Responding to Income Inequality

A recent study by Norton and Ariely on wealth inequality in the United States has generated a bit of buzz in the past few weeks.  The media and public response has been predictable: an overblown amen chorus finding our wealth inequality to be a grave problem.  But the real peril flows less from the inequality itself than the implicit and perennially popular redistribution impulse that follows.

The study invites dangerous thinking by asking participants to indulge their Rawlsian side and imagine an equitable income distribution.  They find that even wealthy and Republican respondents conceive of an ideal distribution being much more equal than it is now.  Surely the study is fine empirical work, but what are the normative implications?  What ought we do about it?

Sadly, popular dissatisfaction with wealth inequality is rife for political exploitation, especially given the undying misconception of a fixed economic pie.  On this view, wealth is a pie that can be divided, but cannot grow.  Our economy is a zero-sum game.  If Jack becomes rich, it must have come at the expense of Jill.  Justice then would be to confiscate Jack’s excess slices of pie and give them back to Jill as an entitlement.  This is what President Obama essentially endorsed when he told “Joe the Plumber” that we need to “spread the wealth around.”  The need for activist government has been the mainstay of the Democratic party for decades.  But when politicians are the middle men for our collective wealth, they naturally exploit it for their gain, at the cost of simplicity and consistency.  Vote-getting tools like earmarks and tax exemptions only make our economy more muddled, unpredictable, and subject to political patronage.  This hurts wealthy and poor alike.

The destructive nature of zero-sum and redistributionist thinking is no surprise given they are at odds with classical economics.  Take the foundational idea that voluntary transactions between rational agents generates new wealth.  If this is true, it undermines the narrative that American wealth is an economic injustice built on stolen land, slave labor, and gunboat diplomacy.  It robs the progressive, technocratic welfare state of its raison d’etre.  So can a solution to wealth inequality really be found in classical economics?

David Brooks recently shed some light on the divide between economic libertarians and statists by explaining his own identification with “epistemological modesty.”  He sees the European enlightenment as split between hyper-rationalizing French like Descartes and Rousseau and intellectually modest Scots like Adam Smith and David Hume.  I find this to agree with Thomas Sowell’s concept of the “unconstrained” and “constrained” visions.  On the one hand are those who believe the world is totally knowable and perfectible, and they trust that educated elites will guide us into a technocratic utopia.  On the other, there are those who believe our ability to understand and shape society are limited.  They trust in traditional institutions–church, family, free markets–as generational accumulations of human wisdom.  All things being equal, it would be better to work with what our predecessors have left us than to rebuild our society according to a radical vision.

If we reject the temptation of technocratic utopias, we will find that the traditional institution of the free market provides the best way to distribute goods and services.  Using government or some other centralized agency to circumvent the market will only yield bread lines and corruption.  The Scottish or “constrained” approach not only maximizes societal utility, it is just in limiting economic activity to voluntary transactions.

So if redistributing wealth through legislation is counterproductive and unjust, what can be done to improve the American situation?  Strengthen the free market by shrinking and simplifying government.  More predictable markets that are less subject to political manipulation will make fairer playing fields.  And we can increase social mobility a couple of ways.  One would be to end unions’ status as exclusive cartels of labor.  Consumer and business loans can lower barriers to market entry, but market criteria must rest on the basis of merit rather than need.  Ultimately, hashing these policy particulars is not as useful as promoting the cultural understanding that progress comes less from centralized political pushes than from individual initiative that works within our traditional institutions.