Becker makes an important point: inequality of income and wealth is not entirely a product of differences in IQ, in other talents, and in luck; it is also contrived, in the sense of being produced by private or public actions that do not promote overall economic welfare. He gives a number of persuasive examples. His emphasis is on public actions, though he mentions cartels, which are private. Of course it must also be recognized that public actions frequently reduce inequality of income rather than increasing it, examples being the social security retirement and disability programs, the Medicare and Medicaid programs, the earned income tax credit (i.e., negative income tax), and food stamps. Probably (in my opinion) the net effect of government is to reduce income inequality, but that is no reason to defend programs that increase it. And it must be borne in mind that some programs that purport to reduce inequality, such as the federal student loan program, may well increase it, by imposing debt burdens disproportionate to the value of the education that they finance.
I address a slightly different question: if public actions that create unjustified inequality of income were eliminated, and private action such as price fixing by competing sellers that do so were also eliminated, would there still be a “problem” of inequality, in the sense of a valid basis for government intervention to reduce inequality? And is there a valid basis, therefore, for the programs (some mentioned above) that redistribute income from the better off to the worse off?
I think the answer is “yes.” With the median family income in the United States today only about $50,000 a year, a great many families cannot afford decent food, housing, child care, and education for their children, and job training for themselves, and cannot afford to move to areas of greater job or educational opportunity for themselves or their children. The result is to reduce the productivity and income prospects of parents and children alike. Since well-off people in the United States are lightly taxed by international standards, it may be possible to increase overall economic welfare by a modest increase in tax and spending programs designed to lift the life prospects of the lower half of the income distribution without killing the incentives of either the taxpayers or the recipients of public largesse. Subsidizing health insurance and school tuition (as distinct from providing loan money for tuition) and early-childhood education are examples of programs of income distribution that may promote overall welfare.
I don’t endorse the argument of the philosopher John Rawls that no one is entitled to a high income because even characteristics that we think internal rather than external to a person, like IQ and leadership skills and athletic skills and energy and good health, are ultimately the product of luck. Therefore, Rawls argued, no one should be allowed to keep more of his earnings than necessary to “incentivize” him to exert himself in a way that will maximize the social product. That treats people like the cells of an animal’s body, or the ants in an ant heap. Rather my point is that, to the extent reducing income inequality increases overall social welfare, there is a case for programs, financed by the well to do, that increase overall welfare by more than the cost of the programs. There is no reason to think that the cost would impose a crushing burden on the well to do, a result that would be objectionable quite apart from the costs in diminished incentives, and related costs such as tax avoidance and emigration.