All Commentary
Friday, September 1, 2006

Eye on the Ball

Like clockwork, the New York Times has produced another page-one story purporting to show that living standards for many Americans have fallen, this time because wages in recent years have failed to keep up with inflation. This has been happening, write Times reporters Steven Greenhouse and David Leonhardt, despite rising productivity and even taking into account the shift from cash to noncash benefits, such as medical insurance. Meanwhile, profits are up.

In other words, workers aren’t getting their fair share of economic growth.

This was followed by a census report showing that while household earnings rose, individual earnings fell. Moreover, the Census Bureau found that the poverty rate has improved only slightly.

The next thing to happen was equally predictable. Those who are uneasy about the moral status of the market economy claimed confirmation in the numbers. And those who favor the market either disputed the numbers, arguing that the economy has produced a better outcome than the one portrayed, or said the results were as they should be, given current supply and demand for labor and products.

That is, both sides agreed that these numbers reflect, or purport to reflect, the outcomes of an economic system in which market forces are permitted to operate freely. But here we have a problem. Market forces are and have been systematically distorted through government intervention. There is no laissez faire. While American society is organized on market lines, the market is interfered with all along the way. So whatever the current income distribution may be reflecting, it does not reflect a system of economic freedom unrestricted by government fiat.

Income statistics are like scriptures or the Constitution: seek and ye shall find. Someone once said, Torture the data long enough and they will confess to anything. This is not to say they can tell us nothing, but the social world is complex, and it seems awfully easy to find whatever you’re looking for. All you have to do is start your graph at a year that will yield the curve you want. Or leave out some things. Or use an index that overstates, or understates, inflation. Or move back and forth between medians and averages, or between individuals and households. There are many ways to get where you’re going.

Spectators to these statistical snowball fights will choose sides according to their values. Those who think the market is morally wanting will accept the gloomy picture. Those who see no moral deficiency will embrace the optimistic account. Each side will feel confirmed in its worldview.

Critics of the Times analysis seem to have the stronger case, though, as noted, the picture is complex. (See Russell Roberts’s analysis here.) You only have to watch people of various socioeconomic categories walk down the street bearing a variety of electronic conveniences to see that there’s something counterintuitive about the claim that economic conditions have deteriorated over the last 30 years — though the role of easy credit (thanks, government) is ominous. We also know from W. Michael Cox and Richard Alm’s research that average workers need to work far fewer hours to buy today’s superior goods than they needed to work to buy yesterday’s inferior goods. (For example, see this.) Americans spend less time at work and more time at discretionary activities than perhaps any other time in history, Stephen Moore and Julian Simon wrote. And certainly we spend more of our income on leisure activities than ever before.

Further, any useful discussion of economic conditions would have to include the matter of income mobility. Most people in the low-income category don’t remain there. They gain experience and move up. (See David Henderson’s take here.) If the same number of people live in poverty this year as did last year, it doesn’t follow that they are the same people. And poverty is a relative term. Would you rather be poor in the United States or in Chad?

Nevertheless, the contest over statistics distracts us from something more important.

Historical Context

In Anarchy, State, and Utopia, Robert Nozick argued that a given wealth or income distribution can’t be judged outside its historical context. The morally relevant question to ask is not Where are we? but rather, How’d we get here?

In a market-based economy wealth and income are the results of transactions. There is no central store from which a custodian distributes largess to various groups arbitrarily. In the normal course of events, unequal wealth and income are to be expected because some people will make better economic decisions than others. A few entrepreneurs saw the future value of the resources that go into fiber-optics long before the rest of us did. High incomes are the rewards consumers bestow on those who act on such insights. It is a mistake to think that tampering with the rewards system would have no effect on the decisions of producers.

Likewise, the shares of income allocated to employers and employees are determined by countless transactions.

The key issue is whether transactions are voluntary or not. If voluntary, the resulting spectrum of wealth and income, and its division among economic groups, are legitimate because they emerge from the preferences of everyone who participates in the market, including the preference for leisure over income. If not voluntary, the legitimacy of the division is tainted because some have forcibly substituted their preferences for those of others.

Thus in Adam Smith’s system of natural liberty, where transactions are consensual, economic inequality is not a matter for public policy (although this is not to say that the successful shouldn’t be generous toward those who suffer through no fault of their own). The proper division of wealth is the one that results from the free exchanges people make. There is no other criterion, and especially no criterion external to the market process.

However, we live not in a system of natural liberty but in a mixed corporatist economy, in which some transactions are involuntary (eminent domain, tax transfers) and even voluntary transactions are touched by coercion. For example, why is there an inflation for wages to keep up with? Government depreciates the currency and increases the cost of living through central-banking policies. That’s a forced transfer of purchasing power from most worker-consumers to politicians and privileged interests. Moreoever, an array of government policies push up the price of basic commodities, such as oil, again raising the cost of living.

Other transactions are tainted by force. When you buy sugar, that voluntary exchange is affected by the forcible exclusion of large quantities of Latin American and African sugar from the U.S. market. When you buy a house or rent an apartment, that exchange is affected by zoning laws, government land-holdings, and myriad other interventions. When you purchase medical insurance (or are unable to), that exchange (or potential exchange) is colored by regulations that permeate the insurance and medical industries. Nothing is untouched by government, that is to say, coercion. And since free exchange generates processes that are socially beneficial, exchange that is forced or tainted by force is detrimental.

If living standards rise under a corporatist system, it just goes to show that even hampered economic liberty goes a long way. (This assumes, dubiously, that much of the prosperity is not a Fed-fueled phenomenon.) We shouldn’t conclude that intervention is responsible for increased well-being. Prosperity takes place despite intervention, and we’d all be far richer in a laissez faire society.

As Russell Roberts says, What keeps my wages high (and yours) is our alternatives. Our focus therefore should be on how the state and its clients limit our alternatives. Why do egalitarian critics of the market demand a higher minimum wage, more-progressive taxation, and demeaning handouts rather than an end to business privileges and other edicts that make it harder to start new enterprises? You’d think someone concerned about extreme income inequality and weak labor bargaining power would look for ways to promote more options, including self-employment opportunities, for workers. While activists think about how employees can get more out of their bosses (which is of dubious general value), they neglect the things that reduce choice: taxes on savings and capital accumulation (including the payroll tax), inflation, licensing, land-use controls, regulations on how to do business, patents, and anything else that raises the cost of setting up enterprises and hiring workers. Bureaucracy is the common man’s and woman’s enemy. But it’s the big protectionist-minded incumbent firm’s friend. (In this regard see Joel Salatin’s Everything I Want to Do Is Illegal [pdf], in which he writes, On every side, our paternalistic culture is tightening the noose around those of us who just want to opt out of the system — and it is the freedom to opt out that differentiates tyrannical and free societies.)

Concern about the poor is admirable. It’s painful to think of children growing up in poverty. But Thoreau had it right: This government never furthered any enterprise but by the alacrity with which it got out of the way.

When market advocates become preoccupied with income statistics, the interventionists win the home-field advantage, because they’ve directed attention away from interference with voluntary exchange. Market advocates certainly should expose statistical deceit where necessary, but rather than playing defense full time, they would do better to go on offense against those who would interfere with free choice.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.