Four Ways that the State Creates Inequality in America Today

Income inequality matters. Let me say that again so you know I meant it: Income inequality matters. This statement may be surprising coming from a self-described “Austrian” economist and a “liberal” in the good old-fashioned pro-market sense. It shouldn’t be. It should be one of our issues. The surprise should be that we pro-market types have not spoken up more on this central issue, thereby letting it become associated almost exclusively with more or less “progressive” opinion.

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

Liberal political theory tells us to expect that sort of thing as a sort of disease to which the body politic is subject under representative democracy. Our presumption, then, should be that much of the inequality of any epoch is produced by tariffs, licensing restrictions, bailouts, and other specific acts of governments. Most of the time the game is rigged more or less. (The trick of constitutional design is to minimize this evil bathwater without tossing out freedom or democracy.) The more a society’s income distribution is determined by politics and not markets, the more it will be skewed away from whatever pattern would emerge in a less fettered market economy. And in general, that skew will be toward greater inequality. As the political component grows, we can expect power to be concentrated in fewer and fewer hands and income distribution be more and more unequal. If political power is growing, we should strongly suspect that some of the rich are using the state to squeeze money from most of the poor.

I cannot cite unambiguous evidence that economic freedom goes with greater equality. There is a small empirical literature on the relationship between economic freedom and income inequality. So far the results are mixed. Both studies showing a positive effect and studies showing a negative effect tend to suggest that economic freedom has a relatively small impact on overall measures of income inequality. It might be, therefore, that my egalitarian presumptions are mistaken. Maybe. But when you have relatively well-defined ethnic groups consistently underperforming the rest of the population, as with America’s black and Appalachian populations, we should presume that such different outcomes depend on different circumstances. And the heavy hand of the state is an important reason different groups in America live in different circumstances.

Here are four ways that the state creates inequality in America today.

1. Privatizing profits and socializing losses

Bailouts move money from taxpayers in general to persons wealthy enough to have portfolios of financial assets. The bigger your portfolio, the more you get in the bailout. And, of course, the greatest gains go to the owners and officers of nominally private institutions that are “too big to fail.”

2. Regulation

If the elements of public choice theory and the theory of regulatory capture are about right, then regulation tends to favor established interests and squelch competition from new entrants. That bad tendency of regulation skews income up the ladder and reduces income equality. I am proud to have been editor of an NCPA report, “Enterprise Programs: Freeing Entrepreneurs to Provide Essential Services for the Poor,” on how regulation makes the lives of poor people more difficult. The report includes a discussion of how housing regulations help to drive the costs of housing out of reach for many poor families.

3. Collapse of the rule of law

The War on Drugs disproportionately harms the poor, especially poor young black and Latino men, tending to marginalize them. The problem is so bad that Michelle Alexander has dubbed it “The New Jim Crow.”  Unfortunately, Alexander’s characterization is all too apt. To cite just one timely example, in New York City poor black and Hispanic men are subject to race-based policies of stop-and-frisk.  Such arbitrary and discriminatory policing is a violation of the most basic idea of the rule of law: We should all play by the same rules. At the same time, there has emerged a power elite that is largely immune to the law and free of its constraints, as Glenn Greenwald has chronicled in “With Liberty and Justice for Some.”  Here again we have a collapse of the rule of law. The situation is so bad that the Attorney General has openly admitted to a policy that has been dubbed “too big to jail.”

We now have not a two-tiered legal system, but a three-tiered legal system in which 1) poor black and Latino men are singled out for scrutiny and sent to prison in disproportionate numbers, 2) the power elite is above the law, and 3) middle class Americans are mostly left alone — so far — if they commit no crimes worse than the drug offenses each of our last three Presidents committed in his youth. This unjust justice system tends to move income up from the lower ranks into the hands of the elite.

4. Public Schools

Finally, I might mention local funding of public schools, which makes it hard educate your child well unless you can already afford to live in a relatively affluent neighborhood.

My fellow (“classical”) liberals should talk more about these evils. We should emphasize the common cause we have on this issue with Progressives and others generally considered left of center. We should make income distribution one of our issues. We liberals all agree that evils such as regulatory capture make it a rigged system. Should we not emphasize, therefore, the evil consequences of rigging the system?