Richard Epstein from the US: The "Income Inequality" Warriors

The critical political struggle of the 2016 presidential election may well be the redistribution of wealth. How that issue plays out is likely to depend on whether it is cast in terms of economic growth or income inequality. 

If the Republicans successfully push the growth agenda, then the Democrats will be on the defensive. If the Democrats drive home the theme of income inequality, then the Republicans will squirm. This is a contest that the Republicans should win if they play their cards correctly.

Let’s start with this fundamental observation: It is possible to reduce income inequality in one of two ways: lower the income at the top or raise it at the bottom. Indeed, it is possible, but only by extreme measures, to eliminate all inequality by spreading the wealth of the richest individuals around so that everyone has the same income. Yet none of the critics of income inequality will go that far, because they realize that that strategy will depress the income of the poor as well as the rich. So instead these critics moderate their demands: they are willing to sacrifice some measure of overall social welfare to obtain greater benefits at the bottom. Their theoretical position is that the substantial gains in utility for the poor will override the relatively small losses in personal satisfaction and living standards that the top income earners will experience as a result of redistribution.

Pity is, they have no idea how to steer this middle course. Politics is a very imperfect science to say the least, so that it is all too easy for these progressive policies to overshoot the mark, as it is much easier to lower levels of wealth than it is to raise them. Put simply, it is an intellectual fantasy to think that it is possible to address questions of inequality without taking into account any productivity losses that these proposals may take. Those difficulties do not arise if the first emphasis is placed instead upon the creation of wealth. Indeed it is altogether possible to improve the position of the worst off in society by a set of productive measures that widen the income gap between rich and poor.

Assume that we have just two groups in society, one of whose members all have wealth at the level of 10 and the second, far smaller, have wealth at the level of 1,000. A change in legal position that increases the wealth of the bottom group from 10 to 15 and the top group from 1,000 to 1,200 will increase absolute inequality even as it improves the position of the people at the bottom. Ironically, it will also give larger percentage increases to those at the bottom. Indeed, many social changes do produce gains across the board. But it is typically beyond the capacity of any social planner to steer productive activity in ways that ensure that whatever growth does take place will result in a reduction of any income gap by any system of state taxation and regulation.

This line of reasoning has not, of course, stopped the champions of income equality in the Democratic Party from pushing its front-running candidate, Hillary Clinton, into putting the inequality issue front and center during the current campaign. Unfortunately, it is difficult to find policy prescriptions that can achieve the lofty goal of producing a sustainable version of income equality. One outspoken critic of income inequality is the New York Times’ columnist Nicholas Kristof, who in a recent column, “Inequality is a Choice,” made it appear that the issue is more tractable to legislative fixes than is in fact the case.

Kristof used as his lightning rod the deplorable state of affairs in Baltimore, Maryland, to explain the urgency of the income inequality crisis. But, as I have already argued, the precarious situation in Baltimore is the necessary outcome of the very economic policies that progressives like Kristof would like to see implemented on a national scale. The simple economic truth is that the prolonged downturn in Baltimore does not trace its roots back, as has often been claimed, to segregation, but to the simple fact that Democrats have controlled every aspect of the public life in the city from 1963 to the present, during which time crime increased, taxes rose, regulations proliferated, and about one-third the city’s population fled. The challenge is to find a set of progressive policies that do not have that combined toxic effect.

It is just there that the tired suggestions of Kristof demonstrate the futility of his position. He berates his fellow Americans for not thinking that inequality is the result of conscious social choices. He is surely right about the general point, but wrong in sizing up the situation when he denounces the nation, which has “chosen to prioritize tax shelters over minimum wages, subsidies for private jets over robust services for children to break the cycle of poverty.”

But his argument breaks down because of two mistakes; the first is the near random juxtaposition of two programs, each of which should be considered separately from the other. The second is the failure to ask which of these proposals will pass muster in an economy that runs on the principles of strong property rights, freedom of contract, and limited government.

