Scott Sumner  

Is the "inequality" issue a cover for something else?

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Consider the following thought experiment. The Democrats take control of Congress and the Presidency. With more than 60 seats in the Senate, they can do as they like. Do they go after the root cause of inequality in income?

Let's make it more specific. Lots of the growing inequality is due to the winner-take-all nature of the modern economy, where marginal costs are extremely low and markets are protected by intellectual property laws. Huge profits go to the knowledge-based industries, and the financiers who finance them. We used to need armies of workers to produce GM cars, but we obviously don't need many workers to produce the "products" of Google, Facebook, etc.

You can find lots of economists on both the left and the right who favor weakening the IP laws. They argue that the protections have gone far beyond what could be justified by the need to encourage innovation. Companies like Disney rake in billions in rents from trivial creative innovations like Mickey Mouse, invented many decades in the past. So it would seem like a no brainer that a future Democratic administration would want to weaken these laws. And yet I don't think any reasonable person would expect them to do so. Why not?

One answer is that a weaker set of IP laws would benefit relatively poor Asian consumers in places like China against rich US companies. And while Democrats may care a little bit about inequality, they care far more about national self-interest. Because the US dominates the global market for high tech/biotech/movies and lots of other IT intensive industries, cracking down in IP abuses would hurt the US.

But why should Democratic politicians care about the welfare of big US corporations? Because they pay lots of taxes. And big government is an issue that Democrats care about even more than inequality.

Even formerly moderate Democrats like Larry Summers are now calling for much higher levels of government spending. But that takes money, and if we reduce inequality in such a way that US businesses make less money and Chinese consumers pay lower prices, then there will be fewer geese to lay the golden eggs needed to finance big government.

And it's not just about the potential loss of wealth to foreigners. Even within the US, inequality helps foster big government. More and more Americans make too little to pay income taxes, and an increasing proportion of total tax revenue is paid by the wealthy. This is also true in big spending states like California and New York, where tax revenues are highly dependent on fat profits in Silicon Valley and Wall Street. It's easier to raise revenue when there are fewer taxpayers to squawk.

I suppose you could argue that just as much revenue could be raised from a country with the same GDP, but more equal income. But in practice this won't work in the US. When income was much more equal in the 1970s, tax revolts broke out in states like California and Massachusetts. Recently the Democrats have made a big deal about helping the middle class. You obviously cannot help the middle class by instituting the sort of 20% VAT that you see in Europe. If you combine their preference for a progressive income tax, with the need to raise huge sums of money for their wish list of big government programs, then perhaps inequality isn't really the problem the Democrats claim it is, but rather the hidden key to achieving their real agenda, big government.

A few years back London elected a socialist mayor, who governed as a moderate. The reason is obvious; the success of London depends on the success of a set of highly inegalitarian knowledge-based industries. The same is true of places like New York, Chicago, Boston and California. That's why any left-winger elected in those places will eventually start to look more like a neoliberal.

Just to be clear, I'm not saying the Democrats don't care at all about inequality. I'm saying there are other things they care about much more than inequality, including the national interest and big government. When the goals conflict, look for the inequality agenda to be tossed aside.


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COMMENTS (13 to date)
Michael Byrnes writes:

Unfortunately, both sides know where their bread is buttered.

Edogg writes:

Doesn't "big government" mean Medicaid, food stamps, and tax credits for people with lower income (not the largest portions of government spending, but major things that the Democrats favor relative to Republicans)? And isn't that stuff aimed at inequality?

Anyway, what about direct lobbying and campaign contributions by the IP-reliant companies? And most Democrats just not being aware enough of the impact of IP?

GU writes:

I don't disagree with your above analysis. I would also add that preaching personal responsibility to the poor (live frugally, don't have kids out of wedlock, save a portion of your earnings, etc.) is also verboten for the Dems. We all know this stuff works (just ask all the upper middle-class Democrats). But it is a way of helping the poor without using the government, hence it is ignored.

