Inequality: A Problem?

Normally, when one reads a proudly left-wing magazine like The American Prospect one expects to read vocal denunciations of inequality. So there’s a certain man-bites-dog quality to a recent article by Dalton Conley, dean of social sciences at NYU and card-carrying liberal. He argues that those on the left should stop worrying so much about inequality per se–its costs are overstated, as well as the benefits of greater equality. Instead, he argues, liberals should concentrate more on helping the poor and less on beating up on the rich.

At the risk of getting Conley’s membership in the liberal club revoked, I think he is right. I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged. It may be aesthetically displeasing, but it doesn’t impose any actual costs on anyone as long as the pie is not fixed. Of course, were that the case it would be different. Gains by the wealthy would necessarily come at the expense of everyone else.

Implicitly, liberals tend to believe the pie is fixed. But, generally speaking, it isn’t. A rising tide does tend to lift all boats even if those at the top get lifted a lot more. But Conley is also right to ridicule the view, common among many conservatives, that enriching the wealthy somehow automatically benefits the poor. That’s obviously nonsense. But neither does it follow that there is no limit to how much we can soak the rich without average people suffering some of the consequences. We really don’t want the rich spending all their time figuring out how to hide their wealth from the tax man or engaging in conspicuous consumption; we’d rather that they invested their wealth in businesses that will increase their wealth but also create jobs and income for the rest of us, too.

For this reason, I have always been more sympathetic to programs that aid the poor than other conservatives. It’s not so much that it’s the right thing to do as that it’s a necessary price that has to be paid to maintain democracy, open markets, private property, a stable currency and a tax system that doesn’t punish success too much. To be sure, there is a heavy price to be paid when social welfare programs go too far. But at the same time I don’t think the social Darwinist, Randian state in which people are left to die if they don’t work is the one that maximizes growth or well-being for the producer class.

Where I think the left is mostly wrong about inequality is in thinking that taxes level the playing field. But the only way taxes really create equality is by discouraging the rich from earning income. The nation is not enriched when this happens. In fact, it is undoubtedly the case that the distribution of wealth today is vastly more equal than it was a year ago. But who wouldn’t turn back the clock if they could even if it meant that the wealthy would benefit disproportionately? It’s also worth noting that almost all of our data on income distribution are based on before-tax income, so by definition taxes don’t equalize income.

I think we should simply give up trying to redistribute income on the tax side and accept that it can only be done meaningfully on the spending side. This would require both the right and left to give up some of their pet ideas. The left would accept that the only purpose of the tax system is to raise revenue and the right would accept that a fairly extensive social welfare state is here to stay. In essence, conservatives would raise the revenue and liberals would spend it. That’s more or less the way it works in Europe, where conservatives accepted the welfare state in return for having it financed conservatively through a value-added tax. Liberals accepted this regressive form of taxation in return for conservatives accepting the legitimacy and permanence of the welfare state.

Over the years, I have asked a number of liberal friends if they would take this deal. They would get a pot of net new government spending of some amount–say 1% of GDP–to spend any way they like to help the poor. But in return, they would have to let me have a low-rate, consumption-based tax system and I would agree to raise taxes enough to pay for the additional spending. It seems like a free lunch to me, but I’ve never found a liberal willing to even consider the deal. They are too wedded to maintaining steeply progressive tax rates on income as a matter of equity.

I wonder, would Prof. Conley take my offer?

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