The Economy is Not a National Pie-Eating Contest

I should start by saying that I do not favor extending any part of the Bush-era tax cuts. (See this post.) So I am even less in the Republican camp on this one than the politicians Nicholas Kristof criticizes in this column, which he begins by comparing our distribution of income to those of banana republics. But I just can’t let statements like this go:

In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie.

But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home — and in the aftermath of Tuesday’s election, it may get worse.

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976.

To gobble something is to eat it hastily in large gulps. The phrase casts income as something that is consumed, not as something that is produced. Maybe that’s true in banana republics, but plenty of people among the richest 1 percent of Americans didn’t defraud anybody in order to produce their incomes. Do I feel oppressed that I made Steve Jobs richer by buying an iPad? Of course not. Do I feel cheated by the Walton family that I enriched them by shopping at Wal-Mart? Again, no. I don’t even think it is unfair that Ken Griffin makes money by out-trading the institutional investors that manage my retirement portfolio — I’m just sorry (but not jealous) that I don’t have enough money to invest in Citadel so I could be on the winning side of those trades.

I do get angry at some aspects of what’s happening with the richest 1 percent. When they exploit campaign finance loopholes to effectively bribe politicians into giving them special treatment, my blood boils. (The taxation of carried interest for hedge fund managers like Griffin is an example.) And I think we should put a swift end to it. When the heads of the major investment banks hoodwink their buddies on the SEC to let them double and triple their bets, pay themselves record bonuses, and then get bailed out with public money, I can’t stand it. But these are failures of regulation and taxation, not production.

We don’t need a tax system that goes out of its way to punish success. We need a tax system that will raise enough revenue at a business cycle peak to run a surplus. Given the unwillingness of politicians to cut spending, that means we need higher tax revenues and thus higher tax rates.

We do not need to discourage the inequality that comes from productive people profiting by selling the goods and services they produce to people who voluntarily buy them. We need to discourage the inequality that comes from peddling influence.

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