More questions for redistributionists
President Obama considers income inequality a “defining challenge of our time.” Continuing from my previous column ( “Questions for redistribution's proponents” ), I have some additional questions for Mr. Obama and others who want government to redistribute more income from “the rich” to “the poor.”
• When you describe growing income inequality in the United States, you typically look only at the incomes of the rich before they pay taxes and at the incomes of the poor before they receive noncash transfers from government such as food stamps, Medicare and Medicaid. You also ignore noncash transfers that the poor receive from private charities. Why? If you're trying to determine whether or not more income redistribution is warranted, doesn't it make more sense to look at income differences after the rich have paid their taxes and after the poor have received all of their benefits from government and private sources?
• You often speak of income inequality as being evidence of economic failure. Can you identify an economic theory that predicts that every well-functioning market economy generates incomes that are equal (or close to equal)? I'm an economist and have never encountered such a theory, so I'd be delighted if you expand my intellectual horizons.
• You also often warn that large differences in incomes make society dangerously unstable. Can you point to historical evidence in support of this claim? But remember: To be valid, the evidence must be from market economies in which the great majority of people — rich and not rich — earn their incomes through voluntary market activities and where the size of the economic pie isn't fixed.
Evidence of social unrest in pre-industrial and nonmarket societies doesn't count. Economic arrangements in such societies are fundamentally different than in our own. And unlike in our market economy, the amount of wealth in nonmarket economies is largely fixed. Therefore, in nonmarket economies, more wealth for some people does indeed mean less wealth for other people. Our economy differs: Because the amount of wealth in market economies isn't fixed, people can get rich by creating more wealth rather than by seizing the wealth of others. In market economies, more wealth for rich people does not necessarily mean less wealth for other people.
• Have you considered that greater income inequality might result from demographic changes that reflect neither weakness or injustice in the economy, nor any increasing differences in economic well-being? For example, do you account for the fact that retirees rely heavily on “consuming” their capital — by, for instance, selling their expensive large homes, moving into less expensive smaller homes and using the differences in sales proceeds to fund some of their living expenses? People's annual incomes are typically lower when they are retired than when they were working, but their wealth — their ability to maintain their standard of living — isn't necessarily lower.
Americans are today on average older — seven years older than we were in 1980. And a larger portion of Americans being retired means that the fall in the annual incomes of the increasing numbers of Americans who retire quite likely causes a rise in inequality of incomes without causing a rise in inequality of spending power.
• Do you not share Thomas Sowell's concern that efforts to “de-concentrate” incomes among the people require concentrating power among the politicians? Asked differently, if you worry that abuses of power are encouraged by concentrations of income, shouldn't you worry even more that abuses of power are encouraged by concentrations of power?
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.