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Some Inequalities Are More Unequal Than Others

We need new thinking about economic inequality.

For at least a generation, we’ve been having an argument about inequality that goes something like this. On the left, somebody points to persistent inequalities in American life, whether it’s the racial gap in test performance, or the pay gap between men and women of similar qualifications, or the fact that some people get “gold-plated” health insurance through their jobs while others are uninsured, or the inexorably rising share of national income going to the 1%. And this person proposes solutions, some of which become bi-partisan shibboleths (affirmative action), some of which scramble partisan categories (charter schools and the rest of the school reform agenda), and some of which become the focus of partisan conflict (some kind of national health insurance, higher tax rates on millionaires).

On the right, somebody counters that inequality is an inescapable consequence of free competition, and that free competition is what drives economic growth, which “makes the pie higher” for everybody. Some inequalities may deserve to be addressed for reasons of justice (most right-leaning folks I know personally accept the importance of providing for the truly needy), but in general you don’t want to reduce inequality because any effort you make to do so penalizes the (relatively) successful and rewards the (relatively) unsuccessful, and this creates the perverse incentives that hamper innovation and growth.

It’s a familiar argument, and one that nobody can win permanently, because few people are completely unconcerned about inequality and few people are completely unconcerned about stalling economic growth. And so you got more of a see-saw effect, with left and right winning alternate rounds of the argument.

But the Great Recession has scrambled this analysis. The Obama Administration came into office with the typical Democratic agenda for tackling various inequalities. But, as a consequence of the recession, he was enacting this agenda of more equitable pie-sharing in the context of a shrinking pie. And a time when most Americans are worried that we aren’t as rich as we thought we were is a difficult time to convince people to share. On the other hand, traditional Republican ideas for promoting economic growth (at the price of inequality) have been substantially discredited by the weak economic performance of the Bush years, the financial crisis and the subsequent recession. We have entered a period of austerity politics, in which both right and left are predisposed to fight fierce rear-guard actions to prevent anybody from taking away their share of the pie. Meanwhile, inequality continues to grow.

There are a couple of other tacks this debate could take. Mickey Kaus, for example, once championed [1] the argument for promoting “social” equality – building up strong communal institutions and forcing people of all classes to undergo common experiences (strong public schools loom large in this vision) – as a counterweight to economic inequality. And there’s a socially conservative version of this argument that fingers our cultural “coming apart [2]” for the widening economic gulf, and claims that a sexual counter-revolution would create the social conditions in the struggling working class conducive to rising on the economic ladder, while also bringing about a conservative version of the social equality that Kaus advocated (“marriage” serving as both the key “strong communal institution” and the key “common experience” for all classes in this vision). But there is the nagging suspicion that both the left-wing and right-wing vision of social equality have the arrow of causation backwards, that you can’t have “strong public schools” for everyone when the impulse to segregate economically is so powerfully motivated, and that you can’t restore a “culture of marriage” no matter how much preaching you do when there’s a persistent shortage of “marriageable” males.

Which is why we need new thinking about economic inequality.

On the left, there is an emerging argument [3] that, in our current economic conditions, the traditional right-wing argument, that inequality is the price of economic dynamism, is actually backwards: inequality is itself holding back dynamism, and is not merely a consequence of the Great Recession but an important part of the cause. I find a lot of this analysis convincing, but I’m less convinced about the remedies. In particular, I remain unconvinced that direct redistribution – of which we are doing more and more through the tax code – will do much to alleviate the growth of inequality. Indeed, when the labor market is slack, direct redistribution may simply be subsidizing businesses who offer low wages. And while I think upper-income tax rates have plenty of room to rise – and should rise – I don’t think that’s really going to do much to address rising inequality either. Democrats like to point out that the higher Clinton tax rates didn’t harm the economy – and they didn’t. But they also didn’t put any kind of a brake on growing income inequality.

I think the Democrats have a number of useful ideas, but I don’t think they’ve painted a complete picture, largely because they remain wedded to a neoliberal consensus view that our comparative advantage has been revealed by the market, and that what we need to do is re-tool our workforce to suit what our economy is inevitably going to become. And I don’t think that view is correct.

Whether it is the result of deregulation or of continued government interventions (and I think it’s some of both), financialization has pervasively distorted incentives across the American economy. We need to tackle that problem directly, and not treat the financial sector as a cash cow that with either miraculously (if you’re a Republican) or through redistributive taxation (if you’re a Democrat) feed the rest of the economy. We already have an industrial policy, but it is driven by the needs of specific sectors – defense, agribusiness, natural-resources extraction, pharmaceuticals, entertainment – and not by our collective interest in moving our labor force up the value chain, which is the only way to create an abundance of jobs paying decent wages.

