Posts Tagged ‘Income Inequality’

Switzerland’s left-wing party has instigated a referendum for November 24 that asks voters to limit pay ranges so that a company wouldn’t be able to pay top employees more than 12 times what they’re paying their lowest-level employees.

I talked with Neil Cavuto about this proposal and made several (hopefully) cogent points.

Since Swiss voters already have demonstrated considerable wisdom (rejecting a class-warfare tax proposal in 2010 and imposing a cap on government spending in 2001), I predicted they will reject the plan. And I pointed out that Switzerland’s comparatively successful system is a result of not letting government have too much power over the economy.

But I don’t want to focus today on the Swiss referendum. Instead, I want to expand on my final point, which deals with the misguided belief by some on the left that the economy is a fixed pie and that you have to penalize the rich in order to help the poor.

I’ve covered this issue before, and I even tried to educate a PBS audience that economic growth is key.

But maybe this chart is the most persuasive bit of evidence. It shows per-capita GDP in France and Hong Kong over the past 50 or so years. France is a nation that prides itself of redistribution to “help” the poor while Hong Kong is famous for having the most economic freedom of any jurisdiction.

Now look at this data and ask yourself whether you’d rather be a poor person in France or Hong Kong?

Hong Kong v France Per-Capita GDP

Since Hong Kong is richer and is growing faster, the obvious answer is that poor people in France almost surely face a bleaker outlook.

In other words, the welfare state can give you the basic necessities and allow you to survive (at least until the house of cards collapses), but it comes at a very high cost of lower growth and diminished opportunity.

The moral of the story is that prosperity is best achieved by a policy of free markets and small government.

P.S. If you want more evidence on the superiority of markets over statism, check out the comparison of South Korea and North Korea and the difference between Chile, Argentina, and Venezuela. Heck, even the data comparing America and Europe show similar results.

P.P.S. As you might expect, Margaret Thatcher addressed this issue in a brilliant fashion.

P.P.P.S. There’s a lot to like about Sweden, but click here if you want to see an impossibly absurd example from that nation of the equality-über-alles mentality.

P.P.P.P.S. There is some very interesting academic research that suggests humans are hard-wired by evolution to be statists. Let’s hope that’s not true.

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I’ve spent a lot of time debunking class-warfare tax policy, and I’ve certainly explained ’til I’m blue in the face that big government facilitates a pernicious form of corruption that enriches powerful and well-connected insiders.

But I haven’t spent much time addressing the topic of income inequality, which is connected to those two other issues.

U.S. News & World Report just weighed in on this issue, citing a leftist video designed to build support for redistributionist policies.

Occupy is by now forgotten (if not gone), but the top 1 percent came roaring back into view this week with a viral video that has been seemingly inescapable for anyone on Facebook or Twitter. The slick, graph-heavy animation shows the results of a 2011 study that found not only that Americans vastly underestimate wealth inequality in the U.S. but that current inequality is very far from what most Americans see as ideal.

I contribute to the discussion, making the point that people should focus on the source of inequality.

…some would argue that not all inequality is created equal. According to one expert, the problem is far worse when it’s a function of bad government than when it’s a function of private industry growth. “If you’re a very corrupt, cronyist type economy like Argentina or Mexico, you have a huge degree of income inequality and it’s driven by the fact that the elites control the levers of power,” says Dan Mitchell, a senior fellow at the Cato Institute, a libertarian think tank. Meanwhile, a less-corrupt, high-inequality, but fast-growing economy–Mitchell uses the example of Hong Kong–might be healthier, more stable, and more likely to have a rising tide of growth lifting all boats, even if it’s lifting some boats more than others. In other words, as long as everyone is benefiting, albeit to different degrees, he says, that’s one key test of whether inequality is “good” or “bad.” …As for the question of where U.S. inequality is coming from, Mitchell says he fears that corporate influence in Washington may be creating inequality of what he might call the Mexican or Argentinian type. That is, he believes that big banks and healthcare companies are skewing the system in their own favor via legislation like Dodd-Frank and healthcare reform.

To get an idea of what I’m talking about, check out this chart comparing economic performance in a nation with capitalism, a nation with cronyism, and a nation with statism.

And since I specifically cited Hong Kong, check out this chart. And click here to see how Argentina has fared with a system where government picks winners and losers.

The article then follows with a sentence that may be true as a political prediction, but completely misreads the point I was trying to make.

If that’s true–that those at the top are able to entrench their places at the top, at the expense of others–it is reason to angrily hit the share button.

NO!!! What I’m pointing out is that we should repeal laws such as Obamacare that promote cronyism and corruption.

But that’s not the only argument against the leftist argument for redistribution. My former grad school colleague, Steve Horwitz, makes the key argument that it is shoddy to compare changes over time for income quintiles without also measuring income mobility.

And you can click this link to hear what one of my professors from grad school, Don Boudreaux, had to say about the notion that wages have stagnated.

if you want even more, here’s something I wrote on income inequality and here’s a debate I did on income mobility. Even better, here’s what Margaret Thatcher said about these topics.

