February 11, 2013
Contrived Inequality
Contrived and Natural Inequality—Posner
Becker makes an important point: inequality of income and wealth is not entirely a product of differences in IQ, in other talents, and in luck; it is also contrived, in the sense of being produced by private or public actions that do not promote overall economic welfare. He gives a number of persuasive examples. His emphasis is on public actions, though he mentions cartels, which are private. Of course it must also be recognized that public actions frequently reduce inequality of income rather than increasing it, examples being the social security retirement and disability programs, the Medicare and Medicaid programs, the earned income tax credit (i.e., negative income tax), and food stamps. Probably (in my opinion) the net effect of government is to reduce income inequality, but that is no reason to defend programs that increase it. And it must be borne in mind that some programs that purport to reduce inequality, such as the federal student loan program, may well increase it, by imposing debt burdens disproportionate to the value of the education that they finance.
I address a slightly different question: if public actions that create unjustified inequality of income were eliminated, and private action such as price fixing by competing sellers that do so were also eliminated, would there still be a "problem" of inequality, in the sense of a valid basis for government intervention to reduce inequality? And is there a valid basis, therefore, for the programs (some mentioned above) that redistribute income from the better off to the worse off?
I think the answer is "yes." With the median family income in the United States today only about $50,000 a year, a great many families cannot afford decent food, housing, child care, and education for their children, and job training for themselves, and cannot afford to move to areas of greater job or educational opportunity for themselves or their children. The result is to reduce the productivity and income prospects of parents and children alike. Since well-off people in the United States are lightly taxed by international standards, it may be possible to increase overall economic welfare by a modest increase in tax and spending programs designed to lift the life prospects of the lower half of the income distribution without killing the incentives of either the taxpayers or the recipients of public largesse. Subsidizing health insurance and school tuition (as distinct from providing loan money for tuition) and early-childhood education are examples of programs of income distribution that may promote overall welfare.
I don't endorse the argument of the philosopher John Rawls that no one is entitled to a high income because even characteristics that we think internal rather than external to a person, like IQ and leadership skills and athletic skills and energy and good health, are ultimately the product of luck. Therefore, Rawls argued, no one should be allowed to keep more of his earnings than necessary to "incentivize" him to exert himself in a way that will maximize the social product. That treats people like the cells of an animal's body, or the ants in an ant heap. Rather my point is that, to the extent reducing income inequality increases overall social welfare, there is a case for programs, financed by the well to do, that increase overall welfare by more than the cost of the programs. There is no reason to think that the cost would impose a crushing burden on the well to do, a result that would be objectionable quite apart from the costs in diminished incentives, and related costs such as tax avoidance and emigration.
Contrived Inequality and Equality-Becker
The media and many intellectuals have greatly criticized the large growth in inequality during past 30 years in countries as different as the United States, China, and Brazil. Yet people in all countries generally accept, and usually admire, differences in incomes and wealth that they believe result from abilities and hard work, and where the work done by the wealthy is considered socially valuable. For example, the great wealth of a Steve Jobs or Bill Gates is little criticized because they were brilliant at what they did, and they added a lot to social value. On the other hand, objections are raised when high incomes and wealth are considered to be undeserved. The distinction between deserving and undeserved wealth is crucial in the degree of acceptance and hostility to inequality.
Government policies that favor some individuals and discriminate against others are the biggest source of contrived inequality. For example, the Russian oligarchs are criticized because much of their wealth came from government favors when Russia privatized many industries after the collapse of Communism, and also from subsequent favors as the Russian government consolidated ownership in natural resource and other industries. Similar government help propelled the Mexican telecommunications giant, Carlos Slim, to become the wealthiest person in the world.
Until fairly recently, all countries simply gave spectrums for telephone services, radio and television transmission, and mineral and energy rights to politically powerful companies. Economists pointed out that this was granting enormous wealth to these companies without getting much in return. Their writings and other pressures finally forced the US and many other (but not all) governments to auction off such valuable and scarce property. Tariffs on goods like sugar and ethanol, and subsidies to the oil and other industries, artificially raise the incomes of capital and workers employed in the protected industries.
In labor markets, China's sharp restrictions on rural migrants obtaining residency in urban areas has contributed greatly to China's rapid growth in inequality during the past two decades. Minimum wage laws raise the incomes of low skilled workers who can find jobs, but they lower incomes of equally productive workers who are made unemployed because these laws price these workers out of employment.
I could give many other examples of government creation of undeserved inequality, but governments are not the only source of such inequality. Unions raise the wages of workers in the sectors unionized, but unions also lower the wages of equally productive workers who are forced out of these sectors into lower paying jobs elsewhere. In addition, unions artificially reduce inequality by suppressing earnings of more productive union members, so that the net effect of unions on inequality is not clear. One blatant example of unions suppressing earnings of more productive members is given by the teachers union's opposition to merit pay for good teachers, even though good teachers have large positive effects on their students.
Private monopolies and cartels tend to raise the wealth of businessmen and workers who gain from the higher prices created by monopolies. The burden of these higher prices is borne by consumers, other businesses, and by the workers who must exit monopolized industries because of the cuts in output that create the higher prices.
Differences in education and other human capital are the cause of much of the earnings inequality within rich countries, such as the US and Japan. The boom in the returns to higher education during most of the past 30 years has widened earnings inequality greatly by sharply increasing the earnings of persons with at least a college education, and earnings also of other highly skilled individuals. Higher earnings of skilled persons is not a problem per se for most people, but they object to the fact that many young men and women with the talent to benefit from higher education are prevented from doing so. Their families and schools do not adequately prepare them for college, and they do not have the family resources that enable them to pay for a college education.
The effects on children of broken families and uninterested parents are considerable, yet much more can be done on other dimensions to reduce the inequality in opportunities to attend college. Preparation in schools attended by poorer children can be improved by increasing competition among schools, by paying very good teachers much more than average teachers, and by getting rid of the bad and uninterested teachers. Student loans might be made more effective by making the amount to be repaid contingent-up to a point- on the incomes of those who are repaying student loans. This would reduce the loan burden to those who turn out to earn relatively little, although this "tax" on high earnings does affect the type of occupations students with large loans choose, and may make student loans less attractive to students planning to go into high earning fields like business or medicine.
The huge earnings and great wealth accumulation of some members of the financial sector are often viewed with suspicion because they are considered more due to luck than to abilities. This suspicion is not universal since the billionaire Warren Buffett, the second wealthiest person in America, is very much admired, even though he made his enormous fortune from investments in companies. The vast wealth of some hedge fund managers, on the other hand, is often criticized in part because it is assumed to be due to good luck rather than great skill. Usually overlooked is the role of these funds and other investors in arbitraging prices and returns in different sectors. Hostility to high earnings in the financial sector has greatly increased during past few years because of the role of banks and other financial institutions (along with governments and other culprits) in generating the financial crisis that so damaged the world economy.
Since Rousseau, many intellectuals have been opposed to inequality per se. Most people, however, distinguish deserving from undeserving inequality. Clearly, much of the income and wealth inequality in any country would be considered deserving because it results from greater abilities and dedication. Yet a considerable fraction of the inequality in most countries would be considered undeserving. Governments are expected to reduce these obstacles, but unfortunately, governments also create many of the undeserved sources of inequality.