Readers under age fifty-five might not realize this, but economic inequality was not a large issue in American political discussions until 1992. After that year, discussions of the issue ebbed and flowed. So much of what has been said by opponents of inequality is simple assertion. What has been missing in the statements of those who want government to reduce inequality is much information about why it exists and any sense of why some kinds of inequality are good.
Unfortunately, a single-minded focus on reducing inequality will lead to bad outcomes, even death. That conclusion follows from standard economic reasoning about the causes of economic growth. Reducing inequality by lopping off wealth from the wealthiest would lead to less economic growth; lower economic growth makes death rates higher than otherwise.
How it began
You might think that the focus on wealth inequality has come about because of the huge growth in wealth of the 100 or so wealthiest people in the world, many of whom live in the United States. While that surely has made the issue more prominent, the upset about inequality began well before that. I date it at 1992. In 1992, Jeff Bezos, whose wealth is close to $300 billion, had not yet even started Amazon, the source of his wealth. He and his then-wife MacKenzie Scott started Amazon two years later, in a rented garage. In 1992, Elon Musk, now the world’s wealthiest man, was a twenty-one-year-old undergraduate at Queen’s University in Kingston, Ontario, who was about to transfer to the University of Pennsylvania.
So, if not the wealth of Bezos and Musk, what did lead to the focus on economic inequality? Two key factors were an article in the New York Times and a politician running for the Democratic nomination for president who picked up on that article.
The New York Times article was reporter Sylvia Nasar’s “The 1980’s: A Very Good Time for the Very Rich,” March 5, 1992. In that article, Nasar reported data from the Congressional Budget Office on income gains at various percentiles of the income distribution. She quoted Paul Krugman’s exaggerated statement that “it [the additional income from a growing economy] all went to the very top.” As a good reporter, she also gave balance. She quoted Lawrence Lindsey, who, in his book The Growth Experiment, had noted that the early 1980s drop in the top federal income tax rate from 70 percent to 50 percent encouraged high-income people to use fewer tax loopholes and thus show more taxable income on their tax forms. One important example, which Nasar didn’t mention, was municipal bonds. Interest on those bonds was exempt from the federal income tax and so that interest income was not reported on tax forms. But when the top rate fell to 50 percent, high-income people shifted much of their investment away from tax-exempt municipals to other investments whose income was subject to the federal tax. The income from those investments showed up on their tax forms, making it look as if their income had risen substantially; in many cases, it hadn’t.
But sophisticated explanations, on target as they were, would only hurt the narrative of politicians who saw a hot political issue. Bill Clinton, running to be the Democratic candidate for president, read Nasar’s March 5 article and latched onto her data. In a May 11 article that same year, “The Richest Getting Richer: Now It’s a Top Political Issue,” Nasar wrote:
Governor Clinton, the likely Democratic Presidential nominee, had been searching for months for facts to illustrate his claim that America's middle class benefited little from twelve years of Republican rule. The explosion of riches at the top struck him as a perfect vehicle.
Nasar continued:
“He [Clinton] was reading the paper that morning and went crazy,” said Dee Dee Myers, the campaign's press secretary, referring to an article in the New York Times on March 5 that reported on the wildly disproportionate gains of the top 1 percent. “The story proved a point he had been trying to make for months, so he added the statistic to his repertoire.”
The economic boom of the last half of the 1990s dampened some of the attacks on inequality. While Bill Clinton had used the issue to get elected, he did not focus much on it afterwards. Barack Obama, by contrast, kept up the attack while president. One can reasonably argue that Obama’s signature contribution to political discussion was his castigation of the wealthy.
Myths and facts about economic inequality
There are many myths about inequality. While I don’t have space to dispel all of them here, I’ll point to two that are highly relevant.
The first is the idea that increases in income inequality mean that the poor are worse off. French economist Thomas Piketty, author of Capital in the Twenty-First Century, often writes as if he thinks that wealth is zero-sum so that increases in various groups’ wealth and income must come at the expense of others. In discussing the United States in the late twentieth century, for example, he calls an increase in the income share of the top 10 percent an “internal transfer between social groups.” Yet, on the very same page, he admits that income for the bottom 90 percent slowly grew over that same period.
Consider Piketty’s statement about the United States and France: “And the poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth, just as in 1910.” That is nonsense. If the poor have the same percentage of wealth as they had in 1910, they are much richer because wealth is much greater. Moreover, Piketty knows that: he shows elsewhere in his book that conditions have improved dramatically for pretty much everyone, writing:
Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 to 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5–10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.