“Inequality” has for a long while been treated as a “Democratic” issue, either because it’s treated as code for concern for the poor (which one would hope would be something both parties care about) or code for envy of the rich (which one would hope would not be an important driving force for either party). But it’s become too serious an issue to be treated as code. I’ll admit, I’m convinced by the argument that the kind of pervasive and growing inequality we’ve seen develop in America has become a deep problem for our political and economic system as a whole, and not just for the fringes thereof. And it needs to be a central focus of both parties’ thinking and policymaking.

Inasmuch as I’ll be listening for anything tonight, this is what I’ll be listening for.

19 Comments (Open | Close)

19 Comments To "Some Inequalities Are More Unequal Than Others"

#1 Comment By Darth Thulhu On October 3, 2012 @ 10:07 am

Unless the Republican Party takes a severe beating in its current composition, I cannot see it embracing the Paul-Johnson rump that would actually oppose the regulatory capture and rent-seeking behavior of the financial industry.

As you say, the Democratic Party, in lauding the Clinton era, is at best neutral and fiddling with minimum wages and small marginal tax increases while doing nothing about the forces encouraging the hollowing out of manufacturing and rewarding irresponsible financial industry gambling schemes and offshore tax havens. And the platform of the Republican Party, as presently constituted, would actively worsen the excessive financialization and skewed priorities while gutting various safety nets.

Neither party really has any strong desire to reign in Wall Street, nor the military-industrial complex. Movements like the Tea Party get distracted into pointless social wedge issues, and movements like Occupy Wall Street float vaguely along without effecting any real policy awareness. Meanwhile, the megacorps continue to pour hundreds of millions into lobbyist groups that Congress continues to allow vast access in writing their own regulations, rigging the game further and worsening inequality with each passing year.

The two major parties currently have no prescription to do anything effective. The Democrats would mildly tinker existing entitlements or propose boondoggle programs, and the Republicans would sneer about the moochers eating cake. Neither wants to do anything effective about the legalized leverage gambling sector hollowing out the productive economy for private gain. Neither wants to do anything about deregulated financial institutions which are still Too Big to Fail.

Barring yet another corrupt corporate implosion on the scale of Enron or AIG, I can’t see anything productive on the matter coming out of either side of Congress for the next couple of elections.

#2 Comment By cw On October 3, 2012 @ 11:10 am

You forgot another bad result of inequality. If there is a class that with way more money than the rest, they use their financial advantage to entrench and further enrich themselves. They lobby for favorable laws (capital gains tax, carried interest anyone?). They create defacto separate educational systems (____country day school- dalton school-harvard) which becomes the only path into the government and the industries like finance and law which have a huge amount of influence on the shape of our society.

And I agree that Inequality leads to less dynamic society. But I don’t think wishing on a star for strong communal institutions is going to do it. One big reason we had strong communal institutions was because we didn’t have entertainment piped into our house 24 hours a day and had to find our fun outside with others. That’s not going to change. And then as we know science has killed god and we’re not going to repudiate science. And the only way the majority is going to accept a re-shaming of sex is through some sort of religious coup ala Iran.

I think the only hope are structural changes in our economy that foster the creation of middle class jobs. Tax, entitlement, health care, and financial reform. Easy right. We’ll come up with a genius plan that will actually work and then fight off the 1% and their henchmen in the gov. and industry and get it enacted.

Actually, global warming might make all of our petty little problems seem irrelevant. There are many avenues for massive social shake-up in climate change: crop failure, plague, catastrophic weather, species collapse….

#3 Comment By will On October 3, 2012 @ 11:29 am

Great thoughts. I’d actually go one further. I’d argue that globalization and the technological revolution are in effect hollowing out the blue collar and white collar industries that fed the middle class. Used to be that you could learn a process on a job and do it for years. True whether you were an auto worker or a lawyer. Now that’s getting carved out. Robots can build cars and algorithms can do document review. Or folks in Bangalore, Oaxaca, or Hanoi.

What this means is that it’s going to come down who can think the best as to who “wins.” This is the vision of the innovation economy. And yet, do we have an obligation to those who just aren’t as smart? I think the hypercapitalist perspective is, they’re losers, too bad. But isn’t there something demeaning about remanding those folks to be bedpan attendants at senior centers for the rich?

