Category Archives: Inequality

The DNC Platform and Inequality

As the Democratic National Committee convention wraps up in Philadelphia, I took some time to look over theparty platform’s planks on inequality. Iain Murray and I counsel a “People, Not Ratios” philosophy on inequality in our recent study; the Democratic platform mostly takes the opposite approach.

Iain and I argue that from an ethical standpoint, the mathematical difference between rich and poor is irrelevant. What matters is making sure that all people, especially at the economic bottom, have enough to live comfortably and securely. The DNC platform instead is about ratios, ratios, ratios: “most new income and wealth goes to the top one percent (p. 3),” “the top one-tenth of one percent of Americans now own almost as much wealth as the bottom 90 percent combined (p. 10),” and so on. Some of the policies it proposes to reduce inequality ratios include:

  • Tax hikes on the wealthy. This would have the unintended effect of leaving less capital for small businesses and startups. The wealthy tend not to hoard their wealth like Scrooge McDuck or Smaug the dragon from The Hobbit. They invest most of their wealth, and as it circulates throughout the economy, and small-scale entrepreneurs, innovators, and other value creators benefit—as do their consumers.
  • Tax breaks for favored corporations. Intentional or not, this would be very good for lobbyists, and hardly anyone else.
  • Tax hikes for disfavored corporations. Ditto, as unpopular industries descend on Washington to try to avoid punishment. If the federal government is going to have a corporate tax, it should be as simple and uniform as possible. Of course, the ideal corporate tax rate is zero—companies pass on their costs to consumers, so it’s really you and me who pay corporate taxes, not GE or Microsoft.
  • A $15 hourly minimum wage. Iain and I discuss this in our other recent paper, “The Rising Tide.” Higher minimum wages would help some workers, but with severe tradeoffs. Some workers will find themselves working fewer hours, or even fired. Other workers, especially younger workers, will never be hired in the first place, denying them the chance to gain skills and experience that can lift them up the economic ladder as they get older. This could potentially increase inequality ratios over the long run. Workers would also see fewer on-the-job perks, such as free parking and meals, flexible vacation policies, and so on. The minimum wage is not a free lunch.
  • Expanded collective bargaining. Again, some workers will get a raise, but at others’ expense. Fewer jobs, higher consumer prices, and more are all among the tradeoffs. And again, increased unionization could increase inequality by giving privileges to union members at non-members’ expense.

Progressives and classical liberals share the same goal when it comes to poverty—ending it. Achieving that goal requires people across the political spectrum to focus more on people, and less on ratios. In that respect, the DNC platform has a long way to go. The most effective policies involve eliminating barriers to entrepreneurship. These include reforming occupational licensing requirements that now affect a third of American workers, as President Obama has suggested. We also recommend clearing vast swathes of the 175,000-page Code of Federal Regulations. Other helpful policies include affordable energy, easy access to capital, and a commitment to an honest price system. For more policy ideas, see Iain’s and my recent papers.

Collective Bargaining Increases Inequality

I recently pointed out that minimum wage regulations increase inequality. That’s not what the “Fight-for-15” activists intend, but it is the result they would achieve. Collective bargaining is another unintentional inequality-increaser. The reasons why are pretty similar, as Iain Murray and I point out on pp. 10-14 of our recent paper, “The Rising Tide.” This week there were two opposing developments in Washington related to the issue: the National Labor Relations Board issued a decision that strengthens the hand of unions seeking to organize workers for representation via collective bargaining, but the House Appropriations Committee voted to defundrelated regulations from being implemented by both the Department of Labor and the National Labor Relations Board.

Just as minimum wages benefit some workers, so does collective bargaining. Union members tend to earn higher wages than their non-union peers working similar jobs. And just as with minimum wages, these benefits come with tradeoffs. Fewer jobs for non-members, higher consumer prices, and more are all part of the collective bargain. Some people make more, because other people make less and pay more.

According to a recent report from the Council of Economic Advisors about declining labor force participation, the U.S. is in the 90th percentile among OECD countries when it comes to union-friendly labor policies. But is only in the 62nd percentile for entrepreneurship-friendly policies (p. 30). Those percentiles are a useful priority guide for policymakers.

Another CEI study by Ohio University economist Lowell Gallaway and researcher Jonathan Robe finds that in union-heavy states such as Michigan, per capita income is as much as $11,000 lower than what it could be without powerful unions and their exclusionary policies. That’s nearly $28,000 per year for an average-size household—money that could be spent on better schools, housing, food, clothing, and much else. Instead, that money is never made at all.

There is also evidence that many union members don’t even want to be members. When Wisconsin gave many government employees a choice on whether or not to join a union, many of them decided against unions. In a painful bit of symbolism, the very first AFSCME local, founded in Madison in 1932, saw its membership decline more than 85 percent within just a few years after the law passed.

