Whence Inequality?

A recent Washington Post headline blared “The richest 1 percent now owns more of the country’s wealth than at any time in the past 50 years.” We are, I presume, supposed to assume this is a problem.

Mention anything relating to the wealthy to the denizens of many political forums and income/wealth inequality will inevitably be brought up. It has become such a common refrain that even skeptics of class warfare are prone to accept that there may be a problem. This is a “past the sale” tactic (falling under the logical fallacy categories “a priori” or “dogmatism,” wherein a point of contention is treated as a given), one made effective by endless repetition, elements of human nature (e.g. envy) and a sympathetic press.

The correct response to the WaPo headline should be “so what?,” followed by an expectation that the decrier explain why this datum (assuming it’s true) is something to be concerned about. I won’t go into WaPo’s analysis beyond noting that it does two things: compares what is vs a survey of what Americans think it should be, and compares America to other first-world nations. Neither of these is even remotely compelling, from a logical standpoint. Neither explains why the headline reports a Bad Thing. WaPo does present a study that asserts growing inequality has harmed economic growth, but the study’s conclusions, which are essentially redistribute and regulate, leave me skeptical of the impartiality of the report.

Lets talk about why.

Supposedly, America has worse inequality than Germany or France or other European first world economies. What else, however, does America have, compared to those other nations? A more progressive tax structure, for one thing. America’s rich pay a bigger percentage of their income, pay bigger share of the overall tax burden, and pay more dollars than America’s poor do, and those disparities are greater than found in Europe. When the bottom 50% of America’s earners pay only 3% of the total tax burden, it’s pretty obvious that there’s already substantial redistribution going on. The increase in inequality has been growing nevertheless. Might we not conclude, then, that perhaps redistributive taxation is not a remediation to income inequality?

Consider the other part of the remedy: regulation. We’ve got a ton of it already, and it has been growing steadily since the Reagan era. If regulation were a remedy for inequality, why has inequality grown?

The answer may very well lie in an interesting tidbit regarding the 1%: The five richest counties in the nation are suburbs of Washington D.C. Could it possibly be that Big Government is a driver of inequality rather than a remedy to inequality? Might it be the case that the massive regulatory schemes coming out of DC are benefiting the already-wealthy and creating opportunities for the well-connected to increase their wealth at others’ expense? Might we reflect on the fact that cronyism and regulatory capture are things that deserved the special nomenclature they earned?

What else have we witnessed mushrooming in the past half century that might coincide with the growth in inequality? How about the national debt, which hovered near 30% of GDP in the 1970s but has grown to more than 100% of GDP today?

There is a peril and pitfall in comparisons like WaPo’s America vs Germany/France/etc. Statically comparing data from different nations offers very little actual insight, because there are dozens to hundreds of variables that might be relevant in explaining the differences. As one example, longevity is often used as a metric of a nation’s health care system (usually by those who advocate for socialized medicine), but a health care system is only one of many factors that affect life expectancy. The Japanese live longer than we do, but it’s not obvious that their socialized medicine system is a bigger factor than their far lower rate of obesity or their healthier diet. It is far better, instead, to look for correlating trends within a nation, and then attempting to determine whether there’s a causative effect between them.

Yes indeed, correlation is not causation, no matter how intuitively obvious or “logical” they may seem in the moment. And, indeed, the correlation between inequality growth, regulatory/bureaucratic growth, progressive taxation, and debt growth does not automatically lead to a causative conclusion. However, if increased redistribution and regulation are posited as the solutions to income inequality, the past correlation of growing inequality with growing redistribution and regulation is relevant in that it undermines the case for more of the same.

In other words, when we are told that we need more government to address inequality, but witness that inequality has grown as government has grown, we have reason to be skeptical.

Inequality is presumed to be a Bad Thing for the poor. The rich are rarely deemed to have any troubles, and fairly so. But, we can look to the oft-quoted Milton Friedman to know what actually helps the poor:

In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.

Fact is, less government, more liberty, freer trade and freer markets are what benefit the poor, not redistribution of wealth, heavy-handed regulation and bureaucracy, or punishment of success. The inequality red herring is intended as a slam on capitalism and free enterprise, despite there being plenty to suggest that the growth of inequality is driven by its antithesis i.e. bigger government and more restrictive economic policies.

So, for those who want to address inequality, the answer does not lie in demanding government take from the haves to give to the have-nots. That hasn’t worked, and there’s scant reason to suspect more of the same will reverse the trend. The answer is less government, freer markets, and more liberty. Of course, control freaks cannot abide that, and we who trust and respect liberty should not let them get away with talking past the sale here. We should challenge both their presumption that increasing inequality is a Bad Thing in and of itself and their assertion that it must be remedied with more government. To do anything less is to grant them undeserved power and the continued ability to do harm.

For further reading on the myths vs the reality of “inequality,” I recommend this report from Cato.