#4 Comment By Rob in CT On October 3, 2012 @ 11:41 am

I agree with you here:

On the left, there is an emerging argument that, in our current economic conditions, the traditional right-wing argument, that inequality is the price of economic dynamism, is actually backwards: inequality is itself holding back dynamism, and is not merely a consequence of the Great Recession but an important part of the cause. I find a lot of this analysis convincing, but I’m less convinced about the remedies.

But I don’t have any brilliant ideas. I’m wary of protectionism (another lefty idea you didn’t mention). Unions, IMO, are on balance a good thing but they’re basically dead at this point.

I’m more comfortable with redistribution than you are (for example, I’d like to see an inheritance tax with actual teeth), but I still see it as a bit of a bandaid. I think the GOP “ideas” are warmed-over garbage.

I’d like to see the largest financial “TBTF” entities broken up. I’d like to see greater scrutiny on that sector in general (says the guy working in the FIRE sector). No, I’m not holding my breath. The government is bought. If 2008-2009 wasn’t enough to bring a hammer down on Wall St., it’s hard to imagine what would. But even then… how does that lead to more economic opportunity for Americans? I think it would be healthy, but I’m not sure it really would address inequality. I don’t think it’s only Wall St. CEOs making 400x the average worker pay.

Some are banging the patent law drum. I don’t really disagree, but I can’t figure how that would fix things.

I’m increasingly convinced we must figure out how to close our huge and persistent trade deficit. But, like I said, I’m wary of protectionism. So, what’s that leave? Devaluing the dollar, maybe?

I’m also skeptical of “industrial policy.” What’s that mean, exactly? How do you move US workers “up the value chain” ? Education is usually the answer, and I’m usually up for investing in education. But of course we’re deeply divided about how best to do that (I’d like to see more direct funding of state schools, while whipping those same schools for spending too much money on non-academic fluff).

#5 Comment By Cliff On October 3, 2012 @ 11:57 am

We on the left (which does not include the “Democratic” Party) are less concerned, I think, with persistent inequality — inequality is a fact of nature — than with increasing inequality, something we’ve been seeing for the last 40 years, and with the policies that drive that increase. The tax system is hardly redistributive when Mitt Romney’s overall tax rate is in the same ball park as that of those of us in the bottom fifth. Of course, I endorse your conclusion that the extreme and rising inquality in the U.S. must be addressed. But I also agree with Darth Thulhu, that there’s not much hope that this will happen. We can only await the crash.

#6 Comment By Noah172 On October 3, 2012 @ 12:01 pm

We need protectionism to bring the factories in China and elsewhere back to the US. It can be done. The US became the world’s greatest industrial power through protectionism. China and Japan became great economic powers through protectionism. Creating high-wage factory jobs will go a long way towards reducing inequality and the social disarray that flows therefrom.

We need a modern-day populist assault on the financial industry and multinationals who send jobs overseas (or relocate headquarters for tax purposes). Steep estate taxes on very large estates, especially those in which the wealth is tied up in investment vehicles rather than an active, productive business. Higher upper-bracket income taxes. Break up TBTF banks. Don’t allow corporations to avoid taxation by renting a potemkin office and mailbox in the Caribbean or wherever.

Balance budgets and start paying down debt, however that needs to be accomplished (much higher taxes and sharply cut back spending). Large government debt weighs down the economy, ultimately leads to inflation and higher interest rates (which hurt the poor way more than the rich), and gives dangerous power to bond traders and bankers, both domestic and, more worrisome, foreign (all of which the Founding Fathers warned us about, and fought like h*ll to avoid).

#7 Comment By Adam On October 3, 2012 @ 12:01 pm

I don’t like the use of the words equality or inequality in this context because it implies end results, ie, everyone should be entitled to equal ends, when that cannot be the case in any truly democratic society. Even equality of opprotunity is a non-starter because I don’t care how good Head Start might be, it won’t put a person in that program on an equal footing with someone from the Ivy League set. That said, I believe some of the cause and effect of this “inequality” relates in large part to the preferential treatment of Capital to the detriment of Labor. For those more learned than I am, an explanation of how we prospered after WWII through the beginning of the Supply Side Age in 1980 with some of the highest tax rates on record, would be welcome. It seems to me that those rates encouraged or incentivized Capital to give Labor a larger share of the production gain pie than has been seen in more than thirty years. Rather than taxation as punishment and redistribution through an inefficient middleman(government), might higher taxation of Capital, inclusive of wealth, not just income, incentivize again that more equitable distribution? Is that thought too simplistic? Is it too reliant on the spector of Central Planning? I would really like to know.

