Economic inequality and the politics of envy

By Misha van Braningen

In my final year of university, both Margaret Thatcher and Hugo Chavez passed away within a relative short span of one another. It was a period I remember well precisely because it was so revealing of the mind-sets and priorities of some of my classmates, who had revelled in the passing of the one and mourned the other. Social science institutes aren’t exactly known to be bastions of free-markets, capitalism, or conservative thought, and so I’m sure you can guess the reception of the respective leaders.

Margaret Thatcher, though noted to be ‘great’, was described as monster who had imposed her extremist ideology on the United Kingdom. She had trampled the poor, broken the unions, sold off important state industries, and, perhaps worst of all, helped the rich become even wealthier. Vulgar songs and passionate leftist invectives were widely shared on social media.

Hugo Chavez, on the other hand, was described as extremely charismatic, one who had valiantly defied the West, called Bush a donkey, and had “helped the poor” by, purportedly, directing money to lift people out of poverty and away from the vile clutches of the rich. For a ‘balanced’ account, I was referred to a documentary by Oliver Stone, a close friend of the dictator, whose work is well known for its half-truths and outright falsehoods. In truth, Chavez had overturned the constitution, violently suppressed the press and political opposition, and had left his country, wracked by violent crime, in a state of economic ruin compounded by its oil dependency. Despite these achievements, Chavez was hailed, because he had made society more ‘equal’.

Equality has always been an obsession of the left. Because it is the assumed natural order of the world, deviances are attributed to ‘injustices’ to be rectified with state intervention and usually more social programmes. If someone doesn’t get their ‘fair share’ of income or wealth, it is a distributive issue to be mended with higher taxes, wage caps and a minimum wage increases.

In recent years the political crusade against economic inequality has reached fever pitch. While political leaders, like Barack Obama, called income inequality the “defining challenge of our time”, grassroots movements like ‘Occupy Wall Street’ (disproportionately made up of highly educated rich whites, mind you), captivated journalists, intellectuals, and college students, bridling at the ‘fixed’ system. It is interesting to note here that the inequality Obama spent many lofty speeches railing against, actually increased under his tenure. At the same time, polls suggested that Americans were overwhelming concerned with the economy and unemployment; economic inequality seemed more of a concern to the elite.

Much of the inequality debate’s intellectual sustenance stems from the work of Emmanuel Saez and Thomas Piketty – both thought leaders on the subject, whose historical data has significantly contributed to our knowledge of income trends over time. Thomas Piketty’s bestseller Capital in the Twenty-First Century has taken the world by storm, and has garnered critical acclaim from prominent economists. For the left, it is celebrated as the coup de grâce to intransigent conservatives.

In a nutshell, Piketty argues that in capitalist countries, the rate of return on capital tends to exceed the rate of economic growth, leading to an ever increasing concentration of wealth in the hands of the few. This rising wealth inequality is said to become so severe that it threatens to destabilise democracies. To prevent catastrophe, Piketty recommends a global wealth tax on the super rich, to prevent the flight of capital, and a tax rate as high as 80% for income starting at $500,000. These measures taken to reduce wealth solely aim to reduce inequality, rather than raise revenue. Piketty ignores the economic disincentives or tax evasion that would result thereof, and admits that the chances of implementation are slim. Instead he believes, or perhaps hopes, that a crisis will spur execution of the policies he deems necessary.

Setting aside issues relating to Piketty’s advocacy, the data he uses exaggerates the concentration of wealth. It only looks at pre-tax market income, instead of after-tax, which reduces inequality with a progressive tax system. It also excludes transfer income (welfare or social security benefits), which falsely casts the elderly as poor, and realised capital returns on the first $500,000 from a property sales (which is tax exempt). By only looking at individual tax returns, it ignores household wealth (a teenager earning from a summer job would thereby be registered as destitute, for example), and complicates analysis of the income of the bottom quintile. When economists Burkhauser and Larrimore accounted for taxes, capital transfers and household size, the findings were dramatically different (the study can be found here). Finally and most importantly, the 700-page tome fails to offer a compelling argument why inequality in itself is problematic.

The conviction that economic inequality is problematic is so deep-seated that to call it in to question generally just provokes moral outrage, instead of a succinct answer. Those that argue that inequality by itself matters are essentially inferring that a society that has its income doubled would be worse off, as it would be more unequal. Through their policies, Piketty and co. take the converse: asserting that society would be healthier if the poor are poorer, provided the rich relatively lose out more.

Others will talk of income and wealth distribution as though there were designated distributor of wealth and income who ought to be following The Rulebook of Fair Allocation. Most commonly it is asserted that the poor are worse off because the sheer wealth of the rich. This line of thinking is derived from the zero-sum ‘fixed pie’ fallacy. Instead society has become wealthier, not poorer, as a result of the Waltons’ Walmart or Bill Gates’ Microsoft. Finally, it is held that an unequal society threatens democracy because it becomes a plutocracy. While there is some merit to this argument, it ought to lead to calls for smaller government with less areas for the rich to influence.

Economic inequality does not matter; economic mobility, declining or stagnant wages, unemployment and poverty do. It is the market system that is most effective at creating jobs and wealth, not the politics of envy.