Income Inequality Matters

March 26, 2013

by Roger Koppl

Income inequality matters. Let me say that again so you know I meant it: Income inequality matters. This statement may be surprising coming from a self-described “Austrian” economist and a “liberal” in the good old-fashioned pro-market sense. It shouldn’t be. It should be one of our issues. The surprise should be that we pro-market types have not spoken up more on this central issue, thereby letting it become associated almost exclusively with more or less “progressive” opinion.

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

Liberal political theory tells us to expect that sort of thing as a sort of disease to which the body politic is subject under representative democracy. Our presumption, then, should be that much of the inequality of any epoch is produced by tariffs, licensing restrictions, bailouts, and other specific acts of governments. Most of the time the game is rigged more or less. (The trick of constitutional design is to minimize this evil bathwater without tossing out freedom or democracy.) The more a society’s income distribution is determined by politics and not markets, the more it will be skewed away from whatever pattern would emerge in a less fettered market economy. And in general, that skew will be toward greater inequality. As the political component grows, we can expect power to be concentrated in fewer and fewer hands and income distribution be more and more unequal. If political power is growing, we should strongly suspect that some of the rich are using the state to squeeze money from most of the poor.

I cannot cite unambiguous evidence that economic freedom goes with greater equality. There is a small empirical literature on the relationship between economic freedom and income inequality. So far the results are mixed. Both studies showing a positive effect and studies showing a negative effect tend to suggest that economic freedom has a relatively small impact on overall measures of income inequality. It might be, therefore, that my egalitarian presumptions are mistaken. Maybe. But when you have relatively well-defined ethnic groups consistently underperforming the rest of the population, as with America’s black and Appalachian populations, we should presume that such different outcomes depend on different circumstances. And the heavy hand of the state is an important reason different groups in America live in different circumstances.

Here are four ways that the state creates inequality in America today.

1. Privatizing profits and socializing losses

Bailouts move money from taxpayers in general to persons wealthy enough to have portfolios of financial assets. The bigger your portfolio, the more you get in the bailout. And, of course, the greatest gains go to the owners and officers of nominally private institutions that are “too big to fail.”

2. Regulation

If the elements of public choice theory and the theory of regulatory capture are about right, then regulation tends to favor established interests and squelch competition from new entrants. That bad tendency of regulation skews income up the ladder and reduces income equality. I am proud to have been editor of an NCPA report, “Enterprise Programs: Freeing Entrepreneurs to Provide Essential Services for the Poor,” on how regulation makes the lives of poor people more difficult. The report includes a discussion of how housing regulations help to drive the costs of housing out of reach for many poor families.

3. Collapse of the rule of law

The War on Drugs disproportionately harms the poor, especially poor young black and Latino men, tending to marginalize them. The problem is so bad that Michelle Alexander has dubbed it “The New Jim Crow.”  Unfortunately, Alexander’s characterization is all too apt. To cite just one timely example, in New York City poor black and Hispanic men are subject to race-based policies of stop-and-frisk.  Such arbitrary and discriminatory policing is a violation of the most basic idea of the rule of law: We should all play by the same rules. At the same time, there has emerged a power elite that is largely immune to the law and free of its constraints, as Glenn Greenwald has chronicled in “With Liberty and Justice for Some.”  Here again we have a collapse of the rule of law. The situation is so bad that the Attorney General has openly admitted to a policy that has been dubbed “too big to jail.”

We now have not a two-tiered legal system, but a three-tiered legal system in which 1) poor black and Latino men are singled out for scrutiny and sent to prison in disproportionate numbers, 2) the power elite is above the law, and 3) middle class Americans are mostly left alone — so far — if they commit no crimes worse than the drug offenses each of our last three Presidents committed in his youth. This unjust justice system tends to move income up from the lower ranks into the hands of the elite.

4. Public Schools

Finally, I might mention local funding of public schools, which makes it hard educate your child well unless you can already afford to live in a relatively affluent neighborhood.

My fellow (“classical”) liberals should talk more about these evils. We should emphasize the common cause we have on this issue with Progressives and others generally considered left of center. We should make income distribution one of our issues. We liberals all agree that evils such as regulatory capture make it a rigged system. Should we not emphasize, therefore, the evil consequences of rigging the system?

54 Responses to “Income Inequality Matters”


  1. [...] Roger Koppl in a nicely done piece. [...]

