At the beginning of the campaign for the Republican nomination, many thought that it was a libertarian moment in which even Rand Paul might well emerge victorious. But with tonight’s results from Indiana, the Republican Party seems poised to nominate the most illiberal candidate in its history—someone who wants to restrict trade and civil liberties and has no interest in taming the growth of the state.
John Stuart Mill is a pretty complicated figure in the history of liberty. The phenomenon of Donald Trump is a pretty complicated development in American politics currently. Both had demanding fathers, successful professional careers, and an impact on the world around them, in ways intended and unintended. It’s doubtful Mr. Trump seriously thought he’d get this far as a candidate, and I wonder if Mill could have envisioned how much his contributions to the history of ideas would have promoted the growing rift between utilitarianism and liberalism.
This past week, at the invitation of a dear friend (Christopher Wolfe —no, wait: this guy), I visited the University of Dallas. On some accounts it’s the ugliest campus in America. On all accounts it’s among the most amazing: where else would you find students who sit in rapt attention for a six-hour (!) debate on inequality (featuring William Galston, Ross Douthat, and yours truly)?
Pending the webilcation of the entire event, herewith my opening remarks. I’m way out of my league here but what the heck:
Inequality, we have it on presidential authority, is “the defining challenge of our time.” Arguably it’s the (or at least a) defining challenge of all times—a profound question that invites deep reflection. Jerusalem had one answer; Athens had another. Hobbes and Machiavelli had different answers yet. A bit closer to home, this country was famously founded on the “self-evident” truth that all men are created equal.
The raging contemporary debate, for good or ill, has nothing to do with any of that. It is limited to income inequality, and it says that r is greater than g: the returns to capital will exceed the economic growth rate and so the rich get richer and the poor get poorer over time. That’s not quite inevitable, or always true. The post-War era experienced a “great compression.” But income inequality has increased dramatically since the 1980s and especially after the 2008-2009 financial crisis: all the gains from growth have gone to the 10 percent or the one percent or whatever. Surely we should do something about that.
It is rare that an election in San Francisco brings good news to the nation, but last Tuesday voters there defeated a referendum that would have interfered with Airbnb by limiting the number of nights people could rent out rooms in their homes. While this victory is good on policy grounds, it is even better for what it tells us about the capacity of the sharing economy to mobilize small businesses and consumers against onerous regulations.
Small businesses and consumers tend to lose out in politics, because they are diffuse groups where the gain for each individual from engaging in politics to shape regulations is small and the cost of organizing is high. In contrast, large businesses and labor unions are more concentrated interests and as a result have more leverage. In politics concentrated interests tend to win out over diffuse groups.
Such concentrated interests stood to gain substantially from restrictions on Airbnb. Hotels are competitors of Airbnb and so are the labor unions of hotel workers. Generally owners who want to rent out apartments for short stays and their customers would be no match for these interests. But Airbnb lowers the cost of organizing, because it is internet based. This organizational ability levels the playing field. The sharing economy is the porcupine of politics with ample quills in the form of participating consumers and small businesses for defense against government regulation.
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.