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Getting Past the Emotional Gripes to the Real Debates About Inequality

Anthony Randazzo
November 21, 2011, 8:17am

While the Occupy Wall Street movement is often criticized for not having concrete goals, there are several clear categories the gripes fall into. Complaints about crony capitalism are completely understandable. Demonization of corporations is a missed target, the fewer opportunities those with money have to manipulate the regulatory system the better. But where the logic falls completely apart is over the host of claims related to income inequality/wealth inequality.

A video put together by the Center for American Progress a few weeks ago demonstrates many of these logical inconsistencies. The arguments are often emotive, and play on populist rhetoric to make some sharp claims. But when you break a lot of this down, I think the debates are really misplaced. The lack of perfect logic here is not to suggest that nothing is wrong in America—in fact there is a lot wrong. And the instincts of most Americans pick up on this. But if we're going to have the right solutions we have to properly understand the problems. Here is a breakdown of some of the CAP video arguments (the whole video is at the end):

To start, we should note the difference between wealth inequality and income inequality. Even if everyone in America had the exact same income, individuals would do all sorts of different things with it. Some might spend, others save, and still others directly invest. Some of those investments would succeed and others would fail. To talk about the problem of too much wealth concentrated among the few is to demand equality of outcomes instead of equality of opportunity (which is fine to argue, but then we're into a capitalism vs. socialism discussion). If everyone had the same income to start and ultimately 1 percent of those people wound up with 40 percent of the aggregate wealth over time, would that be an inherently bad thing? No. The deeper issue is how that comes about—whether or not the 1 percent have achieved their wealth through nefarious practices. And that would be a problem whether or not there was equal income in the first place. (This hypothetical also assumes a fixed pie of wealth, which would certainly not be the case since there is no fixed pie of wealth.) 

When discussing wealth inequality, one could complain that the financial industry has manipulated the regulatory system and benefited from access to subsidized capital (FDIC, Fed discount window, better borrowing rates than smaller institutions from TBTF status, etc.) and suggest that the wealth derived from financial activities in the past would not be as substantial without these public benefits. Therefore the wealth gap was widened through a non-capitalist flaw. One could also note barriers to entry in the legal community (bar association, occupational licensing requirements) drive up the cost of legal services and increase the wealth of lawyers beyond what it otherwise might be. Similarly, problems with the lack of transparency in costs in the medical industry mean that medical professionals make more money than they might otherwise, increasing their contribution to the wealth gap. 

So there are a range of government policy choices (whether you like them or not) that wind up distorting the ultimate wealth that can be achieved in various businesses away from where it would otherwise be. This doesn't necessarily make a value statement on those policy choices, but does suggest where the debate should go if you want to talk about wealth inequality. Consideration of how state, local, and federal rules influence wealth distribution becomes the more pertinent question, rather than just supposing there is an arbitrary size of the wealth pie (40 percent? 30 percent? 20 percent?) that is some how the objective max that any one percentage of the population should have before incurring the wrath of "the others."

Takeaway: There is nothing logically objectionable about the actuality of 40 percent of national wealth concentrated amongst 1 percent of the population; what could be objectionable is the nature of that wealth gap. I've listed some contributors to the wealth gap that have actionable steps to be addressed—let's hear about some other causes of wealth inequality. Then there can be a debate. You can't debate a benign number.

Logically, as the economic pie expands, if a majority of the gains go to a select group in society it does not say anything inherently positive or negative about the gains that go to the rest of society. Again, it is not the condition itself that should be discussed in a vacuum, as is frequently done in OWS marches, but the causes of the perceived problem. Is this majority of gains flowing to the top 1 percent because the top 1 percent just did way better in developing investments than the rest? Is it because wealth necessarily grows exponential the more that you have if you manage it well (i.e. It is easier to make money investing in equities with $100,000 than $100, so those at the higher echelons of wealth will necessarily be able to growth their wealth faster than those at the bottom)? Is it because bank licenses provide limited liability, allowing financial institutions to grow to gigantic sizes they never would have reached without the benefit of public support ultimately leading those financial institutions to beating down everyone in their path and generating massive amounts of wealth? Those are different scenarios (that are not necessarily mutual exclusive), and lead to different policy responses (or non-responses). They are causes that can be measured, debated, and addressed. Is there an objectively proper amount of financial gains that should flow to any particular percentage of the population?

Suppose much of the wealth that was generated in the past decade came from non-productive activities like high frequency trading picking up half-a-cent margins on rapid trades identifying nano-second arbitrage opportunities. While one could debate whether or not this has harmful effects or takes up talent that could otherwise be predisposed to something bringing more value to society, it does not necessarily reduce the wealth growth of others. Think of this as whip cream on the pie. It still counts as part of the pie, but whether or not it is there doesn't impact much of the nature of the rest of the pie. Theoretically the 1 percent could gain 90 percent of the wealth over a 10 year period, but if 40 percent of that wealth is from activities that created wealth that never would have existed anyway, then the 99 percent are not directly injured, even though they don't share in what was created. In this way the wealthy individuals in America didn't prevent others from generating wealth as much as they generated more than others. To complain about that is to lapse into plain old jealousy and envy. Instead, it is beneficial to concentrate on what tangible things, policies, laws, etc. contribute to where financial gains flow. Figuring out whether these are good or bad is a critical question when considering the efficacy of this statement that a majority of financial gain went to a particular percentage. 