#8 Comment By M_Young On October 3, 2012 @ 2:43 pm

As usual the analysis ignores immigration. This is surprising because the evidence is quite clear that immigration is importing poverty. Indeed “Latino” children — many of who are immigrants or children of immigrants — are the [4]

Further, the importation of low wage workers does drive down wages for the poorest native-born Americans– no matter what libertarian-leaning economists say. Borjas reckons the effect has been about 2% depression of wages for non-high school educated Americans. That may not sound like a lot, but for someone making $30,000 a year, that works out to 50 bucks a month — a significant figure for low income folks. And the wage calculations don’t include other economic ‘bads’ like lack of job security, reduction or elimination of fringe benefits, decreased participation in the workforce, etc that is being exacerbated by immigration.

#9 Comment By libertarian jerry On October 3, 2012 @ 2:49 pm

Once the socialist genie was let out of the bottle,that spelled doom for the American Republic. Now we have all 10 Planks To The Communist Manifesto,albeit in modified form, in place in America. The Income Tax,Central Banking,Fiat Currency,large government intrusions into the Economy,Public Education,Socialized Medicine(Medicare and Medicaid),Social Security,Food Stamps,central economic planning and so forth all springing from the womb of Socialism. Added to the above facts is that everyone is numbered,catalogued,and stored for future reference making privacy a joke. Now we have talk,in a supposed free Republic,about income distribution. If America was truly free why should it be anyone’s business how much someone earns and how much their total wealth is? And then who decides? And then,what happens if people decide not to have their wealth “redistributed?” Its either or. You can’t have freedom without property rights. What people earn in a market economy,without the use of cronyism,belongs to them. There is no such thing as “fairness” and “paying one’s fair share” or the “governments money” or “the people’s wealth.” Those are the sayings of a police state economy. The only way that redistribution can be accomplished is to burn the Bill Of Rights and set up a police state,including the gulags. That the use of force and coercion is the elephant in the room that nobody wants to talk about.

#10 Comment By Adam On October 3, 2012 @ 3:37 pm

Where in the world is there, or has there ever been, a model of Libertarian rule? The idea of full blown personal rights cannot exist without accounting for avarice and greed and the purchasing of favors. Sooner or later you get the rule of the gun and tribalism. If government is supposed to be solely in place to protect the rights of the individual, that includes the lessor amongst us from those that would prey on them, correct? Is the financialization of America not a form of aggression upon individual citizens that warrants protection from government? If property rights are the only rule of law, wouldn’t we always have a small group of property owners that rule the rest of us forever and ever unless there is some form of law(estate taxation maybe? property taxes?) that need to be in place to discourage hoarding of power over time and encourages the velocity of money and opportunity? If gold is to be the currency standard, who controls all the gold? It’s great to use ideology to generate ideas, but railing against what actually exists in favor of a Utopia that will never exist for any type of “ism” makes a lot less sense than trying to work within the framework that is actually in the here and now.

#11 Comment By libertarian jerry On October 3, 2012 @ 5:59 pm

Adam…Most libertarians just want to be left alone. They don’t “prey” on anyone. In fact its the opposite. That is the State wants to prey and feed off of libertarians and other productive people.. As far as people with avarice are concerned,taking wealth that was earned from one person by using a gun and then “taking care” of people by making them dependent is no answer for the poverty problems of today. Before the Welfare State,in America,there was private charity,the churches,volunteer groups and especially the family. Now, what do we have today in your “government is going to solve the poverty problem” world. America is bankrupt,including Social Security,Medicare,Medicaid and almost all the State’s Welfare programs. America is up to its neck in unpayable and unsustainable debt. Our children’s and grand children’s future has been mortgaged to the hilt and on top of everything our money is becoming worthless. Its not my Utopia that is failing and bankrupt its FDR’s and LBJ’s fairytale land of a free ride on the government gravy train in exchange for a vote that is collapsing. And as far as Libertarian rule is concerned,libertarians don’t want to rule anyone or be ruled by anyone. What you’ve indicated you desire for our nation has bankrupted America and destroyed our liberty. Whats going to happen,because of inflation,when American money won’t even buy a can of dog food? Whats going to happen when the store shelves are empty of food? Its not about some Utopia. Its about the here and now of a bankrupt collapsing America with over 2/3 of the population trying to live off the other 1/3 and that 1/3 saying…no more.

