A few days ago Paul at PowerLine had fun with Jeff Stein at Washington Post trying to use income inequality to support a wish list on the left. Do read all that Paul has to say but he puts the major point succinctly:
I like to ask those who throw such numbers around questions like “how much wealth in relation to the poorest 80 million households should the richest 400 Americans control?” and “what percentage of the wealth created in this country since 1982 should have gone to the top 5 percent?”
Unless you have a goal there is no reason to play. We would have put the goal as a Gini Coefficient but the effect is the same. We want to play too.
Early on Jeff says:
But while there’s consensus that America is a wildly unequal country, there’s broad disagreement on what, if anything, should be done to address that. [Emphasis added]
It is hard to define wildly in the sentence above but our response would be that there is no consensus that America is a wildly unequal country and there is broad agreement that nothing should be done about income inequality per se. Perhaps we are being hopeful on the consensus but we hope not. There is much to do to improve the economic lot of Americans but trying to change the some aspect of income inequality is taking your eye off the ball.
Jeff has a couple of fun suggestions from Americans For Tax Reform and the Heritage Foundation. They are Get Government Out Of The Way, Repeal Rules And Regulation and, our favorite, Send The 1% To Venezuela. The latter is tongue in cheek but it is likely to reach the goal without much damage to the economy. Why not much damage to the economy? Well Facebook, Microsoft, and Walmart will still be American companies. America might lose some spending by those rich folks but we won’t lose the capital. Most of the rest are just a wish list from the left like universal government childcare or union rights often combined with taxing capital. It is not clear that any of those suggestions will help income inequality and, as proof of the distraction of income inequality, the proponents rarely argue their suggestion is the best way to combat income inequality. Let’s worry about important stuff. Changing income inequality is not important in America.
Income inequality seems to have great resonance. An example is where Scott S. Powell argues in the WSJ that we should do away with or change Sarbanes-Oxley (SOX) because it increases income inequality:
With corporate tax reform in the rearview mirror, Congress and the Trump administration should pare back a misguided regulatory regime [SOX] that imposes unnecessary costs on public companies, discourages initial public offerings, and skews the distribution of wealth toward the very rich.
We would support adjustments to SOX but not because it changes income inequality. In addition, it is not clear what impact SOX has on income inequality. More public companies might mean more rich folks. On the other hand, Michael Tanner has a great article at NRO where he takes issue with what he properly describes as our dangerous obsession with income inequality. Read it all but here is how he starts:
Yippee! Last week’s sell off on Wall Street wiped out more than $3 trillion in wealth. Overnight, economic equality increased. True, you and I aren’t any better off — in fact, some of those losses came out of our 401(k)s and pension plans — but the important thing is that the biggest losers were evil rich people. Warren Buffet lost more than $5 billion, Jeff Bezos more than $3 billion. All together, the world’s 500 wealthiest people lost more than $180 billion. Aren’t you happy?
He answers his rhetorical questions with of course not.
Sidebar: One of the problems with our dangerous obsession over income inequality is the challenges of measuring it. The losses Michael describes are not part of a US tax return so it would be difficult to measure the impact. Two major problems with any argument about income inequality is how to measure it and what is the goal using that measurement system. End Sidebar.
Michael points out that capitalism has provided great benefits in the US. Others (here is a video) have pointed out how it has helped the the world. We need to promote economic freedom, defeat crony capitalism, and protect the needy. Any argument that cites changing income inequality as a benefit should be ignored so that we can focus on serious stuff.
David R. Henderson is exactly right in his title but way too kind in his WSJ Op-Ed entitled A War On The Rich Won’t Help The Poor that analyzes the Oxfam report Reward Work Not Wealth. David starts out with a dichotomy that he shows a counter example of later:
There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off. Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude.
The problem is that he has accepted the Oxfam starting point that inequality is the problem. Inequality is not the problem and Oxfam is (or perhaps no longer is) an antipoverty organization as David describes it. The Oxfam report uses the catch phrase, “Even It Up.” The first might not close the gap as David demonstrates:
Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family.
The second way has no assurance that it will close the gap either. Eating the rich, or some variant of it, will likely have a negative impact on the poor. Will the gap, however measured, be reduced or increased? It should not matter because making the poor worse off is a bad idea. Go check out Venezuela. We are sure there are studies of various plans to punish the rich but we doubt they are definitive. The solution is to work on poverty by encouraging markets, rule of law, free trade, allowing GMOs, and so on. Income inequality is uninteresting and unimportant. Don’t get sucked into it.
We find income inequality a completely silly issue to be concerned about. Economic growth, poverty rates, various measures of unemployment and employment and several others are interesting because if we find policies to ameliorate these problems then we can help people. With income inequality there are three problems: First, changing income inequality won’t necessarily help anyone. Second, we don’t have a goal. What is the perfect Gini coefficient? Third, we don’t know how to change income inequality.
We found evidence on the third issue recently. A MWG double hat tip to Simon Constable and Instapundit. They led us to Ugo Traiano’s [his first name drives spell-check crazy] working paper on the impact of taxes on income inequality. Ugo is at the University of Michigan. It is only a working paper which means that it hasn’t been fully peer reviewed. Almost all working papers have some peer review and this one, like most, thanks a few folks so it is mildly reliable. We are not suggesting that the paper is definitive. Rather, we are suggesting if you really want to change income inequality you need a bucket-load of evidence to convince folks that some set of policies will lead to an outcome.
Ugo finds that increasing tax revenues leads to more income inequality. He finds that the results are robust to measures of income inequality and econometrics. Notice that Ugo did not use increasing tax rates but increasing tax revenues so it leaves some opportunity to argue that increased tax rates might have the opposite effect on income inequality. After all, at some point, increasing tax rates leads to less tax revenue.
We don’t find income inequality an interesting statistic. We don’t think that government policy should be looking to change it. If you do then you need to have evidence that your policies will lead to the outcome and what the outcome is. In addition we would like to know the impact of said policies on serious measures like economic growth.
If you support lower tax rates and not raising the minimum wage to reduce income inequality then we are all with you. But it has nothing to do with income inequality.