Paul L. Caron

Tuesday, September 13, 2016

Five Myths About Economic Inequality In America

CatoMichael D. Tanner (Cato Institute), Five Myths about Economic Inequality in America:

Over the past several years, economic inequality has risen to the forefront of American political consciousness. Politicians, pundits, and academics paint a picture of a new Gilded Age in which a hereditary American gentry becomes ever richer, while the vast majority of Americans toil away in near-Dickensian poverty. As economist and New York Times columnist Paul Krugman puts it, “Describing our current era as a new Gilded Age or Belle Époque isn’t hyperbole; it’s the simple truth.” Political candidates have leapt on the issue. ...

It’s a compelling political narrative, one that can be used to advance any number of policy agendas, from higher taxes and increases in the minimum wage to trade barriers and immigration restrictions. But it is fundamentally wrong, based on a series of myths that sound good and play to our emotions and sense of fairness, but that don’t hold up under close scrutiny.

  • Myth 1:  Inequality Has Never Been Worse
  • Myth 2:  The Rich Didn’t Earn Their Money 
  • Myth 3:  The Rich Stay Rich; the Poor Stay Poor 
  • Myth 4:  More Inequality Means More Poverty 
  • Myth 5:  Inequality Distorts the Political Process 

Of course, even if one accepts the premise that inequality is increasing, undeserved, and leads to the problems discussed above, the more interesting question from a policy perspective is what we can—or should—do about it. There are, after all, two ways to reduce inequality. One can attempt to bring the bottom up by reducing poverty, or one can bring the top down by, in effect, punishing the rich.

Traditionally, we have tried to reduce inequality by taxing the rich and redistributing that money to the poor. And, as noted above, we have achieved some success. But we may well have reached a point of diminishing returns from such policies. ...

Too much of the debate over economic inequality has been driven by emotion or misinformation. Yes, there is a significant amount of inequality in America, but most estimates of that inequality fail to account for the amount of redistribution that already takes place in our system. If one takes into account taxes and social welfare programs, the gap between rich and poor shrinks significantly. Inequality does not disappear after making these adjustments, but it may not be as big a problem or be growing as rapidly as is sometimes portrayed.

But even if inequality were as bad as advertised, one has to ask why that should be considered a problem. Of course, inequality may be a problem if the wealthy became rich through unfair means. But, in reality, most wealthy people earned their wealth, and did so by providing goods and services that benefit society as a whole. Moreover, there remains substantial economic mobility in American society, although as noted above, there are policy reforms often unmentioned in the inequality debate that could expand the opportunities available to people toward the bottom of the income distribution, such as education reform, reducing occupational licensing and other regulatory barriers to entrepreneurship, reforming the criminal justice system, and eliminating the perverse incentives of the welfare system. Those who are rich today may not remain rich tomorrow. And those who are poor may still rise out of poverty.

While inequality per se may not be a problem, poverty is. But there is little evidence to suggest that economic inequality increases poverty. Indeed, policies designed to reduce inequality by imposing new burdens on the wealthy may perversely harm the poor by slowing economic growth and reducing job opportunities.

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Excellent piece.
Moreover, it is disturbing that the nation's narrative has shifted from concern for the impoverished, a well-ordered sentiment grounded in charity, to income inequality, a disordered sentiment grounded in envy.

Posted by: Mike Petrik | Sep 13, 2016 5:24:37 AM

If you start with five false myths it's easy to knock them down.

Posted by: David Cay Johnston | Sep 13, 2016 6:30:47 AM

Exhibit 1 - The number of millionaires in Silicon Valley in 2000 v. 2016.

Posted by: Dale Spradling | Sep 13, 2016 8:05:02 AM

David Cay Johnston hits the nail on the head. I suppose Cato would just shout "but American exceptionalism!" in response to the multitude of studies showing the US's last-in-class intergenerational socioeconomic mobility among developed countries that shatter their third strawman, for instance.

Posted by: Unemployed Northeastern | Sep 13, 2016 8:48:33 AM

Whether it's Cato or Krugman, the discussion has been thoroughly dumbed down. Case in point: Why no differentiation between absolute inequality vs. relative inequality, and trends in material standard of living over the past 150 years? I don't think even Piketty touched on those.

Posted by: MM | Sep 13, 2016 1:25:04 PM