My buddy Steve Teles—in my estimation, one of the country’s most creative thinkers—just sent me his latest on “The Scourge of Upward Redistribution.” Here’s the lead paragraph: America today faces two great challenges. First, the explosion in inequality threatens the public's belief in the justice of our economic system. Second, the slowdown in the formation of new businesses, a key metric of economic dynamism, endangers economic growth and employment. The solutions to these problems are usually in tension with one another — greater inequality is often the price of economic growth — and our politics has been divided according to this tension, with one side playing…
2016 is shaping up as an election in which one of our parties will emphasize the need for growth and the other will call for greater economic equality. These concepts are often seen in substantial tension with one another. In my view, however, if the government encourages innovation we can have both growth and greater equality in the relatively short run.
As I wrote in yesterday’s Washington Times for the celebration of Liberty Month:
In this age of accelerating technology, there is no more important policy than to encourage innovation. Innovation is the primary source of economic growth. New innovative businesses, like Google and Uber, transform our lives for the better. And innovation builds on innovation, compounding growth from generation to generation. As the Nobel Prize winning economist Bob Lucas once said: “Once one thinks about exponential growth, it is hard to think about anything else.”
Innovation in the modern era also tends to make us more equal. Innovation creates a stream of new ideas that are rapidly enjoyed by the great mass of people. Material goods are scarce, because individuals can by and large not enjoy the same material simultaneously. But ideas can be enjoyed by all. To be sure, some innovations are patented, but these patents expire. And, as better innovations come along, the old patents rapidly become less valuable. That is one reason that smart phones have so rapidly become available to people of modest means. Thus, the greater the supply of innovations, the great the common pool from which almost everyone can benefit quite rapidly.
We thus need to ask all Presidential candidates what they will do to promote innovation.
The left and much of the news media are trying to make inequality the central political issue for our time. Their success would create a bigger state with more discretionary powers and, ultimately, less wealth for those at the bottom, because a focus on inequality per se is not directed to improving the living standards of the worse off. As Margaret Thatcher once replied to an MP who complained that her policies were increasing inequality: “So long as the gap is smaller, [those focusing on inequality] would rather have the poor poorer. You do not create wealth and opportunity that way. You do not create a property-owning democracy that way.”
The dangers of a focus on inequality become salient in a recent column by Eduardo Porter, in which he argues that concern about inequality should lead us to revise a variety of regulations and structures in democratic society. Many of his proposals, like empowering unions, would have adverse effects on the poor, as evidenced by the bad effects of public sector unions on education, but the most absurd example is his call for change in antitrust to account not only for efficiency but also inequality.
In the last half century, antitrust law has been improved by a single-minded focus – on the part of enforcers and judges – on whether government intervention will improve consumer welfare.
As a law professor, I earn a lot less than my law school classmates who graduated with similar records, and a small fraction of the income earned by those at the very top. But I am compensated in other ways. In the loveliest line of the wonderful song “If I Were a Rich Man,” from Fiddler on the Roof, Tevye says that the “sweetest thing of all” from becoming wealthy would be the leisure gained to “discuss the Holy Books with the learned men seven hours a day.” The secular equivalent is what I get paid to do.
My situation illustrates what economists call compensating differentials. I get less income from my job because I get more enjoyment than I would in a job requiring similar skills and education. Thus, as Tyler Cowen and Alex Tabarrock note in a recent video, the market would pay a sewer inspector a lot more than a lifeguard even if it had to attract equally skilled job takers. Similarly, if a job creates risks of death, injury or ill health, it will have to pay more to workers to compensate.
This simple observation suggests that focusing only on earned income from employment can provide a misleading picture of any growth in inequality.
It is hard to believe that a book about the Gross Domestic Product could be interesting, important and occasionally amusing, but Diane Coyle has succeeded in all of this with GDP: A Brief but Affectionate History. It has two very salient takeaways for politics, one practical and one philosophical. First, GDP has become less and less good at capturing positive changes in human welfare. As a result, the lower growth in GDP in the last few decades is less troubling than it is often made out to be. Second, GDP is a measurement of the government that has inherent biases that one might expect from a metric devised by the government. Classical liberals should thus be careful to separate their respect for market freedom from any worship at the altar of GDP.
Coyle shows that GDP was designed for a time when most of the economy consisted of the production of materials, not intellectual property or services. Indeed, because it was formulated at the time that government came to seen as responsible for the economy, its underlying image is that of a machine. Put so much capital and labor into the economy and get out such much output of goods.
But of course today much of the economy does not lie in the production of material goods.
If there is one thing that religious leaders around the world seem to agree on today, it is the evils of income inequality stemming from a globalized economy.
Pope Francis said last year in his apostolic exhortation Evangelii Gaudium that “we … have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.”
