Inequality in Income and Wealth—Posner

In discussing inequality of income and wealth (I’ll use “inequality” to cover both) one could focus on inequality between countries—rich countries versus poor countries—or on inequality of wealth within countries. The two inequalities could change at different rates, even in different directions. I will focus, as does Becker, on inequality within countries. 

As he points out, it has grown. This seems to be the result of four forces: (1) a trend away from redistribution—that is, from policies designed to equalize after-tax incomes by combining heavy income taxation with subsidies for poor people; (2) greater competitiveness, in part because of deregulation, more rapid innovation, freer international trade, and a decline in discrimination; (3) the growth in the size of markets (this is related to freer international trade), which increases the returns to excellence and innovation; and (4) an increasing return to IQ because of the changing character of production. The first three points are related to the collapse of communism and the failure of collectivist policies in noncommunist countries (notably the failure of regulation in the United States in the 1970s and the ossification of labor unions despite government support), and the last to the decline of manual labor relative to brain work as economic activity becomes increasingly automated as a result of technological progress. Most commentators on inequality would reword (4) as an increasing return to higher education, but it is very difficult to gauge the value added of a higher education, especially the economic value. Think of such college dropouts as Bill Gates, Steve Jobs, and Mark Zuckerberg. Higher education is indispensable for persons who want to be members of professions, and doubtless helpful for most people who want to go into business, but it will not make up for deficiencies in IQ.

Compare two people, A and B. A does not go to college, and his lifetime earnings are $1 million. B goes to college, and his lifetime earnings are $2 million. In gauging the value added by a college education, one has to control for, among other things, difference in both cognitive and noncognitive abilities (IQ illustrating the first, ability to apply oneself to a task the second). The point is not that B didn’t derive a benefit from college. Maybe without college his lifetime earnings would have been only $1 million too. But maybe if A had gone to college, his lifetime earnings would still be only $1 million because he wasn't smart enough, or motivated enough, to derive any benefit from college. The University of Chicago economist James Heckman may well be right that the only hope for many Bs is early childhood intervention. 

Thus the question is whether today in America everyone who can benefit from a college education gets a college education. If so, increasing college enrollments would not reduce inequality, though school reform at the high school and elementary school levels might increase the number of persons who can benefit from a college education, although Heckman’s research provides a basis for skepticism. 

Inequality is self-limiting to a degree; if it generates tremendous envy and resentment, the government will be under irresistible pressure to adopt redistributive policies. (Equality is likewise self-limiting: too much, and it destroys incentives.) Oddly, increased inequality in the United States has not generated much envy or resentment. The principal opponents of inequality are upper-middle-class liberals rather than poor or lower-middle-class people, and they failed to obtain a rescission of the Bush tax cuts for high-income taxpayers. Obama’s health care reform is the only major redistributive measure adopted in the United States in recent times, and its major redistributive component is an expansion in Medicaid, which the states (which pay half the cost of Medicaid) are busily trying to undermine by reducing the medical treatments for which Medicaid will reimburse providers of health care. 

If I am correct that inequality is not influencing public policy in the United States—is just not a political issue—then I don’t think there is an inequality “problem.” There is just the facts that in the United States a small fraction of the population has an enormous share of the nation’s income and wealth and, at the other end of the income distribution, there are many very poor people. Are the rich a “problem”? I don’t think so. All their money is either spent on consumption or invested, and either way it is economically productive; it’s not as if the rich hoarded their wealth in the form of gold bars. The rich influence elections by their campaign contributions, but they would have the same influence with much less money, because it is not the absolute level of a rich person’s campaign contributions that sways elections but the level relative to contributions by other rich persons supporting competing candidates. 

Warren Buffett warns that without stiff inheritance taxes (which the United States does not have), we will find ourselves in the grip of an “entrenched plutocracy” (according to the Economist article that Becker cites). I don’t understand that concern. The heirs of the rich spend their money on consumption or investment, just like their parents; dissipate it rapidly, if they’re dumb; but in any event do not by virtue of having inherited a lot of money block the upward striving of others. 

Poverty is a problem, but if the rich are not a problem, then the problem of poverty is not a problem of inequality. It looks like a problem of inequality only because the wealth of the wealthy seems an obvious source of money to alleviate poverty. But it is not that taxing the rich would alleviate poverty, but that taxing the rich and using the tax revenues to raise the incomes of the poor would alleviate poverty. Inequality should be a non-issue in the United States—and to a considerable degree it is.

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