Many politicians and activists want to reduce economic inequality, and collective bargaining is one of the most popular policies for doing so. But not only does it actually increase inequality—union benefits come at consumers’ and other workers’ direct expense—the proper goal is to make the poor better off. Iain Murray and I aim at that goal in our recent papers, “People, Not Ratios” and “The Rising Tide.” We encourage others to join us.

Minimum Wage Increases Inequality, Decreases Labor Force Participation

The minimum wage actually increases inequality. It helps some workers, but only at others’ expense. The reasoning is simple: people can’t make money if you put them out of work. When the minimum wage goes up, some people get a raise, but only because other people get their hours cut, are fired, or never hired in the first place. Some people get more, just as many other people get less. The minimum wage’s results are exactly the opposite of its intentions.

That’s why a recent Council of Economic Advisors report, “The Long-Term Decline in Prime-Age Male Labor Force Participation,” misses the mark. On page 42, the report says: “To fight the long-run trend of increasing inequality, the President has proposed raising the minimum wage, giving greater support to collective bargaining, and helping ensure that workers have a strong voice in the labor market.”

There are two problems with this approach. The big one is the implicit assumption that inequality is automatically a bad thing. This is precisely the approach Iain Murray and I warn against in our recent paper, “People, Not Ratios.” The mathematical difference between rich and poor is ethically irrelevant, as Princeton University philosopher Harry G. Frankfurt also argues.

What is ethically relevant is how people at the economic bottom are doing. Do they have enough to live with comfort, dignity, and security? Are they becoming better off over time? What policies will help the poor become better off over time? These are the questions anti-poverty activists should be asking.

That’s a pretty big problem. The second problem is with a study quoted on the same page by David H. Autor, Alan Manning, and Christopher L. Smith, “The Contribution of the Minimum Wage to US Wage Inequality over Three Decades: A Reassessment.”

Economists are famously divided on many issues, leading to President Harry Truman’s wish for a one-armed economist, who would be unable to say “on one hand… on the other hand…” The minimum wage is not a two-handed issue. A survey of professional economists finds overwhelming support for the statement “A minimum wage increases unemployment among young and unskilled workers.”

So not only did the CEA report have to cherry-pick a study that supported its ideological priors, that study’s support is tepid at best. This may be why the CEA report does not bother to quote it directly, which I do here:

We find that the minimum wage reduces inequality in the lower tail of the wage distribution, though by substantially less than previous estimates… These wage effects extend to percentiles where the minimum is nominally nonbinding, implying spillovers.

For more on how the minimum wage affects inequality, see Iain Murray’s and my recent paper, “The Rising Tide.” A future post will make similar arguments about the CEA report’s arguments on collective bargaining.

On the Radio: Income Inequality

Regular readers know that Iain Murray and I recently released a pair of papers on economic inequality, People, Not Ratios and The Rising Tide. I had the opportunity to sit down with RealClear Radio Hour‘s Bill Frezza to discuss them while in DC recently to attend CEI’s annual dinner.

My segment was sandwiched between Clemson University economist Bruce Yandle, of Baptist and Bootleggers fame, and Steve Forbes. I deserve no place on such a billing, and can only consider it an honor.

The show, as aired, is here. Yandle and Forbes, as always, are essential listening.

An extended version of my segment is here.

Inequality: Policies That Work, and Policies That Don’t

CEI recently released a pair of papers by Iain Murray and me about economic inequality. The first encourages activists to ask the right questions: think about flesh-and-blood people, not ratios. The second paper seeks to answer the right questions. Our main focus is on effective poverty reduction policies. But it is also important to know which policies don’t reduce poverty, so policy makers can avoid them. We mention two in our paper: minimum wage hikes and increased collective bargaining.

The arguments against both are similar: they have tradeoffs. Some workers benefit from a higher minimum wage, and many union members benefit from higher union wages. But their benefits come at a cost.

Workers pay for minimum wage increases in the form of reduced hours, firings, some workers never being hired in the first place, higher youth unemployment, and reduced on-the-job perks ranging from paid vacation to free parking and meals. These costs to people must be weighed against the benefits other people receive. Whether they are worth it or not is a decision every individual must make for himself, and is open for debate. That these tradeoffs exist is not debatable.

Collective bargaining’s costs include higher consumer prices, along with lower wages and reduced purchasing power for other workers. Public sector unions impose massive costs on taxpayers through their pension obligations. They are major contributors to potential government bankruptcies in coming years from California to New Jersey. Again, some workers do benefit from collective bargaining. And it is every individual’s own decision if the tradeoffs worth it or not. But the tradeoffs exist.