In a 2008 speech at George Mason University, the Dalai Lama asserted: “Economic inequality, especially that between developed and developing nations, remains the greatest source of suffering on this planet.”
Ecumenical Patriarch Bartholomew wrote in his 2012 Christmas encyclical that “the gloomy consequences of the overconcentration of wealth in the hands of the few and the financial desolation of the vast human masses are ignored. This disproportion, which is described worldwide as a financial crisis, is essentially the product of a moral crisis.”
This week brought more news of a globalized world—a simultaneous strike in Paris, London and Berlin against Uber—the service that allows people to summon cars through phone apps. Uber is itself a worldwide phenomenon. It can succeed anywhere there are a substantial number of smartphones, and that is rapidly becoming everywhere. In fact, the strikes backfired by giving publicity to Uber and encouraging more people to sign up.
While taxi drivers will continue to try to strangle the service, they will lose—quickly in some jurisdictions and slowly in others, like Virginia where regulators last week banned Uber. The advantages of Uber are ultimately too great to be denied and Uber-friendly jurisdictions will serve as demonstration projects. On Thursday The New York Times described Uber’s many benefits for consumers and for society. Most obviously, the service will bring more competition to an often highly regulated and sluggish market—the taxi industry. In particular, it will help poorer and middle-class consumers who are unable to find cabs at crucial times and are not regular users of higher-priced car services. It will shrink the carbon footprint, as fewer people will need to own cars and spend time looking for parking spaces.
Uber could also help decrease inequality of consumption, as I have previously argued that information technology generally does. Only the .01 percent can afford chauffeurs at their beck and call. But how different is the experience of having a car ready to pick you up at a moment’s notice? More and more people can ride like the millionaires of old.
In my last post, I discussed how the nature of innovation in our time raises questions for Thomas Piketty’s forecast of increasing inequality in his new book, Capital in the Twenty-First Century. In this post, I argue that his policy proposals also leave out consideration of innovation and thus risk great social harm.
Piketty does not recognize how crucial extraordinary individuals are to innovation and distribution. As Robert Solow notes in his review. Piketty seems skeptical that today’s highly paid “supermanagers” add much value for their very high salaries. Solow endorses this skepticism, agreeing that agency costs are responsible for these high salaries. On this theory, boards of public companies are cozy with these managers who often appoint them to their positions and the result is sky high compensation. But if agency costs were the cause, we should observe closely held companies paying supermanagers less, but as Greg Mankiw points out, they do not.
A much better explanation is that innovations in the structure of corporations– faster telecommunications and the availability of data that represent the details of companies’ operations—have enabled managers at the very top to make a huge difference throughout their organization. A business today is the shadow of one or a few individuals who can take the key decisions.
Thomas Piketty’s book Capital in the Twenty-First Century has gotten a better reception from left-liberals than any book since Limits to Growth. The books have important similarities. Both posit societies in the grip of a doomsday pincer. Limits foresaw a future of poverty and hunger, as inevitably declining resources outrun inevitably increasing population. Piketty sees a future of increasing inequality, as capitalists enjoy an ever-greater share of global income than workers. Both books are also used to justify government intervention. Limits to Growth was the basis of attempts to slow down population growth and require conservation of resources. Capital in the Twenty-First Century expressly calls for a global wealth tax.
Most importantly, both books share a similar, fundamental flaw, although Piketty’s book is far more interesting and sophisticated. They do not take sufficient account of innovation– of the manner in which human ingenuity again and again benefits us all. The mistake in Limits of Growth has already become clear, as Matt Ridley reminded us in the Wall Street Journal last week. We are not running out of energy, for instance. We have more usable oil than ever as we have learned to exploit shale. Innovators are creating wide variety of energy sources that were either not well understood or even imagined in 1972, when Limits to Growth was first published.
Piketty’s book has the same flaw. In his lucid and favorable review, Robert Solow shows that Piketty’s claim of increasing inequality is based partly on his belief that the rate of return on capital will stay constant, even as economic growth slows. In Piketty’s view, a sluggish economy means that people who own capital will gain a greater share of income than people who earn wages. This projection depends on a technological slowdown . But with the relentless increase in computational power, there are more reasons to believe in technological acceleration than stasis.
Economic inequality in the country is rapidly increasing. But our libertarians are right that inequality, by itself, hardly undermines the case for liberty.
A free country is a place where everyone is getting better off, although some, because of their hard work and natural gifts, more than others. Libertarians always point to the progress of technology as benefitting us all. Everyone is living longer, or at least everyone responsible enough to attend to what we can all know about avoiding the risk factors that imperil our health. In our march toward indefinite longevity and even the Singularity—the moment in time when machines are smarter than humans— it might be reasonable to hope that few will be left behind. And almost everyone benefits from the constant improvement and plummeting cost of the “screen”—from the smart phone to the tablet and laptop to the huge flat-screened TV.