Within a classical liberal position, all subsidies to any groups should generally be regarded with suspicion. In this case, the condemnation of tax shelters is high on the list of classical liberal targets. Tax subsidies, whether for the rich or the poor, lead to a misallocation of resources. The subsidized activity now takes place past the point where marginal revenues exceed marginal cost, and thus leads to social losses. For these purposes, it does not matter whether the subsidy comes from general revenues or from specific levies against other particular lines of business. Both should be rejected. Tax shelters to the rich do not pass the test under any theory of limited government.

But why couple tax shelters with the minimum wage, which does not help the poor even if tax subsidies for the rich were reduced today? In his column, Kristof bemoans Utah Senator Mike Lee for lamenting the lack of equality of opportunity in the United States. But Lee has the better of this argument. The minimum wage laws kill opportunities for the least well-off in society by making it too costly for firms to hire marginal workers. In so doing, it cuts them out of the working economy, and makes them ever more dependent on a set of transfer payments that do nothing to increase their skill sets, self-sufficiency, or sense of self-respect. It is one thing for an employer to give workers raises as a spur to, or recognition of, greater productivity. But when government imposes those obligations from without, it hurts the very individuals whom it wants to help.

Knocking out any tax subsidies for corporate jets is likewise a no-brainer for the same reason. But it is a much harder position to think of how best to provide those “robust services” to get children out of poverty. On this score, the standard progressive line is to favor stronger unions within the framework of an overall public school system. But that system works for the benefits of the unions, and not for the benefit of the children who are denied access to charter schools, which provide better education to the children that they teach than ordinary public schools.

Kristof then cites the work of the British economist Antony B. Atkinson, whose new book Inequality: What Can Be Done? only illustrates the massive progressive confusion on this subject. To be sure, both Atkinson and Kristof are right to insist that government take concern with competition and monopoly policy. But the pro-competition program is an integral part of the classical liberal tradition. So the key question is exactly how to implement the program. My own view is that the stress should be on horizontal cartels that reduce output, raise prices, and reduce social welfare. The great danger in this area is that competition policy can attack successful companies like Google and Microsoft, not because they have engaged in monopolistic behavior, but because their wealth as foreign companies makes them ready targets for redistribution in Europe or China.

It is not enough therefore for egalitarians to state their ultimate objective. It is equally necessary that their proposals can implement that objective correctly. Yet that cannot be done on matters of monopoly and competition, if in the next breath comes a plea that unions be strengthened. That plea is wholly ironic since the success of large industrial unions depends on their ability to exert monopoly power over employers in both the public and private sector. Put simply, Kristof’s second recommendation is inconsistent with the first, and depends on the wholly unsupportable claim that the monopoly power of labor unions is somehow different from that possessed by firms when in fact the same principles apply to both.

Ironically, therefore, one useful reform that might improve management labor relations is to remove the bar in the National Labor Relations Act that prevents the formation of company unions. That one reform could allow workers to have a collective voice within the firm, without organizing industry-wide strikes that can idle a nation with large negative consequences to the overall economy. But the notion that industry-wide unions can help redress income inequality is wholly misconceived. Unions bargain for the advantage of their members, and the only way that they can keep wages above the competitive level is to cut job opportunities to lower paid workers in the effort to obtain higher wages, which in turn will result in higher consumer prices for poor and rich alike.

The rest of the Atkinson/Kristof program is also a recipe for economic disaster. There is no way to organize a system of public service jobs at minimum wage that is capable of supplying services that are needed. The proposal will typically result in make-work positions that will reduce the number of workers who can obtain private sector jobs. Likewise, there is little merit in thinking that much relief could come from raising marginal tax rates to 65 percent. Putting that reform is moving into uncharted waters, where it is likely that reducing private investment capital will cut the demand for labor, lowering overall wage levels. A tax reduction is on balance, more likely, to result in overall improvements, which is why states that favor low taxation policies typically outperform their high-taxation rivals.

Sensible policies to combat inequality follow from a consistent classical liberal position, which seeks to promote competition in the private market and in the provision of public education. The rest of the egalitarian program is counterproductive insofar as it keeps the poor worse while leaving the rich worse off as well. That is a strategy for dual ruin that will only deepen the current economic malaise. 

Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.