In short, economic growth in Britain, France, and the United States has made the poor spectacularly better off.
Do the rich deserve to be rich?
The other main myth is that the rich don’t deserve their wealth. It’s true that a small percent of them didn’t or don’t deserve their wealth. If they obtained their wealth through fraud or by using the political system to get special treatment, then they are undeserving. Exhibit A for someone who got his wealth through fraud is Bernard Madoff, who ran a Ponzi scheme to take wealth from strangers and even from friends.
Exhibit A of someone who got his wealth as an insider in the political system is Lyndon B. Johnson. In the 1940s, after he had defended the budget of the Federal Communications Commission, an official at the FCC suggested that the Texas congressman’s wife buy a license to operate a radio station in the Austin market. She did so and only a few weeks later, applied for a better part of the spectrum and for longer hours of operation. Both requests were granted within weeks. The FCC also was slow to grant licenses for other radio stations to compete in the lucrative Austin market. By the time LBJ ran for president in 1964, the market value of his and his wife’s net worth was between $9 million and $15 million, over half of which was the value of their media holdings. To put that in perspective, $14 million in 1964, when adjusted for inflation, would be $151 million today.
But these are the exceptions that prove the rule, at least for the US economy. Most very wealthy people became wealthy by producing goods and services that other people were willing to pay for. Jeff Bezos is a good example. My wife and I order items regularly from Amazon and save a lot of time by doing so. Even using a low value of $60 per hour for my time, I save well over $2,000 per year. When someone produces something that we voluntarily pay for, that person deserves the wealth he earned. The two key words in the previous sentence are “deserves” and “earned.”
Two facts about economic growth
While there are some controversies in the literature on economic growth, there are two things that we economists know well.
First, all other things equal, as the amount of capital per worker rises, workers become more productive. Their higher productivity leads to higher real wages. That’s why, when people immigrate to the United States from very poor countries, their productivity and their real wages immediately multiply by a factor of 4 to 15. If the amount of capital per worker rises more slowly, real wages will rise more slowly also.
Second, as people’s real incomes rise, mortality falls. One main reason for this is that safety is what economists call a normal good. Safety is like steak or luxury cars. As our incomes grow, we demand more safety, and the market provides it. Jobs become safer, we buy safer cars, we make our homes safer, and we spend more on life-saving medical care.
Taxes on wealth reduce economic growth
Many people who decry the great wealth of the wealthiest want the government to reduce it. Proposition 40 on the California ballot in November, for example, would impose a 5 percent tax on the wealth of billionaires. The tax would apply to the amount by which the person’s wealth exceeds $1 billion.
Many billionaires have left California just because of the threat of the tax and, if the tax is voted in, more will follow. That’s the good news, not just for them but also for Americans, because it will allow them to keep their wealth intact. Most wealth of billionaires is not held in savings accounts and money market funds; it is wrapped up in ownership of companies. So, the wealth they hold will continue to make our economy productive.
The bad news, if the measure passes, is that to pay their tax, many California billionaires would have to sell off assets. One’s first thought might be that that wouldn't hurt productivity because those assets would end up in other people’s hands and, therefore, would keep being productive. But a billionaire who owns a large percent of a firm would own less and would have less say over how that firm’s assets are used. A billionaire is a billionaire for a reason: he or she made good choices about investments. With fewer billionaires in charge of firms’ allocation decisions, the decisions would likely be worse. With worse decisions comes less effective capital and, therefore, less productive labor.
Moreover, I haven’t even considered the fact that higher taxes on wealth, whether by California’s government or by the federal government, would reduce the incentive to earn wealth. With less incentive to create capital, there would be less capital than otherwise and, therefore, workers would be less productive than otherwise. With less growth in productivity would come less growth in real wages.
Lower economic growth means more deaths
With real wages and real incomes growing more slowly due to higher taxes on wealth, people would invest less in safety. We wouldn’t demand that our jobs be quite as safe because, with lower real income, we would value safety less. We wouldn’t make our homes quite as safe. We might not replace that old Camry with a new safer-driving Tesla. We wouldn’t spend quite as much on medical care that raises our probability of living longer.
In short, higher taxes on wealth lead to more death. Even though they might not know it, and probably don’t, those who focus on reducing wealth inequality by reducing the wealth of the wealthy are advocating a system in which more people die.
Let’s not do that. Let’s have an economic system in which people live longer. To get there, we need to reject plans to have the government take more of people’s wealth.
