth in the poorest Americans. This is because net worth, unlike income, doesn’t bottom out at zero. There are tens of millions of Americans (I’ve had trouble finding an exact number) with net worths of less than zero (i.e., their assets are worth less than their liabilities). Because this is true, progressives can truthfully say that the Walton family (or the Kochs, or pick your rich, non-Democrat bogeyman) have more wealth than the combined wealth of the poorest 40% of Americans. This is deceptive, because it implies if the Waltons just shared a little bit of their vast wealth, they could alleviate suffering for millions. However, because anyone with a net worth of one cent or more is richer than the tens of millions of Americans with a negative net worth. The sum of all negative numbers must be less than zero. I am a lab tech at a junior college, but my net worth is greater than the combined net worth of tens of millions of Americans, including some members of Congress. I assure you if you took my wealth and distributed it among tens of millions of Americans in debt, it wouldn’t go very far. The Waltons’ wealth would go farther, but not far enough to end poverty. Wealth inequality is not the problem. Poverty is the problem.
Too many poor people, eh?
I think that’s true, or at least it means that reducing income inequality does not seriously address poverty. An extremely high income individual, like the CEO of Walmart, makes about 1000 times as much income as a full time minimum wage worker (e.g. around $20,000/year as opposed to $20,000,000/year). This is the kind of fact that the progressives trumpet to explain why there is plenty of money to pay higher wages. The problem with this argument is that there are far more than a thousand poor people for every super high income person. There are millions of low wage workers for every person earning millions of dollars per year, meaning that, even if you confiscate every multimillionaire’s wages and redistribute them, it amounts to at most a few dollars per year, per poor person. The low wage workers at Walmart and McDonalds, taken in aggregate, make far more money than the executives do (about a thousand times as much, I figure). A million dollars is a lot of money for one person, but not that much for a million people.
Even I can understand this math!
Plus, a person with negative net worth at the age of 25 (my daughter, say, or me when I was her age —unless babies count!?) is quite likely to have a positive net worth at 50…this isn’t a problem, it’s just life.