End Of The Year Thoughts On Inequality And Its Remedies

Sculpture, Art, Breadline, Bronze, Depression, 1930

The approach of the end of the year seems a good time to sum up thoughts. My comments here will not be news to regular readers, but may be to others. Also, this exercise is helpful for me to keep my thoughts clear. (I also expect to take next week off, so you won’t be hearing from me for a while.)

Most of my work for the last several years has been focused on ways to reduce before tax inequality by reducing the amount of before-tax income that goes to those at the top of the income distribution. For better or worse, there don’t seem to be a lot of progressives that share this beat. There are a few points that are worth making.

First, my focus on reducing income at the top doesn’t mean for a second that I don’t see efforts at raising income for those at the bottom (and middle) as being important. I have long been involved with or worked alongside people trying to raise minimum wages, protect or increase Social Security benefits, and increase unionization rates.

These are very important efforts, but at the end of the day, our ability to raise incomes at the middle and bottom will depend on reducing incomes at the top. This gets to the old pie-cutting story. If we want those at the middle and bottom to have much bigger slices of the pie, the folks at the top will have to get by with smaller slices.

To see how skewed the pie eating has gotten, if the federal minimum wage had kept pace with productivity growth since 1968, as it did from its establishment in 1938 until 1968, it would be $24 an hour today. That means a single full-time minimum wage earner would have an income of $48,000 a year. A two-earner couple getting the minimum wage would have an income of $96,000 a year.

This is a striking counter-factual, but we can’t just go from here to there. In order for the economy to allow for this sort income and consumption by those at the middle and bottom, we have to reduce income and consumption at the top.

We can talk about expanding the pie, but I don’t think that I, or anyone else, has a magical formula to hugely expand the size of the pie.  There are areas where better policy can lead to a more productive economy, but we are more likely talking about one to two percent rather than ten to twenty percent, and even these gains are likely to be a long-term story, not gains we can see in two or three years.

It is also worth focusing on what pie-eating among the top means. There are many progressives who have made a sport of highlighting the enormous wealth that Jeff Bezos, Mark Zuckerberg, and other super-rich types have accrued from recent stock market gains. While the wealth of the super-rich is obscene, reducing these fortunes will actually not free up much room for more income lower down the ladder.

As a practical matter, Jeff Bezos and Mark Zuckerberg probably don’t consume much more in a given year than your average single-digit billionaire. This means that if we took away $100 billion from each of them, it would not free up much consumption for those at the bottom. If we want to create the economic space to substantially expand incomes at the middle and the bottom, we will have to substantially reduce the consumption of not just some tiny segment of super-rich people, but also the rest of the top one percent and even the top five percent. (That gets us a cutoff in household income of around $300,000.) We might even have to knock down the income a bit of the next five percent (cutoff of household income around $200,000).   

There is the political issue of the enormous influence that the super-rich can buy with their wealth. This is a huge problem, but it is best addressed in the near-term by increasing the opportunities for ordinary people to have a voice.

I know many on the left want to use taxes to reduce the income, and therefore consumption, of those at the top. While we can and should make our tax system more progressive, there are real limits on how far we can push progressive taxation. Rich people don’t like to pay taxes. They can and do find ways to avoid and evade taxes. Insofar as they are successful in these efforts, we fail to reduce their income in the way intended, we create a huge tax-gaming industry, which is a source of economic waste and itself a generator of inequality, and we undermine faith in the system.

It is far better if we change economic structures in ways that don’t allow people to get so rich in the first place. As a political matter, it is hard to defend an institutional structure that is both inefficient and a large generator inequality. As a practical matter, it is much easier to design systems that don’t give rich people billions of dollars in the first place, than to try to impose taxes that pull most of their billions back after the fact.

Patent and Copyright Monopolies

I like to begin with patent and copyright monopolies both because this is the clearest case, and also because the most money is at stake. The basic point is painfully simple: patent and copyright monopolies are not intrinsic to the market, they are government policies designed to promote innovation and creative work.

As policies, they can be altered as we choose. They can be shorter or longer, stronger or weaker. We also can use other mechanisms to promote innovation and creative work.

These policies transfer an enormous amount of income from the bulk of the population to those in a position to benefit from patent and copyright monopolies. I calculated that these policies may transfer over $1 trillion a year from the rest of us to the beneficiaries of patent and copyright monopolies. This is an amount that is larger than the military budget, it is close to half of all before-tax corporate profits. In other words, it is real money.

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