Why the Mechanisms of Inequality Matter

Atlantic blogger Matthew Yglesias argues that it doesn’t matter why income inequality is increasing. According to Matt, as long as higher top tax rates and more downward redistribution won’t much hurt economic performance, then we ought to just go ahead and raise taxes and increase transfers, never mind the mechanisms of rising inequality.

Oftentimes, though, liberals act as if the thing that needs to be done is to prove somehow that inequality has exploded because people are in some sense “cheating” – so you get these long stories about corporate governance and corrupt compensation committees, etc. The problem here, though, is that even if this is true, it could still also be true that the cure – policy interventions into the operation of the market – would be worse than the disease. And, conversely, if you could prove that the rise in inequality was all above board – really was driven entirely by globalization and technological change – nothing about that causal analysis would debunk the idea that we ought to make our tax system more progressive.

The relevant debate isn’t about how we got here, it’s about what would happen if we tried to change things. Some people, of course, think changing things would be immoral. Indeed, there are some people I know who adhere to the bizarre view that one source of injustice in the contemporary United States is that our richest citizens aren’t rich enough. But beyond those people, you have a lot of people who take the view that raising taxes would have dire economic consequences, whereas lowering them would have large benefits. That’s the only debate that really matters in this regard. If the costs to the non-rich of higher taxes on the rich would be small (as I believe), then higher taxes on the rich to provide more benefits to the non-rich makes sense irrespective of why inequality has grown so much whereas if the costs would be high then it doesn’t make sense – again, completely apart from the causal issue.

I think Matt and I agree that the pattern of national incomes is largely morally irrelevant, but for quite different reasons.

From the classical liberal perspective, if today’s pattern is less equal than yesterday’s, but both patterns emerged from billions of individual transactions, each one of which took place on terms agreeable to the parties involved, then there is really nothing left over to evaluate morally. The relevant questions about the distribution of the gains from trade have already been settled in both cases.

Additionally, once we notice that many of these billions of transactions take place between parties of different nationalities – Americans trading with Canadians trading with Chinese, etc. – it becomes obvious that it is extra arbitrary to focus on national patterns of income, as if the nation were a giant factory with profits in need of equitable distribution. Many liberals, even extremely gifted professional liberal economists like Paul Krugman, seem congenitally incapable of thinking carefully about why nation-level equality matters, partly due to the blithe assumption of a fundamentally fallacious economic nationalism that afflicts both popular politics and academic economics.

That said, many welfare liberals are at some level quite sensitive to the fact that if the pattern of national incomes emerged from fair processes, then the argument for taking some people’s money and giving it to others is extremely weak. That is why many of Matt’s fellow travelers are keen to show that the pattern of incomes did not emerge from fair processes. The emphasis in some quarters on the importance of unions is a good example. If you think that strong unions are required to bargain laborers a fair share of their firms’ profits, and that the power of unions has eroded, then it will be natural to think that labor is now receiving an unfairly low wage, which will likely be reflected in nation-level inequality measures. In this case it should be obvious why this mechanism of rising inequality matters: because it matters for both morality and policy. If the problem is labor’s diminishing share of profits due to diminishing bargaining power, then the appropriate response will be measures designed to improve the bargaining position of unions. An increase in taxes and transfers will simply miss the structural cause for moral concern.

I take it (both from his blogging and from personal conversation) that Matt is some kind of utilitarian who really couldn’t care less about matters of fairness or justice – or equality. What Matt cares about is utility. The reason Matt thinks we ought to redistribute “irrespective of why inequality has grown so much,” is simply that he doesn’t care about inequality per se, and so he doesn’t care what caused it. He just suspects that if it were lower, national utility would be higher. If the marginal utility of money is greater for people with less money than for people with more, then we should take money from people with more and give it to people with less, period. Whether or not people acquired their money through fair processes, whether or not they are entitled to it, or have some “right” to it, is simply irrelevant to the question of whether someone ought to take it away from them and give it someone else.

But surely Matt understands that the inability of utilitarianism to acknowledge principled constraints on the way people may use one another is the main reason why most moral philosophers believe utilitarianism to be false. Perhaps Matt thinks these philosophers confused. But if so, then they share their confusion with most Americans, who also don’t believe utility maximization is a good justification for the appropriation of their property. As a matter of practical politics, philosophers don’t matter, but the public does. Which is why Yglesias-style utilitarian arguments for redistribution are non-starters in American politics, while arguments based in structural unfairness have the potential to be powerfully persuasive. If the system is rigged at a deep level against some people, then some redistribution may seem like a good way of balancing the scales. As matter of practical politics, his welfare liberal colleagues are right to keep sniffing around for “cheating” in the system.

Now, as I like to point out, the problem with structural injustice is structural injustice, not the nation-level inequality it may help produce as a side-effect. Which is why I think national Gini coefficients are a distraction, and why programs that lower the national Gini coefficient simply by moving money around make it all-too-easy to ignore the real, hard problems. I suppose a virtue of Matt’s argument for redistribution is that it doesn’t even pretend to be fixing a problem.