Why Inequality Doesn’t Matter

Published May 1, 2014

What are we talking about when we talk about inequality?

This is one of those examples of a term which gets thrown around in the modern media space over and over again without anyone bothering to define it. It’s analogous to when we talk about “health care costs.” What do we mean by that?

Do we mean the amount of money Americans are spending on health insurance premiums per capita? Do we mean the amount of money taxpayers are spending on reimbursing insurers, hospitals, and drug companies for health care services and products? Do we mean the portion of the economy taken up by such costs, both out of pocket and paid for through government borrowing? Or do we mean any of the amounts above as compared to what the Congressional Budget Office prognosticators predicted the amounts would be?

The media is happy to use the term interchangeably for all those things, with the result being that health care costs are going up, down, and sideways all at the same time.

So it is with inequality, which is, like Hansel, so hot right now.  The assumption I take from the depiction of Thomas Piketty’s book – the radicalism of which David Harsanyi detailed the other day – is that we are talking about income inequality in the aggregate. There are lots of people, you see, and there are a ton of them who make very little money, and there is a smaller amount who make slightly more money, and then there is an even smaller amount who make slightly more than them, and then there is a very tiny amount who make a good bit more than them, and then there is an even tinier amount who have the ability to swim in vast vaults of golden coins while dressed in their smoking jackets.

From the left’s perspective, this is a negative ramification of capitalism. In reality, it ought to be considered one of its virtues. This inequality of outcome was historically driven by hardened class systems – not so in a free market economy. As Kevin Williamson notes:

“Far from having the 21st-century equivalent of an Edwardian class system, the United States is characterized by a great deal of variation in income: More than half of all adult Americans will be at or near the poverty line at some point over the course of their lives; 73 percent will also find themselves in the top 20 percent, and 39 percent will make it into the top 5 percent for at least one year. Perhaps most remarkable, 12 percent of Americans will be in the top 1 percent for at least one year of their working lives.”

Or as James Poulos wrote, on the comparison of Piketty to Alexis de Tocqueville:

Unlike true aristocracy, which persists through immobile multi-generational families, the ranks of the ultra-wealthy are constantly in turmoil, with new billionaires frequently entering—and old billionaires’ offspring departing, via prison, suicide, incompetence, or simply choice. A tiny handful of families, it is true, have managed to keep colossal wealth in their own hands over a period of many centuries. How many of those are American?

“A business aristocracy,” Tocqueville says, “seldom lives among the manufacturing population which it directs; its object is not to rule the latter but to make use of it.” True aristocrats live on the same land as the peons because that is what you have to do to exercise true lordship. Fake aristocrats, by contrast, live either in exclusive resorts or in the halls of power.

The left continues to operate on an a priori assumption that income inequality/wealth concentration is a bad thing, because of those riches backstroking through their money. But that’s just a jealousy trope. Upon closer inspection, you’ll see that income inequality and wealth concentration don’t inhibit economic mobility; they don’t inhibit economic growth; and they are not detrimental to democracy or to human liberty. Admittedly, I haven’t read all of Piketty’s book yet, but from the excerpts and interviews I’ve read, of these aspects he appears to be only arguing for the third, since the bulk of academic research undermines any arguments for the first or second. A representative sample from Piketty’s book:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

How anyone can argue this when the past three centuries have given us an explosion of democratic freedom and an elevation of the livelihoods of numbers of humans unprecedented in the history of the species, I have no idea. Nor can I see why anyone needed to offer policy proposals to mitigate this “problem”, which apparently has very few measurable downsides. That’s why the whole problem with the Piketty-driven conversation that frustrates me has to do with the right’s response thus far, and the concession that this type of inequality even matters. So what if the rate of return on capital reproduces itself faster than the rate of return on labor – in real life, the money doesn’t stay in Scrooge McDuck’s vault, it goes into investments which pay more people to do more things. Piketty doesn’t think this will happen – he projects economic growth at levels lower than anything we’ve seen since the industrial revolution. You’ve got to be a pretty high-level doomsayer – well beyond the “machines are going to take our jobs and our birthrates will be zero” – to believe that sort of thing.

If you’re not an economist, you may know inequality of outcome by another term: life. In any society, what you earn over the course of your life is unequal to others and ought to be unequal to others because you are not others, you are you. Your earnings will be unequal to that of others, because you are a different person with different skills and different work ethic and different priorities. In a free society, these earnings will be largely due to your own knowledge, your own work ethic, and the quality of what you produce. In an unfree society, it will be due to who you know.

The real inequality problem is that of the Two Americas: not divided between one that is rich and one that is poor, but between one that is protected by government and another is punished by it. It’s a class war, yes, but not along economic lines – instead, it runs along the lines of the unprotected vs. the protected.

The protected ruling class, thanks to its friends and cronies in government, gets the most lucrative opportunities with the least amount of risk, while the unprotected working class gets the opportunity to pay, via taxes, for the bailouts, subsidies, and rigging of the rules which largely run against their interests. The real inequality problem isn’t that Scrooge McDuck has his vault of cash. The problem is a system where he uses the tools of government to insulate himself from the reality of the marketplace and ensure he no longer has to earn that smoking jacket.

Sadly, that’s something Thomas Piketty’s fans don’t seem to acknowledge. Perhaps this fellow should look into it.

[First published at The Federalist.]