Inequality, and a True Progressivism

I have discussed inequality before, but apparently haven’t succeeded in ending debate. The Economist (10/13) has published an analysis by its economics editor, Zanny Minton Beddoes, which I recommend highly. (Click here; and here for a related editorial). Beddoes addresses inequality in depth and concludes by calling for a true progressivism – not mindless capitalism-bashing (nor government-bashing) but a program for reforming government’s role to better spread capitalism’s benefits.*

I have argued that fixating on inequality per se is misguided (and reflects, frankly, a big dollop of envy). What counts most is your absolute quality of life, not how it compares to others’. The problem of the poor is not plutocrats. Wealth is earned not at the expense of the poor but, by and large, by profiting from contributions toward the betterment of all. And the poor can be raised up – by boosting their ability to so contribute – without dragging down the rich.

A lot of inequality is merely the difference between mature people in the prime of their working lives, with accumulated assets, and young whippersnappers just starting out. Yet classic rich-versus-poor inequality of course exists too. It’s mitigated if the poor have reasonable opportunities to rise – the American ideal. But such social mobility isn’t what it once was. We’ll return to this.

Beddoes elucidates that while inequality is indeed growing in many countries (ours included), worldwide it is falling. That’s not contradictory. Global inequality is indisputably falling simply because less developed (and poorer) nations (mainly China and India) have much higher economic growth than advanced nations. Within those fast growing countries, the rich outrace the poor, increasing intra-country inequality, yet still those poor are outracing rich country populations.

Less affluent Americans are falling behind, in part, because some wealth is now being redirected from them to poorer people in Asia. Bad for us; good for them (at least equally deserving human beings). Thus, again, rising local inequality actually translates into falling global inequality.

Some Americans are losing out because they are becoming less competitive not only in what is more and more a global labor market, but even within America, where economic rewards increasingly go to the more skilled and educated.** Wealth is unequal not chiefly because the rich are hogs, or the game is rigged, but primarily because educational attainment is unequal, and its importance is growing. Once, anyone could earn good pay in factories without a college degree; but that’s sooo twentieth-century, an inexorably shrinking part of the economic landscape. (The President’s “manufacturing” obsession as a jobs panacea is retrograde.)

Drop out of high school, or even college, and you’re likely to have a low-wage job, or none, with your situation often aggravated by lack of marriage, and single-parent children, who grow up to repeat the syndrome. Whereas better educated people are likely to have better jobs, marriages with equally educated partners, and two-parent children who go on to repeat that model.

This is the nub of America’s inequality and declining social mobility.

Government isn’t helping. Our first battleground is in the schools, where entrenched teacher unions fight real reform of a system disgracefully disserving the disadvantaged, trapping them in their plight. And as for wealth redistribution, Beddoes highlights that it’s largely from the affluent to the affluent, especially the affluent elderly (through programs like Medicare, Social Security, and a host of tax preferences like the mortgage deduction). Such welfare for the rich dwarfs any redistribution to the needy.

And government’s interventions in the economy aren’t helping either. I recently listened to anti-capitalist crusader Arundhati Roy rail against a litany of alleged evils of free market economics in India. I kept thinking: she’s missing it completely. Nothing she denounced is actually free market economics; to the contrary, it’s non-free market economics, it’s India’s culture of cronyism, corruption, and over-regulation that stifles competition and economic opportunity; it’s government perverting the free market. So fixated was Roy on demonizing “capitalism” that she couldn’t see this Indian elephant in the room.

This is a key element in the “true progressivism” Beddoes argues for. She says governments can narrow inequality without large-scale redistribution or an engorged state. Beddoes invokes Teddy Roosevelt’s trust-busting – instead of helping favored businesses, which often means hobbling their competitors, government should be removing barriers to competition (many of them erected by government itself). That expands economic opportunity and the size of the pie for everyone. While such an assault on cronyism and corruption is particularly vital for countries like India and China (where the state itself is directly in business), Beddoes says rich nations “also need more competition in traditionally mollycoddled sectors such as education.”

Health care too, in America. And (sorry, Lefties) we are increasingly over-regulated. Reviewing the regulatory picture, the same Economist issue quips that “If banks once did banking, now they practice law.” Fine for the biggest ones (maybe), but ruinously costly for all other businesses, again undermining competition, economic dynamism, and equality of opportunity. (A friend yesterday alerted me to a 1992 Wall Street Journal op-ed by a hotel owner telling how government regulation contributed to destroying his business. The author: George McGovern!)