One of the biggest coups for the American Left over the past 30 years is selling the idea that most people are helpless. Not saving for retirement, as if it was a surprise event, is normal both because of SS but also because it's not socially shameful to be irresponsible when it comes to retirement saving.

Mark V Anderson writes:

I would agree that our IP laws give far too much benefit to the IP owner, especially the absurdly long copyright rules. But I am skeptical that this has a significant effect on inequality. I think GU's post indicates items with a much larger effect. But I don't know of any objective evidence either way.

alex writes:

I think you've got the direction of causation wrong. I can't imagine big government qua big government as anyone's goal. I can imagine it as a means to reduce inequality, though. Or more likely, as a means to keep their pockets full

Mark writes:

Actually "big government qua big government" has been the express Progressive goal for over a century. The desired policies of that big government have changed over time and some of what many first generation Progressives favored such as assimilation for immigrants and eugenics along with a belief in American exceptionalism would horrify today's Progressives. However, the goal for both is the same; a country and economy under the direction of the best and brightest bureaucrats who can decide on the best policy "for any purposes necessary" (to paraphrase Malcolm X). As FDR put it, we are in the day of "enlightened administration" and Progressives have steadily worked to expand the scope of that administration. Scott has it precisely correct.

Scott Sumner writes:

Edogg, I doubt that very much government spending is aimed at the poor, it's mostly for special interest groups. The military industrial complex, the medical industrial complex, the education industrial complex, big agriculture, etc.

GU, I agree with your criticism of the left. Rather than preaching to the poor, I'd rather change the incentives they face.

GU writes:

Scott,

I agree, I'm not the preaching type (though I'll give advice if asked). And I'm not sure how much preaching actually changes behavior. Incentives really do matter.

Jim Glass writes:

Yes, but this same dynamic is true of so many issues, for both parties.

E.g., Peter Orszag notably complained after leaving the Obama Administration's employ that with their filibuster-proof majority the Democrats could have resolved the $20+ trillion present value funding shortfall of Social Security any way they wanted, knowing that in the future they (very most probably) would never have that chance again. Yet no Democrat anywhere showed any interest whatsoever in doing so, preferring to keep a contentious issue (admitting to their own left side that there was a problem to fix) off the table, while preserving an issue with which to successfully bash Republicans in the future in the inevitable big SS-funding fights to come. Don't the Democrats care about Social Security? Sure they do, at a secondary level -- but they care about their political convenience and well-being more.

You can multiply this by 1,000 issues and apply it to both parties. One remembers how back in 2001 the Republicans repealed the estate tax starting *ten years later*, thus taking great political credit from their base then for something they hadn't done which thus had no cost to them (fiscal or otherwise). They could have *actually repealed* the estate tax then (don't believe the nonsense stories they spun about how technical budget rules kept them from doing it for a decade) but why inconvenience themselves when they could get such political reward from their base without doing so? (Actually both parties loved this set-up as the great/awful 'pending repeal of the estate tax' became a big partisan fund-raising issue for both sides for a decade, even as the tax just sat there.)

I had lunch this week with a former law school buddy who is now a big power-player in Albany. He tells some great stories about how Republicans keep control of the Senate in a state that Democratic voters dominate. The Democratic political leadership (notably and visibly from Cuomo down) works to keep the Repubs in power so the Dem leaders can pose as supporting the popular proposals of their left side and blame the Repubs for blocking them, instead of taking full control of the legislature and responsibility for what their own party proposes. You can imagine the quid-pro-quos traded between the party leaders behind the scenes to keep this state of affairs in place. But don't the NY Democrats care about their popular issues that they pose as supporting? Sure they do, as a secondary matter -- political self-interest comes first.

This is politics, time immemorial, it affects war and peace and the fate of nations. William Jennings Bryan famously manipulated his Democratic party into giving enough support to the Philippines Annexation treaty for it to pass by one vote -- so he could run for President as an Anti-Imperialist damning the annexation, which he thought would be a big winning issue for him. Wasn't he genuinely anti-Imperialist? Sure he was, but you have to win the election first...