  2. Roger McKinney Says:

    Good intro to the subject! Thanks!

    Fogel in his book “Escape from Hunger and Premature Death” estimates the inequality in 1700 was about 90 (if I remember correctly). Capitalism reduced it to about 40 in the West by 1900.

    Other causes of inequality are 1) Fed policies of inflation take from the working poor and elderly on fixed incomes and give to the finance industry; 2) inflation destroys manufacturing jobs by eroding depreciation and taxing inflated profits; 3) Fed policies cause boom bust cycles which hurt the working poor more than anyone; 4) immigration increases inequality from the bottom. The first three are evils while the last is a good cause of inequality.


  3. [...] I agree with Roger Koppl, [...]


  4. “Progressives” will not settle for (classical) liberals being concerned about inequality to be resolved reducing government intervention in the economy. If we are not for direct transfers we will be seen as part of the problem.

  5. luke4315 Says:

    communism may rise?Republican form of government is like that.

  6. Current Says:

    I don’t agree.

    If you work in any field, one that’s dominated by government interference, or one that isn’t, you can see that there are vast differences in ability. Without progressive taxation those differences would lead to much larger differences in income and capital wealth. I think that effect would drown out everything else that Koppl mentions. Like Koppl I can’t cite unambiguous evidence on this. But, I’d point out that in areas like electronics where the hand of the state is quite light there are large differences in salary.

    That doesn’t mean I agree with progressive taxation, I don’t. I think we should defend inequality as necessary because if it’s leveled by taxation the incentives towards entrepreneurship and innovation are seriously blunted. We have to accept inequality as a fact of life.


  7. I started reading this post with expectation that I would disagree with the arguments I found, because I disagree with the title “Income Inequality Matters”. But I do not think I saw any arguments that income inequality matters. I found that idea only as a premise.

    For the arguments that I found, I applaud.

    It seems to me that the arguments here could be offered under a title such as, “The State Increases Income Inequality”. Then hapless readers such as I would not get a blood-pressure boost just from the title.


  8. Roger,

    This was a theme in some of W.H. Hutt’s writings, for example in “Economists and the Public” (1936).

    Hutt argued that it was the society of “status” and “caste” that institutionalized income inequality on the basis of rank and “class” in pre-capitalist society.

    It is the open, competitive market economy, Hutt explained, that has given more avenues and opportunities to (as an unintended consequences) reduce the degree of income inequality in society, as well as raise the absolute standards of living of those in all income brackets.

    As in many areas of economic theory and public policy, it is always worth looking at W.H. Hutt’s writings, even when one does not agree with every argument or conclusion.

  9. Martha Says:

    In a democratic regime and free economy besides the output of the production, externalities will be created to benefit the bystanders that are not necessarily the part of the industrial machinery.

    Some will pay for those benefits but not take advantage of it while others will not contribute but cash in on the benefits. Whether you are free rider or forced rider, this helps distribution of wealth within the echelons of the society.

    An accountants view of balancing the books or achieving a delicate balance is not the perspective of the economists as they focus on the overall value created for the society rather than tract the transactions that make it happen.

  10. koppl Says:

    Thanks all for your comments. I didn’t mean to suggest that the income distribution should be flat under any hypothetical regime of laissez-faire. I meant only to say that “interventionism” tends to skew income further away from the politically weak and towards the politically powerful.

    A Facebook friend has reminded me that the evidence seems to support the claim that transfers and progress tax rates reduce income inequality. Again, I did not mean to suggest otherwise. Rather, the sorts of thing I listed above swamp the effects of taxes and transfers. If I burn down your house and then give you pup tent to sleep in, you would not thank me for helping you keep a roof over your head.

    Adam Smith thought that individual differences were largely a product of the division of labor. Only the “vanity of the philosopher” makes him think he is somehow superior to the street porter. If we think he was basically right, then we should expect the growth of freedom over time to reduce income inequality. The research of Richard H. Steckel and others seems to support this expectation. As freedom and wealth have growth the health and height of the poor has grown much closer to that of the elite. This effect is so strong that we can have this site:

    http://individual.utoronto.ca/somody/quiz.html

    The philosopher no longer seems so different from the street porter.

  11. dcrollins Says:

    Sacrilege! What is this, Occupy Wall St?

