David R. Henderson  

Answering Paul Krugman's Challenge on Inequality

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Eric Posner's Tin Ear... There's no point in arguing ov...

And challenging Paul to step up.

Paul Krugman writes:

So, can anyone show me an example of a prominent Republican politician proposing anything that would reduce after-tax-and-transfer inequality? Bank shots don't count -- saying that slashing food stamps will help the poor by making them less dependent, or that cutting capital gains taxes will bring the confidence fairy to everyone's door, don't qualify. On the other hand, I'm not demanding that every part of a politician's program reduce the Gini coefficient, or even that the overall program have that effect. I just want to see one significant piece that goes in that direction.

Maybe there's something out there, but if so, I haven't heard about it.


I can show Paul an example. And, actually, so can Paul Krugman. He has heard about it.

That prominent Republican is Kentucky Senator Rand Paul.

Rand Paul, and I'm sure Paul Krugman knows this, is a prominent opponent of the drug war. The drug war exacerbates income inequality by taking people whose income is typically already low--and making it lower. Eighteen to 72 cents an hour in prison doesn't give you much income. I've written about that here.

Rand Paul has also been an outspoken critic of civil asset forfeiture. Admittedly, I cannot show that civil asset forfeiture increases inequality. My guess is that it does because the people to whom it's done tend to be the most vulnerable who happen to have assets. If so, then reforming civil asset forfeiture is likely to reduce income inequality.

Here's a question for Paul Krugman: Since you care so much about income inequality, why aren't you speaking out against the drug war?


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COMMENTS (21 to date)
BC writes:

I would add to the list (1) reform of occupational licensing, which protects typically higher income incumbents form lower income challengers, and (2) school choice, which helps low income students get the same educational opportunities that high income students get.

A better question is what are the income inequality lowering policies that progressives favor that don't simultaneously grow the size of government or inhibit meritocracy? I mean this as a sincere question, not as a Krugmanesque attack. Since the main difference between progressives and conservatives on economic issues is the size of government, it would be good to find common ground around smaller government policies that yield greater equality.

JJ writes:

The biggest cause of income inequality is Zoning laws but I don't think I've seen a presidential candidate or a prominent columnist like Krugman point that out.

Kevin Erdmann writes:

The issues regarding taxes on corporations and capital are subtle. One thing I've been working on is a series on tax policy in housing. The thing with taxes on capital is that it is generally passed through to laborers and consumers. Is this controversial? This is generally accepted, right?

So, taxes on corporations and capital gains in general probably lead to some marginal movement from investment to consumption, but probably have minor redistributive effects, except where taxes are not leveled evenly - for instance, US firms investing in foreign production to avoid US taxes, or firms investing in tax-favored industries.

Probably the area where the uneven taxation of capital is most severe is housing. Home owners get capital gain exemptions, mortgage interest deductions, and most of all, exemption on their rent payments to themselves. I'm still working through the details, but because we have taxes on corporate income and capital gains, renters have a huge tax burden that homeowners don't have.

I wouldn't be that surprised if eliminating corporate and capital taxes created an immediate net improvement in income distribution, because home owners would stop receiving these huge benefits at the expense of renters.

This has nothing to do with confidence fairies, or whatever. And, this idea isn't going to go anywhere with either Paul Krugman or the Republicans.

Andrew_FL writes:

Didn't Paul Ryan propose some occupational licensing reform? That should reduce inequality.

I might remember wrong, though.

Lupis42 writes:

Krugman has tacitly acknowledged affordable housing as a major driver of inequality, but he seems to think that DeBlasio is the solution, rather than a reduction in zoning restrictions.

Miguel Madeira writes:

Krugman against the drug war (or, at least, against, the war against marijuana):

http://krugman.blogs.nytimes.com/2014/07/30/ending-prohibition-2-0/?_php=true&_type=blogs&_r=0

David R. Henderson writes:

@Miguel Madeira,
Thanks.

Miguel Madeira writes:

"A better question is what are the income inequality lowering policies that progressives favor that don't simultaneously grow the size of government or inhibit meritocracy?"

I will ignore the point of "inhibit meritocracy", because this is very difficult to really define (after all, both defenders and enemies of Affirmative Action think that are defending meritocracy, and both could be right if their priors are right); I will define "size of government" as "power of government" (could also be defined as "size of the government budget", and this difference of terminology could have differences about the effect of a particular policy over the "size of the government").