None of this has anything to do with love of big govt or of big corporations per se, it is the dynamic of politics. Libertarians are every bit as guilty of this as everyone else (when they get a chance to be), think about it for a moment.

As to "inequality" as an issue, first, it is far more internal Democratic politics of this sort than substance. The Democrats have been running on it for 100 years and it's never won them a dog-catcher office in a general election -- but it is a *great* internal base motivator and fund-raising issue so they keep using it.

Count Google searches on "Piketty" and "income inequality" and such, you'll see they are trivially low across 48 states but with massive spikes in Washington DC and New York City, and a good-sized one in Cambridge/Boston, and lesser so through that corridor -- the centers of left-side wealthy true believers. (And even they appeared only with all the election marketing.) When your message targets true believers you are fund-raising and base-motivating, not going after the median voter.

Secondly, I'm old enough to have watched it evolve and see the Dems change their spin on it. A good 20 years ago the Dems (Krugman in particular in my clip file) were having the same rants about the evils of income inequality as now -- only then it was all about between *quintiles*. Well, since then the top quintile has shot up higher than ever, but evil quintile inquality has disappeared from Democratic rhetoric. How come?

Probably because 20 years of research has shown the rise of top-quintile income is due to higher education, longer work hours, two-earner intact families, etc. And these are the very people in the wealthy New York thru Cambridge/Boston base that the Dems are playing to with the issue. It does not play well to look at your audience and say *YOU are the incarnation of this evil income inequality, *you* are causing it..."

So it has to become someone else. Not you, *them*, the top 1%! The evil, richest, top-income 1% are destroying our society, *them*, Lebron James, Jennifer Anniston, Katy Couric, Warren Buffett, er, the Koch brothers, anonymous 'rich bankers', 'CEOs'...

It's politics, and political group affiliation and political expedience for the leaderships always comes first. Actual policy on the merits is always a distant secondary consideration -- as to income inequality, Social Security, annexing foreign lands, war and peace, taxes, IP, you name it.

Michael Byrnes writes:

@Jim Glass,

Great comment! It rings all too true...

You comment on the top quintile vs the top 1% reminds me of the most interesting take on inequality I have seen recently (by Reihan Salaam, in Slate):

http://www.slate.com/articles/news_and_politics/politics/2015/01/the_upper_middle_class_is_ruining_all_that_is_great_about_america.html

Scott Sumner writes:

GU, That's good.

Jim, Lots of good points---but your making me even more cynical!

robert writes:

This issue reminds me of a criticism of the criticism of the Ferguson policy department. Basically, one of the problems in Missouri as well as in New York is that the government uses the police departments to generate revenue. Even though it is illegal for the departments to issue quotas, there is implicit pressure on the departments to issue tickets and arrests. This primary goal, which should be a secondary goal at best, creates tension in the community and exacerbates problems.

It does not seem that this is an issue that will be addresses, and it does not seem like an issue the government would like to discuss.

Bruce Kettelle writes:

Jim Glass writes: "The Democratic political leadership (notably and visibly from Cuomo down) works to keep the Repubs in power so the Dem leaders can pose as supporting the popular proposals of their left side and blame the Repubs for blocking them, instead of taking full control of the legislature and responsibility for what their own party proposes."
With the greatest respect, this is not believable. Nor is it visible in the antics/efforts of New York D candidates in election periods. They are great actors if they are trying NOT to win.
But more important, wealth must be the focus when economic inequality is discussed. Income is a poor subject in this context since decision power and taxation have redefined 'income' segments in so many ways...and reduced the tax rate for the redefined segments in every case.
If wealth is defined as retained income utilized to produce income, wealth accumulation is a difficult task for most of the 90 per cent. For the bottom 50 percent it is impossible.
And yet, it is wealth that provides the cushion during down periods...and especially in recessionary periods when income-producing wealth is sufficient to protect the living standard of the top 10 percent.
Meanwhile, when those among the rest lose their jobs, they are forced to convert savings and home equity to income...the exact opposite action available to the top 10 percent.

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