Inequality Explained

By John C. Goodman

Saturday, October 05, 2014

Why does the left care about income inequality? University of Chicago economist, John Cochrane asked that question the other day and could only settle on one answer: they like big government.

But first things first. What do you think would be more helpful to people at the bottom of the income ladder: redistribution of income from the rich or getting a good education and acquiring the habits of self-discipline and self-control?

To help you think through that question, consider this. Over the past 35 year the income earned by the top 1 percent has grown from 10 to 20 percent of household income. If we taxed away all of that increase and divided it up among all the other families it would amount to only $7,105 per household each year. However, the average wage gap between a family of two college graduates and a family of two high school graduates grew to $30,000 over the same period of time.

In other words, not going to college appears to be four times more important than anything that could be gained by taxing the rich for people in the lower half of the income distribution.

I learned these facts from Harvard economist Lawrence Katz, by way of Eduardo Porter, writing in The New York Times. Porter assumes causality is involved. He complains that

    …the United States trails nearly all other industrialized nations when it comes to educational equality.

    Barely 30 percent of American adults have achieved a higher level of education than their parents did. Only Austria, Germany and the Czech Republic do worse. In Finland more than 50 percent of adults are more educated than their parents.

And he goes on to consider all the things we might do to encourage more people to go to college.

But I think this is mistaken. A college education doesn’t cause people to be successful. Rather, the self-discipline and the tenacity required to set goals and achieve them leads young people to get degrees and to be successful.

Just think of how many billionaires don’t have a college degree. There is Bill Gates, Michael Dell, Ted Turner and Mark Zuckerberg – just to name a few. Personal characteristics not sheepskins, produce success in life.

As I have written before, although the left seems obsessed by the existence of inequality, the most interesting analyses of the phenomenon are on the right. For the most part, all the left does is deplore. By contrast, both Charles Murray and Tyler Cowen argue that problematic change is occurring: the middle is disappearing and people are gravitating into the upper and lower strata of society. For Murray the reason is behavioral. For Cowen, it is aggravated by technological change.

Murray says we are experiencing an ever widening cultural divide. As summarized in a previous post:

    Upper-middle class professional types … get married and stay married. They work hard and work long hours.

    … for the blue collar, never-got-beyond-high-school class, however … [a] shocking number aren't even working at all. Many are not getting married in the first place. Of those that get married, the divorce and separation rates are soaring.

    What about happiness and well-being? About 65% of the upper middle class professional types say they are in happy marriages. That number has been dropping steadily for the past 40 years for the working class types; and today it stands at 25%!

And Murray's study leaves out blacks, Hispanics and other minorities — just so you don't think the fundamental problem is racial or ethnic. His study focuses only on the white community.

Tyler Cowen has a completely different approach. Are your skills a complement to the computer or a substitute for it? If the former, he predicts that life for you is likely to be cheery. If the latter, life is likely to be dreary. "This is the wave that will lift you or that will dump you," he says.

As I wrote in a forthcoming review of Average is Over:

    Cowen finds examples everywhere of intelligent machines substituting for human labor. Robot arms are doing the work of doctors in the operating room. Computers spend more time flying our planes than the pilots do. Smart software is being used to spot phony reviews on the Internet, to detect liars at online dating sites and to profile passengers in airports. Computers are creating music, playing chess and drawing pictures of human faces.

So what can be done about any of this? Virtually no one has a compelling solution. And there may be no solution. Back to John Cochrane:

Why is there a big political debate just now? Why is the Administration and its allies in the punditry, such as Paul Krugman and Joe Stiglitz, all a-twitter about “inequality?” Why are otherwise generally sensible institutions like the IMF, the S&P, and even the IPCC jumping on the “inequality” bandwagon?

That answer seems pretty clear. Because they don’t want to talk about Obamacare, Dodd-Frank, bailouts, debt, the stimulus, the rotten cronyism of energy policy, denial of education to poor and minorities, the abject failure of their policies to help poor and middle class people, and especially sclerotic growth.