I think in two progressive policies who, perhaps, could be considered as lowering inequality and reducing the size of the government:

- less restrictions to immigration (it is ambiguous, because more immigration actually increases inequality in US, but decreases global inequality)

- repealing right to work laws (again, ambiguous, because some people see RtW laws as a government interference in the bargaining between employers and unions, but others see it as a compensation for other government interference in the opposite way)

Outlawing lotteries and all types of gambling would reduce inequality. These are direct, unconscionable schemes to reduce the money resources of the many and give them to the few. Worse, the government takes its cut wherever it makes gambling legal, now almost everywhere.

It doesn't matter that the games and lotteries are fair (*1) or voluntary, or that the participants derive some pleasure from doing it. They shouldn't derive that pleasure, because inequality is increased.

This reminds me of the market in goods, which also increases money inequality. Money from the many flows into the accounts of the few. This should be outlawed, regardless of the government getting its cut in taxes. It doesn't matter that the market is fair (*2) or voluntary, or that the participants derive benefits (goods and services) from doing it. They shouldn't derive those benefits because the market increases inequality.

Money should be equally divided and stay that way.

The only true equality derives from social justice. Leaders of the community should direct what is produced and distribute the goods to those who are good and deserving. This eliminates money, and so eliminates incomes and income statistics, producing true money equality.

It would remain to eliminate inequality in skills, athletic ability, intelligence, beauty, children, and power. Let's work on it. Power is last because that is what the equalitarians want more of until the blessed condition of universal social justice comes about.

*1 Fair because the costs, odds, and payoffs are knowable in advance.
*2 Fair because the goods and terms of sale are knowable in advance.

I don't really propose the above, which I believe is illogical and dangerous. I do think that the above is what the equalitarians want. It is straight out Marxism. They have anointed themselves as the vanguard of the proletariat.

Seth writes:

@BC - I think an even better question is what are the income inequality reducing policies that progressives favor and don't actually increase inequality?

khodge writes:

While I am totally in agreement with the point of your post, I don't see the value of accepting Prof Krugman's challenge without at least stating that you are explicitly stipulating his premise that income inequality is a bad thing.

Miguel Madeira writes:

@Knodge,

I think the point of Krugman is that Republicans don't really care about the size of the government and that their talk of "small government" is simply a mask for defending the interests of the rich.

Then, replying to Krugman's challenge does not imply any kind of acceptance (even if only "for the sake of the argument") that inequality is a bad thing, because what Krugman is trying to argue is not that Republicans are neutral about equality/inequality, but that Republicans are actively in favor of inequality.

David R. Henderson writes:

@khodge,
While I am totally in agreement with the point of your post, I don't see the value of accepting Prof Krugman's challenge without at least stating that you are explicitly stipulating his premise that income inequality is a bad thing.
I don’t agree. I think inequality is bad when it results from bad policies and good when it results from good policies. That’s why I gave those examples. Abolishing the drug war, for example, would reduce income inequality, but it should have been abolished anyway. Allowing entrepreneurs to keep the income they’ve earned from their creativity might increase income inequality, but it should be allowed independent of that.

Kevin Erdmann writes:

Seth makes a good point. Another distribution would be eliminating education subsidies. These are subsidies to high income households (households that graduate from college) from low income households (households that don't attend college or, worse, who are induced to college by the subsidy and then drop out). Or, alternatively, we could describe education subsidies as a tax on low IQs. So, as Seth points out, there is a lot of redistribution that could be achieved by undoing progressive policies.

Miguel Madeira writes:

"Another distribution would be eliminating education subsidies. These are subsidies to high income households (households that graduate from college) from low income households (households that don't attend college or, worse, who are induced to college by the subsidy and then drop out)."

Depend if we are talking about the present moment or about the future - in the present moment, the beneficiaries of these subsidies could be from every type of household (even if in the future they will be from households who graduated from college), and the main contributors from the subsidies are the rich households (because the taxes are progressive).

Ali Bertarian writes:

@David R. Henderson:
"Allowing entrepreneurs to keep the income they’ve earned from their creativity might increase income inequality, but it should be allowed independent of that."

