People, Not Ratios Why the Debate Over Income Inequality Asks the Wrong Questions
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People, Not Ratios Why the Debate Over Income Inequality Asks the Wrong Questions By Ryan Young and Iain Murray May 2016 ISSUE ANALYSIS 2016 NO. 3 CEIAnalysis-RyanIncomeREV16:Layout 1 4/26/2016 8:45 AM Page 1 People, Not Ratios Why the Debate over Income Inequality Asks the Wrong Questions By Ryan Young and Iain Murray Executive Summary standards, we conclude that most poverty activists are The debate over income inequality became especially asking—and answering—the wrong questions. Their heated following the English-language publication of misguided focus harms the poor. French economist Thomas Piketty’s bestselling book, Many inequality activists believe that in order for Capital in the Twenty-First Century. The controversy some people to have more, others must have less. But has generated more heat than light. This paper seeks to a brief tour of economic history over the last century clarify common points of confusion in the inequality shows that the modern economy is emphatically not a debate and expose the fundamentals behind the zero-sum game. ideological tussle. For all sides of the inequality debate, the overarching goal should be to reduce According to a host of data, poor people around the global poverty. world today are living better than ever before, though much work remains until everyone has enough to live The paper begins with an analysis of Piketty’s book with comfort and dignity. According to data from the and some of his policy proposals, including a global economic historian Angus Maddison, from 1910 to tax on capital, and his argument that capitalism has 2003, the world saw more than a quadrupling of per built-in increasing inequality because rates of return capita income, even as global population increased by on capital tend to outstrip overall economic growth. three and a half times, from 1.8 billion to 6.3 billion. But for all Piketty’s concern about mathematical disparities between rich and poor, he never asks some There is more wealth today, and more wealth per obvious questions: person. In China, the government’s gradual loosening of economic control has allowed 680 million people to • How are the poor actually doing? escape the absolute poverty standard of $1.25 a day— • Is their economic situation improving over time? the largest reduction of poverty in history. • What policies can make the world’s poor Increasing wealth has led to the democratization of better off over time? good health. In the United States during the 20th century, average life expectancy increased by 30 years, Contra Piketty, the mathematical ratio between a while infant mortality dropped by 90 percent. society’s highest and lowest income and wealth strata In addition to better health, poor people today have is less important than the actual living standard for more, better, and cheaper consumer goods than their people living at the economic bottom. In other words, parents or grandparents did. And while the price of relative poverty reduction should take a backseat to formal schooling has gone up significantly, schooling absolute poverty reduction. People, not ratios, are and education are not the same thing, and today the most important. Since the current debate is almost latter is affordable to all. In the developed and parts of exclusively about relative and not absolute living the developing world, nearly everyone has inexpensive Young and Murray: People, Not Ratios 1 CEIAnalysis-RyanIncomeREV16:Layout 1 4/26/2016 8:45 AM Page 2 or even free access to books, documentaries, college- justified, as is his defense of “a just inequality based level lectures, and other intellectual riches to a degree on merit, education, and the social utility of elites.” never before seen in history. However, Piketty’s prescription to address what he In almost every area of life, the poor in the United sees as “a more worrisome inequality, based more States and many places around the world have seen clearly on vast wealth” focuses on tempering large their standard of living improve more during the last fortunes and inherited wealth rather an on tackling ab- century than in the last several millennia combined. solute poverty. There is much left to do, but much has also already been accomplished. A companion paper applies this paper’s “people, not ratios” approach to a concrete policy agenda to help The paper concludes with a limited defense of inequality, the poor. Planks of the agenda include a stable price which Piketty and many like-minded inequality scholars system, affordable energy, easy access to capital, might mostly agree with. Piketty’s aversion to ancien occupational licensing reform, and regulatory reform. régime status societies, in which hereditary kings and nobles have more rights and privileges than others is 2 Young and Murray: People, Not Ratios CEIAnalysis-RyanIncomeREV16:Layout 1 4/26/2016 8:45 AM Page 3 Introduction