Beddoes’s second point is to recognize that the gigantic edifice of state social spending has gotten grossly out of whack, directing the lion’s share of subsidies to the affluent and elderly, rather than toward investing in the young and the disadvantaged, to boost their contributions to future economic progress. Not to mention that out-of-control entitlement spending threatens to wreck our economy altogether.

Beddoes’s third priority is to reform taxes, to improve efficiency and fairness. While the rich do already pay a disproportionately high share of income taxes, our crazy-quilt of loopholes and special interest giveaways is loaded with unfairness and distortions of economic activity that seriously harm the nation’s welfare. Just the sheer cost in man-hours of coping with tax complexity is a huge economic liability.

All these policies would help reduce inequality and broaden economic opportunity; but of course they are good not just for the disadvantaged, but for society as a whole.

Beddoes concludes by noting that some rising countries are progressing on parts of this agenda (one reason why they are rising); but not the richer nations, and “the most shocking shortcomings are in America, the rich country where income gaps are biggest and have increased fastest.”

America’s to-do list should also include fixing immigration, particularly our suicidal near lock-out of the world’s best-and-brightest. This exemplifies today’s American Disease: people’s narrow idea of self-interest short-sightedly undermining their true long-term good. The same applies to all the government subsidies everyone stubbornly clings to, which will ultimately sink our whole ship.

I remain a great optimist about the future for humanity as a whole. But while America is still blessed with a vast reservoir of human creative energy, God has not somehow decreed that we will maintain our privileged status even while refusing to adapt to a changing world. I’m not optimistic about America biting Beddoes’s bullets.

It surely will never happen in a second Obama term. With Romney, and a fresh shuffle of the political cards, maybe there’s at least a chance.

* The blogosphere’s Lefties have mounted the predictable shrill attacks on The Economist for daring to call its prescriptions “progressive.”

** Broadened educational opportunity was probably the key reason why American inequality fell significantly in the last century.

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16 Responses to “Inequality, and a True Progressivism”

  1. Gregg Millett Says:

    Thanks Frank, you always make me think a bit about my commie tendencies.

  2. rationaloptimist Says:

    Gregg — what will it take to beat them out of you?

  3. Lee Says:

    On almost any subject the world is divided into two groups: (1) those who believe blahblahblah is better except when it isn’t and (2) those who believe blahblahblah is not better except when it is. You have firmly established yourself to be in, say, camp #1 and I could try to respond with a long list of reasons I am firmly in the other camp.

    However, when one speaks in specifics rather than the whole of blahblahblah, one finds tremendous amounts of similarities between the two groups. Oh, sure, on the edges, people would tweak things, but for most specific instances, people are in pretty close agreement as to what the right answer should be.

    So, let’s get down to brass tacks. Which loopholes should be closed to rescue $5,000,000,000,000 from the federal budget over the next decade? Is Medicaid more efficient than private sector insurance or does it just encourage moochers to get sick?

    By the way, the game /is/ rigged (except where it isn’t). It’s called the old boy network and it is alive and well. Sure there are a few Bill Gates and Steve Jobs who lead large companies because of their ability to produce better goods for less. However, many CEOs are worth the high salaries they command not because they are that much better at building better products for less than others are, but because of their connections. They know each other and that’s worth a lot!

  4. rationaloptimist Says:

    Lee: 1) Which “loopholes”? All of them. Really. Very roughly speaking, the feds collect around a tril in taxes annually, and the value of deductions equals another tril. So you could actually cut tax rates in HALF if you eliminated all deductions (and Obama is wrong in saying the math doesn’t add up for Romney cutting rates by 20%). The tax system would be far better for the economy simplified to the point where you paid a straight percentage of income with no deductions whatsoever. The percentage would be quite low and, for many people, zero. If you want to subsidize anything, then just send people checks. I think the fed govt knows how to do that.
    2) I didn’t say there is no game rigging. Of course there is. But Lee, you don’t earn what you earn because the game is rigged, but because of your contributions to society. Isn’t that true of most affluent people you know? Think about it.

  5. Lee Says:

    Loopholes: Governments subsidize some things, e.g. roads or education through twelfth grade, by paying for it from tax receipts. Other things are funded via tax incentives, which we are calling loopholes. Is it really your belief that this latter category has little worth preserving? Sure, some tweaking is needed, but the whole baby with the bath water?

    Rigged game: in the technical fields that I play in, much of the middle class is a meritocracy in that, for the most part, people are rewarded for producing better widgets for less. The upper class people I know are generally quite bright and effective and it would be easy to conclude that this too is a meritocracy at work. However, I know plenty of other people who are as bright and effective, but didn’t have the connections. Of course there are exceptions, but the surest way to get to Davos is not the productivity of widgets; it is havinb connections to those already there.