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I did a debate on income inequality for PBS, but haven’t written much about the issue because I think it is a misguided diversion.

One frustrating aspect of this debate is that folks on the left genuinely seem to think the economy is a fixed pie and that rich people get money by impoverishing others.

This is utter nonsense. Just look at this chart comparing North Korea and South Korea, or this chart comparing Chile, Argentina, and Venezuela. With the right policies, countries can get much richer over time, yielding enormous benefits for the average household.

More rational leftists understand this data, so they change the argument by asserting that the rich are getting richer faster than the poor are getting richer and that politicians should “solve” this alleged problem with class-warfare tax policy and more redistribution.

They even cite numbers from the biased bureaucrats at the Congressional Budget Office to supposedly prove their point.

There are all sorts of methodological problems with this kind of research, including the fact that people move up and down the income ladder over time, so it is very sketchy to compare, say, the top 20 percent in 1990 with the top 20 percent in 2010.

But even if you incorrectly assume that all households are locked into their current income levels, the data used by the left is deeply flawed.

My colleague, Peter van Doren, reviewed two studies for one of Cato’s in-house journals. Here some of what he culled from the scholarly publications.*

Increasing inequality in the distribution of earnings has become one of those stylized facts that everyone “knows.” The nightly news reminds viewers that ordinary workers have not fared well in the labor market over the last 25 years, while corporate executives have. Many professional economists and a recent CBO report have supported this view as well. While it is true that the cash explicitly paid to employees has become more unequal over the last generation, the…more benign explanation for the change in cash compensation over a generation is the dramatic increase in health insurance costs. …inequality in total compensation has not increased because the fixed costs of health insurance are a much larger percentage of the total compensation of lower-earnings workers. Burkhauser and Simon explore this explanation. They add the value of employer-provided health insurance as well as Medicaid and Medicare to the pre-tax, post-cash-transfer household income data and find that the bottom three income deciles actually exhibit higher growth than the top seven deciles from 1995 to 2008. …Warshawsky makes a similar discovery. Using unpublished BLS total compensation data, including employer health insurance expenditures, from 1999 to 2006, he finds that the growth in compensation by earnings decile (from the 30th to the 99th) averages 35 percent, with 41 percent growth at the 30th percentile (workers earning $10–$14 an hour) and only 35.8 percent growth at the 99th percentile (workers earning $59–$80 an hour).

Translating all this into simple English, it turns out that the rich are getting richer slower than the rest of us are getting richer.

By the way, even though I’m glad total compensation is growing more rapidly for the non-rich, these studies should not be interpreted as good news. As noted in the excerpt above, much of the additional money is diverted into a rather inefficient healthcare system.

This is the problem, not inequality. As I’ve explained before, American healthcare suffers from a third-party payer crisis caused by too much government intervention.

And because this distorted system leads to ever-higher costs, the increase in total compensation for lower-income and middle-income people does not translate into an increase in their living standards. Ordinary people feel like they’re on a treadmill.

In other words, while assertions of rising income inequality are dubious, there is a real issue of stagnation.

But as is often the case, the left’s answer is completely wrong. Class warfare and redistributionism are terribly misguided, as illustrated by this Walter Williams column and this Margaret Thatcher video.

If we want to help people live better lives, restoring a free market to health care would be a good first step, as explained in this video.


*“Can the Rapid growth in the Cost of employer‑Provided Health Benefits explain the Observed increase in earnings inequality?” by Mark J. Warshawsky. september 2011. ssRn #1932381. And “Measuring the impact of Health insurance on Levels and Trends in inequality,” by Richard V. Burkhauser and Kosali i. simon. March 2010. nBeR #15811.

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The statists are making a big issue out of income inequality, hoping to convince ordinary Americans that redistribution is their only hope for a better life.

I’ve explained with a pizza analogy that this is horribly misguided because it falsely assumes the economy is a fixed pie.

Simply stated, it doesn’t make sense – or help anybody – if inequality is reduced by policies that hurt everyone, but happen to hurt upper-income people more than lower-income people.

Moreover, redistribution tends to create a “poverty trap” as people get seduced by dependency.

That’s why I’ve argued that economic growth is the best way of helping the less fortunate.

But I have to admit that Margaret Thatcher does a much better job of eviscerating the left’s agenda on this issue.

While it’s inspiring to watch Thatcher in action, it’s also painful to realize that the current crop of GOP presidential candidates seems generally incapable of making similar arguments. Can you imagine, for instance, Mitt Romney making these remarks?

Last but not least, Thatcher’s remarks remind me about Churchill’s famous quote, which is very appropriate for this discussion.

The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of misery.

And if you want real-world examples, look at this chart comparing North Korea and South Korea, or this chart comparing Chile, Argentina, and Venezuela. Now ask yourself a simple question: Which societies have generated more prosperity and higher living standards for ordinary people?

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