The inequality discussion became all the rage with the release of Thomas Piketty’s 2015 book, Capital in the Twenty-First Century. America’s admitted socialists, like Bernie Sanders, swooned while the Democratic Party’s closet socialists chimed in with: “I told you so. I told you capitalism doesn’t work.” Piketty himself applauded Bernie’s call for a progressive estate tax and for special new taxes on the wealthy. Piketty’s book became a bestseller and brought the debate over inequality to the evening dinner table.
As David Harsanyi writes at the Federalist: “Piketty’s book . . . [has] been deemed an ‘important book’ by a bunch of smart people. Why not? It validates many of the preconceived notions progressives have about capitalism: Inequality is growing. Mobility is shrinking. Meritocracy is dead. We all live in a sprawling zero-sum fallacy. And so on.”
The central premise of Piketty’s theory is that when the returns on capital grow faster than the returns for workers, income inequality between those who have capital and those who labor widens and does not self-correct.1
In reviewing Thomas Piketty’s propositions on correcting income inequality, Daniel Shuchman writes at the Wall Street Journal: “Piketty likes capitalism because it efficiently allocates resources. But he does not like how it allocates income.”2
Piketty asserts that “when the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”3
How would Piketty fix these “unsustainable inequalities”? With massive income taxes on the wealthy. Piketty proposes an 80 percent bracket for incomes over $500,000 and a 60 percent rate for incomes over $200,000. Shuchman explains that Piketty is less concerned with raising tax revenue and more concerned with “putting an end to such incomes.”4
Shuchman explains that Piketty believes that there is “a moral illegitimacy to virtually any accumulation of wealth, and it is a matter of justice that such inequality be eradicated in our economy. The way to do this is to eliminate high incomes and to reduce existing wealth through taxation.”5
Adamsmith.org’s Sam Bowman does a good job answering some of the standard accusations from the left on inequality. To those who, like Piketty, claim inequality slows growth, Bowman points out that studies that conclude that inequality slows growth are flawed and “end up comparing Sweden with Mexico, leaving out a lot of other factors that might be the cause of both Sweden’s lower inequality and its lower crime and poverty rates, and assuming what they’re trying to prove. But even though countries with lower inequality might have higher growth rates, that doesn’t mean that cutting inequality will boost growth rates.”
For example, while the Swedish population has longer average life spans, lower levels of violence, and higher overall education than the U.S. population, Swedish-Americans also have the same statistics while living in the United States.
Bowman cites a paper by Kristin Forbes that found the opposite of what liberals argue. She found that “an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth.” So much for Piketty’s argument that too much income inequality impedes economic growth.
Bowman concludes: “It’s not inequality that matters, it’s poverty and overall living standards.” In other words, would you rather make $10,000 where the rich earn ten times that or make $30,000 where the rich earn 20 times that? What really matters is your standard of living, not your neighbors’. In reality, the poor are getting richer all the time, and the rich are also.6
HumanProgress.org does a good job analyzing the amazing leaps of prosperity over the past two hundred years. According to their website, in 1820 over 90 percent of the world lived in extreme poverty, measured as less than two dollars a day. In 1990, when I got married, the percentage of the world’s population living in extreme poverty represented around 30 percent (in constant dollars). Fast-forward to today, where less than 10 percent of the world lives in extreme poverty.7
Dwelling on income inequality ignores the dramatic decrease in poverty that has occurred as capitalism and the division of labor have spread worldwide throughout the past two centuries.8
Perhaps part of the problem in examining unequal incomes is that we fail to acknowledge that it may be more important to analyze what you can buy with your income, rather than the actual dollar amount in your paycheck. Tim Worstall at Forbes writes that while we do “have widening inequality of cash or money incomes, . . . we’re also seeing something of a shrinkage in inequality in terms of consumption.”9
Before the industrial revolution, the poor lived a life of bare subsistence, lucky to have enough to eat. They lacked clean water and basic sanitation, resulting in epidemics of contagion, while the rich lived a pampered existence far removed from the vicissitudes of the street. Today, rich and poor alike enjoy the same basic necessities of food, clothing, housing, technology, antibiotics, etc.
As Worstall puts it: “Today’s inequality might [peak with] the plutocrat with many mansions, jets and cars, but poverty on the bottom these days, absent mental or addiction problems, is about not having good food rather than having none, not having good housing rather than having none. We’re all on the same spectrum now, not the poor falling off the bottom of the subsistence level altogether.”10
Dalibor Rohac, at the Washington Times, explains how “despite greater numerical income inequality, cheaper consumable goods have really equalized the comforts available to people of all income levels.” Because of trade and cheap consumer imports available at discount stores like Walmart, “low-income groups [have] access to goods that previously were enjoyed only by the rich,” from flat-screen TVs to video games to cell phones and computers.
As I have noted on national television, much to my wife’s chagrin, I buy shirts at Target for $7. Rohac writes that “[i]n terms of the actual material conditions of living, developed countries appear to be more equal than ever before.” You can see this firsthand. Just go to Target or TJMaxx and you, too, can experience the equalizing effects of worldwide free trade and the division of labor.11
Deirdre McCloskey explains the equalizing effects of the worldwide economy. Despite income inequality, the poor have made incredible gains.
“In relative terms, the poorest people have been the biggest beneficiaries. The rich became richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.”
McCloskey points out that at no other time in history have so few lived in poverty: “not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.”12