There are many policies that instead can make the poor better off, from affordable energy to occupational licensing reform, to easy access to capital, to regulatory reform, a CEI specialty. But some policies do not help the poor—or if they do help some of the poor, the tradeoffs eliminate net gains in human well-being. Minimum wages and collective bargaining are two such policies. Well-meaning activists should approach them with caution.

For more, see Iain’s my new paper, The Rising Tide: Answering the Right Questions in the Inequality Debate, as well its companion paper, People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions.

Inequality Coverage

Iain Murray’s and my new papers on inequality, People, Not Ratios and The Rising Tide, have gotten some good coverage.

Kudos to CEI’s communications team for all their hard work. More to come.

Raise, Don’t Level: New CEI Papers on Inequality and Poverty Relief

Economic inequality is one of today’s defining issues. How to address it? Iain Murray and I offer an unconventional approach in a new two-part CEI study, released today. The first part frames the issue. The title sums it up well enough: People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions. The second part,The Rising Tide: Answering the Right Questions in the Inequality Debate, outlines a concrete policy agenda to make the poor better off.

Anti-poverty activists routinely fret about the ratio between a CEO’s salary and her lowest-paid employee’s, or how the top one percent’s ratio of national income compares to the bottom one percent’s. Instead of mathematical ratios, we encourage activists to focus on human beings. Again, we plead: focus on people, not ratios.

Ratio-obsessed activists from Thomas Piketty to Naomi Klein ignore some obvious questions due to their monomania:

  • How are the poor actually doing?
  • Is their economic situation improving over time?
  • What policies can make the global poor better off over time?

We seek to fill these disappointing gaps. According to nearly all available data, poor people are better off than ever before in human history—keep at it, then! There is still lots to do, but ignoring the accomplishments people have already made, and what can make more accomplishments possible, only hurts the poor.

Over the course of the 20th century, infant mortality went down by more than 90 percent—just think of how many parents’ broken hearts have stayed whole thanks to modern technology and sanitary practices.

Life expectancy improved by 30 years during the 20th century. And that’s not the only type of length modernity has improved: from 1900 to 1950, the average American became three inches taller, thanks to better nutrition, food security, and health care. The process has only continued since then.

Even if it was only the top one percent that enjoyed zero infant mortality, lived a hundred years, and were all seven feet tall, their best efforts could not bias society-wide statistics nearly that much, despite their most conspiratorial plutocratic efforts. This is what mass prosperity looks like.

According to the Swedish economist Max Roser, since 1960 the number of people living in absolute poverty has declined from nearly two billion to about 700 million—a two-thirds decline. And this happened as total world population more than doubled! This is good news. Today’s most important task is to keep this great enrichment going, and to eliminate absolute poverty altogether.

The poor will never have as much as the rich—every curve has a bottom and a top ten percent, and always will. No changing that. But only the hardest heads deny that most poor people today live better lives than their parents or grandparents did—and that future generations can expect this wonderful trajectory to continue, if they’re allowed to.

This is both a reason to celebrate, and a reason to double down. Now that we haveasked the right questions about inequality, the second part of our study, The Rising Tide, seeks to answer them: what policies can continue to make the world’s poor better off?

There are a lot of answers. We don’t pretend to have all of them, but we offer a few. One is an honest price system: runaway-inflation countries such as Zimbabwe and Venezuela are universally poor. Keeping inflation in check and making sure prices convey honest information will help consumers and entrepreneurs make wise decisions that create value for people.

Affordable energy is another answer, allowing everything from clean home heating (natural gas is somewhat cleaner than dung and logs, especially indoors) to more and better transportation choices, which expands employment options.

Any aspiring entrepreneur needs access to capital—Dodd-Frank-style financial regulations openly insult every person trying to escape poverty. So do many governments’ resistance to granting formal property rights to their people.

Another answer—there really are a lot of them, and no single panacea—is occupational licensing reform. There is no legitimate reason for an interior decorator or a hair-braider to undergo hundreds of hours of training in something they already know how to do, in order to do for pay something they can do for free. Nearly a third of American workers require government permission to begin their day’s work. That is ethically wrong, and should be immediately reformed.

Inequality is a complicated issue. Properly addressing it requires both asking and answering the right questions. Ask how real-world people are doing, not abstract income ratios. And ask about policies that can help people escape poverty. The answers are numerous, and Iain’s and my papers do not pretend to have all of them.

But, we humbly submit, a general ethos of not stamping down on impoverished hands would be a good start. It would also be quite a change from current policy in the U.S. and many other countries.

For more, see our papers, People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions, and The Rising Tide: Answering the Right Questions in the Inequality Debate.