This is true, according to the Census Bureau (see table H-8). From 2001 to 2010, Census reports median income fell from $52,005 to $49,445, adjusted for inflation (using CPI, in 2010 dollars). Of course this is somewhat of an arbitrary measuring point. If you were to measure from 12 years ago, the decrease would be worse, down from $53,252. Though if you chose to measure two decades back, you'd find median income has increased from $47,032 in 1991. What is the broader point. Well, like the story so far, the important thing to discuss what has caused this to happen. The dot-com bubble making millionaires out of previously lower income tech nerds contributed to median income being the highest in 1999-2000. It would make sense to see it fall in the aftermath of the 2001 recession, then peak again in 2007, only to fall once more in the current recession. Does the present state of median income actually say anything about the past decade? While median income has risen over the past few decades does that fact inherently suggest it should keep going?

If we've hit a technology plateau and picked much of the low hanging fruit from the American economy, then we should expect the structural problems in our labor market and capital markets to prevent continued growth in the median income. If this diagnosis were to be correct, it would suggest where the debate over how to address economic woes should take place. And it would yield much different policy results than might be suggested by supposing the wealthy are putting intentional downward pressure on the middle class.

Again, this is inherently not a problem. The CAP video makes this argument. If you're already geared up to believe the wealthy are taking too much in society you'll see this as a bad thing. If you're looking at the statement from a logically indifferent perspective, the response would be, so what? When making an statement like this and then presuming the conclusion is "therefore this is bad" the argument falls apart because there is a missing theorem: what caused this gap and is that cause a bad thing? There is a need for more diagnostics in this debate. If a dozen diseases can have similar symptoms we can't just focus on the symptoms. Or even assume the symptom is an indication that something is wrong. 

No, that is not the American Dream. That is to suggest that the American Dream is everyone always wins, all the time. No one ever promised that every entrepreneurial idea would succeed. In fact, most small business ideas don't take off. The American Dream is that you can pick yourself back up. That there is always opportunity. The reason that libertarians complain about oppressive regulations (not all laws) and occupational licencing is because those things limit opportunity. They often fly in the face of the American Dream. 

The nature of the American Dream is that if you succeed you can get ahead, and it is not necessarily at the expense of others. This statement in the CAP video is to suggest that those in the 1 percent are many who have achieved the American Dream. They have gotten ahead. That doesn't necessarily mean they've kept everyone else down. If everyone were to achieve the wealth status of those in the 1 percent (minimum of around $500,000 a year) then the 1 percent would just be some higher figure. If the American Dream is that you get ahead while pushing others back, then why would anyone want to support the American Dream?

The reality is that labor mobility is down because both progressive and conservative ideals have promoted homeownership as an investment all should have. This has encouraged debt. This has families weighed down by bills and unable to take advantage of opportunities. This has households unable to sell a home and move to a new place where there is work. This distorted view of the American Dream, that you can have it all quickly without having to work for it and there will never be problems, that is something that has contributed to the mess of today.  

These things are not logically consistent. Was it ever easy for the middle class to move into the upper class? Were the poor once easily mobile but now something is drastically different? There has always been a tough road for moving between classes of wealth. Such a statement needs to be quantified with causes, and it should not assume that the goal of individuals in society is to try and move up the wealth ladder. Sure, most people wouldn't mind more income and more wealth, but a lot of people are able to live happy, content, and full lives in wealth classes that are not the elite. There is a lot of assumption and little causal evidence to link some of these ideas together.

Okay, so the tax code is broken. Let's fix it. All for that.

But before we move on, let's dig into this a bit. First, 1,500 millionaires is less than 1 percent of all millionaires in America. It may or may not be a problem, but in either way it is a low enough number to be statistically insignificant.

Second, to argue there is a tax break on dividends (as is done in the CAP video) is to suggest there is an inherently proper rate they should be. And what might that rate be? (Hint: the answer can not be "well because these other things are being cut" since that is not logically connected, just selectively attached.) From one perspective dividends are double taxed because after they are taxed and added to personal income they get taxed again. Even if one rejects this argument on some objective tax policy grounds (not appealing to social values), the 2003 tax law that changed dividend taxes only reduced them to the rate of capital gains taxes for most taxpayers. Is there something inherently different between dividends and capital gains such that they should be taxed differently? Unless this can be shown, it is inappropriate to argue there is a tax break on dividends.

The nature of this debate, though, gets at a deeper issue, one that should be addressed in comprehensive tax reform: on what grounds should anyone pay any taxes? Is the taxing of income the most equitable way to tax in society? Is there any connection between taxing income and paying for public services? Is it just an easy thing to tax that we've gotten used to. Maybe it is the best way to tax, maybe not. But it shouldn't be assumed that is the proper way to tax without a fundamental argument to back up that position.

That said, the sense that it is unfair that some have been able to escape taxation while others pay taxes is understandable. I share the frustration. The tax code is unjust, it is complicated, it distorts the use of resources, it grants political favors. But this sense of frustration should not lead to one of envy and rage, but rather to disgust in the political system for allowing for this to happen.

There is nothing illegal about using foreign labor, and American businesses try to get foreign companies to come to our shores all the time. Global competition. Should we reject other people shipping their jobs to us? This idea that it is un-American to use foreign labor misses the value that using more affordable labor can have by freeing up American workers with skills to specialize in something that we can do better than anyone else. At this point I am making a value statement, since this is a more concrete matter to debate. In my view, it is problematic to want to get old jobs back instead of looking towards the future. Not all employment is created equal. No one is demanding that the U.S. stop importing food so that we can have more agricultural jobs, so why do we glamorize telephone operations and manufacturing work as somehow inherently needed to be done in America? But moving beyond the value statement, that is matter that should be debated. Not make a statement that presumes American companies that use labor beyond our shores are some how doing something elicit or getting some kind of unfair tax advantage.

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Here is the CAP video:


Anthony Randazzo is Director of Economic Research


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