That is the only response that should have been given to Krugman. Any other response provides the implicit agreement with the Krugmans of this world that something should be done. You may not imply so, but they infer it, because if no one tells them that trying to "fix" inequality is not the job of government, how else will they know? Force the leftists to argue on our soil, not theirs. Put them on the defensive and ask them why we should run our world based upon envy and covetousness. It is just a lousy strategy for the defense of freedom.

michael writes:

To discus policies, governmental or otherwise without the context of history bbc.co is short sighted. Dr. Krugman points out various causations of inequality and the rich respond? Using political labels and monikers in describing the war between Capital and labor is historically degrading to labor. For all of the current generations of citizens lives the rich have gotten richer while the less than poverty level middle class have sunken further toward that line.

No expense has been spared in reducing the burden on Capital by government than in the USA. We have witnessed the third worlding of America, while the rich become the mega rich. There no longer exists a single income home here that provides a real middle class lifestyle.

Clearly, the demise of this ideal began when Roosevelt died and his New Deal with it after WWII ended and the vengence of Capital began to be felt by labor in the dismantling of labor laws with teeth.

Bringing rhetoric into the conversation about "liberty" in a time of oppression is just sickening.

Miguel Madeira writes:

"That is the only response that should have been given to Krugman."

No, because the point of Krugman is that the "small government" talk of the Republicans is only a disguise to defend inequality; then, if you want to refute this point, makes sense to show cases of Republicans defending policies that could reduce inequality.

Explaining better:

- If Krugman is right and the Republican rethoric is simply a mask to defend inequality, all Republican policies should be in the sense of maintaining or increasing inequality

- If Krugman is wrong and the (or some) Republicans are honest in their defense of "small government", some Republican proposals will increase inequality but others will (even if by statistical chance alone) reduce inequality

In other words, if you are really neutral about inequality - don't considering it as an intrisincal good or bad thing - it is expectable the at least some of your proposals will have the collateral effect of reducing inequality (it will be a big coincidence if you claim that you don't care about equality or inequality but all of your proposals end up increasing inequality).

liberty writes:

School vouchers and the drug war (and prison sentence, etc) policies are good examples, and represent two types of policies that libertarians/Austrians/small gov repubs might support.

The latter is the removal of authoritarian powers that tend to hurt the little guy. Libertarians are good on this, Republicans in general much less so.

The former tend to be compromise positions for economic libertarians (who might prefer fully privatized without-subsidy policy), and favored by left-libertarians. There are others of this sort - where the state-ownership or directed subsidies are replaced by "market solutions" which include income support for all / the poor, in the form of vouchers, negative income tax, etc.

If Republicans had the courage to take on the former, and libertarians had the -sorry to say it - compassion to consider the latter, then Krugman would have no case at all. As it stands, he has a bit of a point here.

Floccina writes:
Probably the area where the uneven taxation of capital is most severe is housing. Home owners get capital gain exemptions, mortgage interest deductions, and most of all, exemption on their rent payments to themselves. I'm still working through the details, but because we have taxes on corporate income and capital gains, renters have a huge tax burden that homeowners don't have.

Yes rent a home and you do not get a tax exemption but the rent the money to buy a home and you do.
My state Florida adds to this by exempting the fist $25K of a home owner's home but not a rental home from property taxes.
Our tax system is designed to look much more progressive than it is and is riddle with vote buying scams.

Chris Solis writes:

My friend is a lawyer at a famous brokerage on Wall St. His income is 7 figures. He says they make money with the click of a mouse. They created programs to know when to buy and when to sell, and they do it using clients money, not their own. They never show a loss, and if so, it's just on paper, make believe.

With a few people in control of so much wealth on Wall St and in the Fed Banks (owned by people), there is no escaping wealth inequality.

To suggest we could live in an America with wealth equality is as realistic as saying unprocessed tar oil is great for spreading on your sheets before you go to bed because it makes you sleep well.

When Paul Krugman starts donating 90% of his earnings will I believe he is remotely interested in wealth equality, because he makes more money than over 250 million Americans.

My grandfather told me long ago, the Democrats are the original rich, and still are the richest Americans, and will never not be, because they have created the systems to keep them rich, and to keep the poor poor.

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