  6. rationaloptimist Says:

    Loopholes: We subsidize a lot of things through tax deductions that shouldn’t be subsidized, most prominently the mortgage deduction, for most who benefit from it. We’d be much better off doing none of this through the tax code; thereby keeping tax rates as low as possible; and any subsidies actually judged by consensus to be worthwhile, just send checks.
    Rigged game: Many people of merit & talent do not have opportunities for utilizing them. Creating those opportunities is our challenge. But unfortunately “progressives” are too often fixated on what people GET rather than what they contribute and helping them contribute more — thereby earning more. My own brilliancy has not, indeed, gotten me to Davos.

  7. Lee Says:

    It is a common misconception that the mortgage interest deduction is pork barrel for homeowners. In fact, it is to give lower and middle class taxpayers a level playing field with upper class taxpayers. Here are some numbers.

    Suppose there is no deduction for mortgage interest. Suppose you are upper class and have $300,000 in an investment account that regularly pays 4% and you want to buy a $300,000 house. Scenario #1: If you use the money to buy the house then your tax implications from the money that is no longer in your investment account (which thus earns no interest) and the mortgage you don’t have (which costs you no interest) is $0. Scenario #2: On the other hand, if you keep the $300,000 investment and by the house with a 4% mortgage then your tax will be based upon the $12,000 of interest you earn on your investment, but you cannot deduct the $12,000 for interest paid on the mortgage. That is, your taxable income will go up $12,000 and your taxes will be higher compared to the first scenario.

    Depending on your actual numbers there can be a tremendous incentive to use your cash on hand instead of taking out a mortgage. Two points to be learned about a tax code without a mortgage deduction: (1) it favors scenario #1 over scenario #2, but I see no good reason that it should, and (2) the lower and middle classes don’t have a house’s worth of cash on hand and are stuck with the inferior scenario, #2.

  8. Lee Says:

    Or putting it another way, with the purchase of a house, the rich person will be able to find a way to effectively write off $12,000 in income. The poor person will not be able to do the same, unless there is a mortgage deduction.

  9. rationaloptimist Says:

    In other words: the wealthy are in a better position than the non-wealthy. I am shocked, shocked. When will “progressives” give up the absurd idea that we can somehow have a society where wealthier people don’t have any advantages?
    I just heard one of these guys on the Newshour saying what we have to do is “suppress productivity.” (I’m not making this up.) What a marvelous prescription for the economic future of the less well-off that “progressives” are supposed to care so much about.

  10. Lee Says:

    Of course life favors the wealthy. But having a tax code that permits the wealthy to effectively deduct their mortgage interest but not the poor — that is something you think is good?

  11. Lee Says:

    Or putting it another way: if we eliminate the mortgage interest deduction we will not increase taxable income as much as expected. Those who are wealthy enough will pay off their mortgages, avoid them in the first place, or otherwise arrange their finances so as to effectively continue to get the mortgage interest deduction. The only people who will have more taxable income are the not so well off.

    So, yes we’ll get more tax from these poor and we can offset it by an across-the-board tax cut for all, which, as any capitalist will proudly tell you, helps most those who pay the most taxes — the wealthy. Is this really what you are aiming for?

  12. rationaloptimist Says:

    The existing mortgage deduction greatly favors the wealthy because their mortgages are bigger and their tax rates are higher so every dollar of deduction is worth more. That is something YOU think is good?

  13. Lee Says:

    But those who are rich enough can get the reduction in taxable income whether or not there is a mortgage interest deduction; eliminating the mortgage interest deduction will not address the issue of the wealthy getting more cents back for each dollar in income reduction.

    To address that issue, I would change the tax code so that deductions first come offset the income of the zero percent bracket (a.k.a. standard deduction) then the next lowest tax bracket, then the next lowest tax bracket, etc. Currently deductions first offset income in the zero percent bracket, but then jump to the highest tax bracket and then to the next highest, etc. I would definitely explore changing this.

    New York State has something similar for married folks whose adjusted gross income is in excess of $300,000.

  14. rationaloptimist Says:

    I guess I’m not smart enough to understand how the rich can get the mortgage deduction even if it’s abolished; nor am I rich enough to be aware of that New York State tax provision you mention. But I am gratified that YOU are presumably in that bracket. It proves that not all one-percenters are monsters of greed who want to crush the proletariat underfoot.

  15. Lee Says:

    That New York State tax provision phases in at incomes lower than $300,000. However, I do agree that the vast majority of rich people are good people … and likewise for poor people and various other categories of people.

    Thank you for providing this blog, for allowing contrary opinions, and for dignifying those contrary opinions with your responses.

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