and, more importantly, for raising the The debate over income inequality poor’s living standards over time. became especially heated following the The poor are better served by other English-language publication of French policies. These include an environ- economist Thomas Piketty’s bestselling ment favorable to innovation, Relative book, Capital in the Twenty-First entrepreneurship, and enterprise; a Century.2 To date, this controversy has stable, predictable, and honest price poverty generated more heat than light. This system; easy access to affordable reduction paper seeks to clarify common points energy and capital; and a more of confusion in the inequality debate transparent and accountable regulatory should take and expose the fundamentals behind system. For this paper, we confine a backseat the ideological tussle. ourselves to properly framing the inequality debate. to absolute Contra Piketty, the mathematical ratio between a society’s highest and lowest A note about terminology: It is poverty income and wealth strata is less common to talk about income as being reduction. important than the actual living distributed. It is not. George Mason standard for people living at the University economist Donald J. economic bottom. In other words, Boudreaux notes, “Income in relative poverty reduction should take a market economies is not a pie that is backseat to absolute poverty reduction. first produced and then distributed.”3 Since the current debate is almost Instead, “the ‘distribution’ of income exclusively about relative and not is merely a summary statistic of one absolute living standards, we conclude among gazillions of unintended that most poverty activists are asking— consequences springing from a hugely and answering—the wrong questions. complex and ongoing decision-making Their misguided focus harms the poor. process involving hundreds of millions of consumers and producers.”4 This All sides have the same goal—ending paper will therefore forgo the poverty. Their differences lie in how conventional phrase “distribution” in to achieve that goal. We argue that favor of accurate terms such as wealth focusing on absolute poverty reduction and income ratios, inequalities, and leads to policies better suited to helping disparities. people escape poverty than the current emphasis on relative poverty. In a companion paper, we argue that two Capital in the Twenty-First popular poverty eradication policies— Century high minimum wages and extensive collective bargaining—are ineffective Thomas Piketty has taught at the tools for reducing income inequality Massachusetts Institute of Technology Young and Murray: People, Not Ratios 3 CEIAnalysis-RyanIncomeREV16:Layout 1 4/26/2016 8:45 AM Page 4 and the Paris School of Economics, equality to 1 at absolute inequality. where he is currently a professor. For Piketty’s research finds that “Belle more than 15 years, Piketty, along with Époque Europe exhibited a Gini numerous coauthors, has collected coefficient of 0.85, not far from 7 Capital’s various massive amounts of data on economic absolute inequality.” inequality around the world. His 2013 The 20th century’s first-half tumult translations book, Capital in the Twenty-First changed that dramatically. Piketty Century, compiles much of that data, sold a combined writes: “[T]he two world wars, and the and concludes that economic inequality public policies that followed from them, 1.5 million copies in Europe and America is rising to played a central role in reducing levels not seen in 100 years. as of January inequalities in the 20th century.”8 2015. This is Capital was well-received in France. Since war and depression destroy The English translation became a wealth, they reduced inequality not by impressive publishing sensation in America, lifting up the poor, but by destroying for a 600-page reaching the number-one spot on ancién regime fortunes. “In this respect, Amazon.com and selling more than it was indeed the two world wars that book consisting 80,000 hardcover copies and 12,000 wiped the slate clean in the 20th century mostly of data e-books in two months. Harvard and created the illusion that capitalism University Press estimated in April 2014 had been overcome.”9 analysis. that Capital’s total sales would quickly Income inequality gradually increased surpass 200,000 copies after just a few in the postwar decades, with the rise more months.5 This turned out to be an sharpening in the 1970s and 1980s, understatement. All told, Capital’s to the point where today it is nearing various translations had sold a combined pre-war levels. America, in particular, 1.5 million copies by January 2015.6 has rapidly growing inequality This is impressive for a 600-page book compared to the United Kingdom consisting mostly of data analysis. In or France. the process, Piketty sparked a national conversation in America about Piketty also argues that growing economic inequality that could lead to inequality contributed to the 2008 a number of public policy changes.