The Inequality Diversion — Laissez FaireLaissez Faire

Are Republicans becoming champions of wealth redistribution? The Atlantic’sDavid Graham says yes, and along the way he links to a piece by former National Review writer Josh Barro who argues that Republicans had better get on board since inequality is rising.

That inequality is rising may or may not be true. But, conceding the point for the moment, my response is to go ahead and echo Yaron: Who cares? If my neighbor’s income doubles and mine only goes up 20%, why should I be upset? Why should relative wealth matter to anyone not suffering from a severe case of envy? Barro gives two answers to that question.

Reason 1:

The problem with rising inequality is not that lower-income families can’t afford ever-cheaper electronics; it’s that they can’t keep pace with the rising costs of health care, education and (in certain parts of the country) housing.

Non sequitur, unless Barro is arguing that inequality is causing rising costs in health care, education, and housing—something that doesn’t seem prima facie very plausible.

What is plausible is that there is a real problem if the cost of certain big ticket items keep astronomically rising while many people’s incomes aren’t rising or aren’t rising as fast. But the problem doesn’t concern relative incomes.

And, it turns out, those rising prices are primarily due to government intervention. See Free Market Revolution, especially chapters 4 and 13. (If you don’t have a copy of FMR handy, well, go buy it, but also check out this post from Dan Mitchell.) If you got the government to reduce its distortion of market forces rather than increase it, you would not see spiraling costs for health care, education, or housing—and you would see a rising standard of living for all productive individuals.

Reason 2:

There’s also no reason to think that, whatever standard of living we start from, an economy where nearly all the improvements accrue to a small fraction of families is either politically sustainable or morally acceptable.

Again, plausible. But only because it packages together earned inequality and unearned inequality.

Earned inequality means inequality that results from the fact that, on a free market, different people create vastly different amounts of wealth. Steve Jobs produced way more wealth than I have, and so it’s morally right that he had a much higher income.

Unearned inequality results whenever people use political power to defy the market and fill their coffers. When Hugo Chavez seizes the meager incomes of his citizens, leaving them in squalor, or when Jeff Immelt uses GE’s political connections to gobble up billions of taxpayer dollars via subsidies and other special government favors, then of course the inequality that results is immoral.

The principle is: If people get what they earn then whatever level of equality or inequality results is absolutely fair; if not, then whatever level of equality or inequality results is immoral. The amount of inequality itself is irrelevant to the matter.

So, then, what’s been happening with inequality in America over the last half century? Frankly, I don’t know and I don’t think anyone really knows. There are statistics showing a significant rise in inequality, but they are problematic, as we have cataloged again and again and again. But what is clear is that the government has distorted market forces such that it’s impossible to say precisely how much of whatever inequality does exist is earned and how much is unearned.

What is also clear is that, however much inequality exists in the US, the problem is not the inequality and the solution is not more of the same interventionist poison. The problem is government intervention and the solution is to free individuals to earn what they can and to keep what they earn. Inequality is a diversion.