#12 Comment By Andy Zook On October 3, 2012 @ 10:22 pm

@libertarian jerry… So you just want to be left alone. Does than mean you won’t step in to aid someone who is being exploited by a baddie who believes “Just let me alone”? The problem with your utopian ideology is that reality would break it: any anomaly (like a baddie who takes your ideology fully to heart) would again break your utopia to pieces and in order to stave of suicidal-every-man-for-himself anarchy you and your buddies would have to form a “gov” and start administering some un-libertarian like law and order… and you’d be right back where we are now, except the selfish/criminal/rebellious/anti-social kings-of-their-own-fantasy-mole hills would hate you for “not leaving them alone”

There has to be a attempt at balance – extreme individual freedom is an empty freedom without some checks and balances like the common good, civility, mutuality, sharing and compromise. We certainly won’t all agree on “the” balance but some of you libertarians have abandoned a balance and want to live on an island all by yourself (the only way you’ll ever truly be “left alone”)

#13 Comment By libertarian jerry On October 3, 2012 @ 11:34 pm

Andy……I’m a libertarian not an anarchist. I don’t know where you get your ideas about libertarianism,but your putting me into the wrong pigeon hole. Why don’t you Google the Libertarian Party site and download their 2012 Party Platform. You may learn something.

#14 Comment By Steve Sailer On October 4, 2012 @ 4:26 am

Noah,

I’m all in favor of sticking it to the rich, but more substantive issue is the cost of middle class family life, in which the rich play only indirect roles.

Are the superrich bidding up the prices of Gustav Klimt paintings and Shinnecock Hills golf club memberships? You betcha.

But consider three sizable costs faced by potential middle class parents: housing, education, and health care.

Are the superrich hogging all the chemotherapy? No, not really.

Are the children of the superrich wrecking the public schools for middle class kids? No, not really.

Are the superrich hogging all the houses in safe neighborhoods with good public schools? No, not really.

The actual problems with the cost of living for most is increased demand for these building blocks of middle class life.

The big problem with the rich is their excessive domination over the Overton Window of what we are are allowed to think. The rich don’t suffer much from, say, massive immigration by unskilled foreigners, so it’s considered “hateful” to suggest that our politicians and media have screwed up massively over the decades by not enforcing immigration laws.

#15 Comment By JohnEMack On October 4, 2012 @ 10:42 am

It seems to me that one of the problems regarding inequality lies with our educational system. One of the best antedotes to inequality is the ability to start a new business and prosper. Yet our school do not teach anything about how to start a business, how to operate one, how to fill out a financial report, how to calculate expected cash flow, how to interview, hire and fire prospective employees, or even how to balance a checkbook. Rather, exept for business schools, high schools and colleges only prepare students to be good employees. If we are to overcome inequality issues and to be competitive as a people in the future, we need to be flexible, and self-employment is one of the highest forms of economic flexibility. But if we are to become sufficiently flexible, we not only need to encourage entrepreneurs — we need to train them. Instead, we are educating our prople to be proletarians.

#16 Comment By Georgina Davenport On October 4, 2012 @ 2:11 pm

As we have seen now, you were disappointed. A topic such as inequality simply will be covered in a debate, which favors more “populist” topics such as we saw. It is a “large picture” problem, one which individual cannot see past their own immediate interest to see, even if they belong in the disenfranchised group. American politics, probably driven by the American people, has become shallow and petty. This idea of greater good, social justice, compassion, etc have become lofty ideas that concerns a few intellects and ideolouges.

#17 Comment By David Giza On October 14, 2012 @ 2:17 pm

Georgina Davenport: I agree with you. People will always care about their self-interest above others. Why? Because it’s human nature.

#18 Comment By Bryan On June 6, 2013 @ 9:59 am

If economic inequality is the root of our problems, confiscate all wealth and redistribute it on an equal per-capita basis.

Problem solve. Paradise achieved.

No?

#19 Comment By David On July 8, 2013 @ 2:09 pm

One idea that you never hear about (especially from conservatives) is the free market idea of being able to work for foreign companies. Not American-based subsidiaries of foreign companies, but foreign companies that compete directly against American companies. Do you think that could solve some of the inequality in the United States? Possibly, but be sure that American companies and conservatives will make sure that no one ever has access to that information.