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Friday, February 2, 2007

Inequality Matters

In the controversy now raging over whether income inequality in America is growing a lot or a little, some pro-market people say it doesn’t much matter. This attitude is unjustified, not to mention harmful to the cause of individual freedom because it misses the bigger picture.

For example, Tyler Cowen (subscription site) writes, While there is little doubt that the gap between the wealthy and everybody else has widened in recent years, the situation is not as unfair as some of the numbers seem to imply….The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such….What matters most is how well people are doing in absolute terms.

And Bruce Bartlett (subscription site) writes, Personally, I am willing to concede the point [of growing inequality], but I would prefer to come at the income distribution question in a different way. I have long sought a study showing exactly what the cost of inequality is. If my real income does not fall, how am I hurt when Bill Gates makes another billion dollars? After all, the economic pie is not fixed.

How could growing economic inequality not matter? I might understand that position if the American economy were not saturated with government actions that serve privileged interests. Under those circumstances, we could say, with Ludwig von Mises, Inequality of wealth and income is an essential feature of the market economy. It is the implement that makes the consumers supreme in giving them the power to force all those engaged in production to comply with their orders. It forces all those engaged in production to the utmost exertion in the service of the consumers. It makes competition work. He who best serves the consumers profits most and accumulates riches.

In a market context one shouldn't judge one's material position relative to others. What's the point? Envy hardly seems an efficient route to happiness.

But we live in an economy that is far from a free market. The hand of government is pervasive — and not just in the obvious ways. There is an invisible political hand, which is different from the invisible hand Adam Smith famously wrote about. In a thousand ways, government intervention at the behest of dominant business interests squelches competition and protects incumbent firms and managers. (One example is the complex of federal and state laws that diminish the threat of corporate takeovers, which would impose discipline on overpaid executives. The pro-free-market writer Timothy Carney documents big-business enthusiasm for regulation in The Big Ripoff.) This is hardly news to advocates of the freedom philosophy, who routinely document the ubiquitous interventionism. Let's not forget it when the conversation turns to economic inequality.

In itself, inequality born of political privilege should be worrisome simply on grounds of justice, even though the position of most income groups has improved in absolute terms. Bastiat's concept of legal plunder comes to mind. But the problem goes deeper. Writing at The New Republic Online, Bradford Plumer identifies another reason for concern.: Over the last few years, political scientists have been converging on the view that massive disparities in wealth and income really do distort the democratic process — by allowing a tiny segment of the population to wield outsized influence in the political realm. The idea isn't terribly groundbreaking — even casual observers of American politics know that money can buy power–but recent research is slowly nailing down exactly how this process works.

Plummer cites research by Larry Bartels (pdf) of Princeton and Lawrence Jacobs (pdf) of the University of Minnesota and Benjamin Page of Northwestern showing that influence with Congress and the White House in both domestic and foreign affairs correlates strongly with income. It doesn't seem to matter which party is in power. Is this surprising?

Wealthier and better-educated citizens are more likely than the poor and less-educated to have well-formulated and well-informed preferences, significantly more likely to turn out to vote, much more likely to have direct contact with public officials, and much more likely to contribute money and energy to political campaigns, Bartels writes. … [T] he political process has evolved in ways that may be detrimental to the interests of citizens of modest means. Political campaigns have become dramatically more expensive since the 1950s, increasing the reliance of elected officials on people who can afford to help finance their bids for re-election. Lobbying activities by corporations and business and professional organizations have accelerated greatly, outpacing the growth of public interest groups.

As for foreign policy, Jacobs and Page write, The results of cross-sectional and time series analyses suggest that U.S. foreign policy is most heavily and consistently influenced by business, followed by experts (who, however, may themselves be influenced by business). Labor appears to have significant but smaller impacts, and the general public practically no effect at all except on issues of very high salience in cross-sectional analysis.


Quest for Power

What Bartels and Jacobs/Page find is something that libertarians have theorized about for ages. When government has the power to determine the fate of economic affairs, getting hold of that power is paramount. Since the life and death of profit-seeking projects hang in the balance, people will spend huge sums of money to shape policy. Who is more likely to succeed in that form of competition, the rich or nonrich?

This is not to suggest that people who buy political influence act purely defensively and that the state is the only culprit. On the contrary, the growth of government in America came at the behest of business interests unwilling to trust their fortunes to free and unpredictable consumers.

In this connection, we may invoke the familiar Public Choice principle of dispersed costs and concentrated benefits, which tends to assure that well-organized, narrowly focused interest groups will prevail over unorganized masses such as consumers. This will be the case despite the facade of democracy in which every vote is said to count. The real action will be behind the scenes.

The upshot is that in a corporatist state, economic inequality is an iterative problem: Wealth influences policy, which influences the distribution of wealth, which further influences policy. And so on ad infinitum.

What can we do about it? What we shouldn't do is attempt directly (that is, forcibly) to redistribute wealth. It wouldn't get at the interventionist roots of the problem and would fail to distinguish legitimate economic gains from illegitimate political gains. Thus it would fall short by justice and incentive standards.

Moreover, as a solution it is logically flawed: If the political system is dominated by wealth, how can we be confident in any political approach to economic inequality? It's not as though we have no experience in the matter; does anyone remember the Great Society? As Anthony de Jasay said in a related context, trusting government to solve the problem is like trying to jump over one's own shadow.

The key to ending politically induced inequality is to build a mass constituency for depoliticizing society. (This would include replacing the government's virtual monopoly of education with a free market in schools.) An appealing justification for radically reducing government power is that unjustified inequality would end and economic reward would be more closely aligned with service to consumers. To be sure, there would be income inequality (though not political inequality) in a true market economy. But it would most likely be less than we see today. How much less? We won't know until after the liberal intellectual revolution.

  • 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.