Putting Economic Inequality in Perspective

Many people are concerned about income and wealth inequality. I am not concerned about economic inequality as such; I care about absolute poverty (how many people live in misery because of wretched physical conditions), and I care about a broad distribution of opportunity (everyone’s having a “fair shot” at economic success), but I don’t see it as a problem if someone earns vastly more money than someone else, just as I don’t see it as a problem that poorer people tend to have more leisure time than richer people. Only those consumed with envy could see economic (or leisure!) inequality simpliciter as a problem, right?

But I actually don’t think people on the left care about economic inequality or leisure inequality or inequality of looks or appealing personalities or anything else of value, in themselves, either. They care about economic inequality because they think it has negative consequences, particularly for political inequality, and because they think it is a symptom of some deeper problem. I disagree on the first count and agree on the second. Let me explain.

Does Inequality Have Bad Consequences?

The fear of the left is that in an unequal U.S., the rich will “buy” politicians to do what they want. As a result, we will get more pollution and more redistribution that flows from the middle class to the rich. The so-called “oligarchy study” (the term “oligarchy” never actually appears in the paper) went viral recently, showing that the preferences of wealthy Americans (and organized interest groups) matter for policy change in the U.S., while, controlling for the preferences of wealthy Americans, the preferences of other Americans make little difference. But wealthy Americans and average Americans actually have similar views on most issues, and where they diverge, the wealthy often have clearly superior views: less likely to loathe immigrants and gays, to fear free trade, to oppose marijuana legalization, and to be narrowly ideological. In addition, the wealthy tend to be more skeptical of taxation and welfare programs than the non-wealthy — your views on whether that difference is problematic may vary according to your views of the welfare state.

Still, let’s assume that the influence of the wealthy on U.S. politics is baleful; does that mean that growing economic inequality would reinforce that baleful influence? It remains unproven whether more inequality will mean that the rich pay more in campaign contributions and get more out in policy terms. The most likely explanation for why the rich are influential is simply that they have similar levels of education and status to politicians and move in the same social circles and care about the same sorts of things. Studies looking at how campaign contributions “buy access” to legislators generally come up with very weak results. To take just one policy example, federal air pollution regulations have always ratcheted up, and air quality in the U.S. is vastly improved relative to 50 years ago, in part due to regulation and in part to technological changes. Rising inequality certainly doesn’t seem to explain these trends.

A bigger problem with the U.S. political economy is the influence of lobbyists for sheltered industries. Recall that the “oligarchy study” showed that politicians pay a great deal of attention to organized interest groups. In many cases these organized interests seek a bigger share of the economic pie at the expense of a smaller pie overall. Does economic inequality have anything to do with the power of organized interest groups? Perhaps, but if so, the research hasn’t shown it yet.

Is Inequality a Symptom of a Problem?

Let’s first get some facts straight about inequality in the U.S. Yes, the U.S. has the highest income inequality in the developed world (OECD), but it also has substantial upward mobility:

• 79% of Americans between the ages of 25 and 60 experience at least one year with household income below 150% of the federal poverty line. 76.8% of Americans “will reside in a household that exceeds $100,000 of annual income for at least one year” between ages 25 and 60, and 20.6% of Americans will exceed $250,000 annual income for at least one year.
• Pretax wage data overstate inequality and understate upward mobility for low- and middle-income Americans. Using post-tax-and-transfer data on total compensation, Gary Burtless finds that “between 1979 and 2010 . . . [h]ouseholds in the middle three-fifths of the income distribution saw their after-tax incomes grow. . . about 40%. . . Over the past one-, two-, and three-decade periods, both middle class and poor households have experienced noticeable gains in living standards.”
• 71% of Americans whose parents were in the bottom half of the income distribution improved their rankings relative to their parents.

Still, as I pointed out on this blog some time ago, countries with a history of racial slavery have much higher income inequality today. The U.S. actually has the lowest income inequality of any European settler state with a history of racial slavery. Latin American countries have much higher inequality. That fact suggests that the U.S. is doing something right today to make up for the legacy of slavery today’s Americans have inherited. But that legacy still probably explains something about U.S. inequality today. According to Rank et al., whites are much more likely (56.4 percent) to encounter at least one year of affluence than nonwhites (23.6 percent), and according to Pew, blacks experience dramatically less intergenerational upward economic mobility than whites.

So why does inequality in the U.S. continue to have a racial dimension almost 150 years after the end of slavery? First, it has only been about 50 years since the end of Jim Crow laws that harshly discriminated against blacks throughout much of the country, and many victims of those laws are still alive. Second, certain government policies reinforce the initial inequality created by slavery and segregation. Exclusionary zoning laws and public school monopolies combine to exclude low-income Americans, especially minorities, from high-quality schools. Occupational licensing prevents ordinary Americans from starting their own service businesses, especially in poorer areas. Benefit eligibility “cliffs” entrap poor people into bad or no jobs, because getting better work could mean losing benefits. And finally, let us not forget the role of the prison-industrial complex in incarcerating one in three black men at some point in their lives, resulting in permanently lower income.

Inequality in the U.S. is a symptom of some real problems, to which libertarians have answers.