    I kid, of course. Glad to see you assert the egalitarian case for classical liberalism.

    Next we’ll see Mario Rizzo come out for universal healthcare…oh wait, he did that a decade ago in the editorial pages of the WSJ.

  12. Mario Rizzo Says:

    If I remember correctly, my statement was to the effect that an explicitly “socialized” healthcare system would make all of the inevitable rationing of a highly regulated system more explicit. And so people would really see what is going on. It was not motivated by egalitarian considerations. It was my version of policy sarcasm.


  13. [...] At ThinkMarkets, Roger Koppl argues that Income Inequality Matters. [...]

  14. Roger McKinney Says:

    I would go further than Mario: socialized healthcare would be superior to the current system. The current system has the state promoting unlimited demand while limiting supply through massive regulation. The system is already state controlled, but for the benefit of doctors at the expense of working consumers. Making it completely socialist by adding price controls would at least give consumers a break. The current system is the worst of all imaginable worlds.

  15. John Says:

    I’m wondering how far one might go with exploring Item 1?

    For a while now I’ve been thinking the existing limited liability, at lease in how it’s currently implemented, has not out lived it’s use. It’s too easy to protect income streams from risky activities by paying them out to some other entity which then just leaves whatever assets the owners wish to have at risk behind for damages.

    Similarly, it’s clear the current agency law has some issues if we cannot hold corporate decision-makers accountable for the results of their decisions or inaction when action was clearly needed something is wrong.

  16. Young Back Choi Says:

    Roger Koppl seems to be eager not to let the progressives monopolize the good “business of inequality.” It could be seen as an intellectual entrepreneurship.

    But much of what he complains about is rent-seeking/ kleptocracy. Inequality is a relative concept. Can it be really the case that tariffs, bailouts, regulations, etc. are the main reasons for inequality, when up to 60% of the Federal government budget is dedicated for re-distribution, and people in lower income quintiles do not pay hardly any tax (other than sales taxes), but receive much in transfers?

    Roger says that “when you have relatively well-defined ethnic groups consistently underperforming the rest of the population, as with America’s black and Appalachian populations, we should presume that such different outcomes depend on different circumstances. And the heavy hand of the state is an important reason different groups in America live in different circumstances.” Really? Thomas Sowell’s Ethinic America seems to suggest different reasons.

    He also says that “local funding of public schools, which makes it hard educate your child well unless you can already afford to live in a relatively affluent neighborhood.” Really? Surely, poorer areas collect less school tax. But that does not mean poorer area spend much less. Consider two school districts, Great Neck and Hempstead. Per pupil spending per year by the two school districts is not that different, $29K vs.$27K, respectively. Though the Great Neck raises $26K per pupil and Hempstead only $10K, respectively, the difference is largely made up by transfers from NY State, $2K vs. $15K, respectively. However, Great Neck is one of the highest performing schools in the nation, while Hempstead, the least. The issue is surely more than how much money is spent per child.

    Denouncing rent-seeking and kleptocracy is consistent with liberalism. But I don’t think joining the blame-game of inequality without solid evidence, whether one blames the market or the government.

  17. Current Says:

    Koppl: “Rather, the sorts of thing I listed above swamp the effects of taxes and transfers.”

    What evidence do you have that they do? I think that taxes and transfer likely swamp out the effects you discuss. Who’s to say which one of us is right? I’ll admit I have as little evidence as you.

    Koppl: “Adam Smith thought that individual differences were largely a product of the division of labor. Only the vanity of the philosopher’ makes him think he is somehow superior to the street porter.”

    Yes, but decades of study of intelligence has shown that there are real differences, they are large, and sadly they are heritable to a large degree. Adam Smith was wrong about this.

  18. Guest Says:

    This is simply a brilliant article!


  19. [...] Income Inequality Matters, by Roger Koppl [...]

  20. Roger Koppl Says:

    Thanks to everyone for those further comments.

    It seems there may be some doubt that the sort of thing I complain of swamps the effects of transfers. There’s no margin in being in dogmatic about empirical issues. Perhaps I’m am wrong about that. Income distribution is complicated. (And complex too, I suppose.) According to the US Census, however, median black household income in 2009 was 63% that of white households. (http://www.census.gov/compendia/statab/2012/tables/12s0691.pdf) I think that fact tends to support my view that many black families are being effectively excluded from the market by “The New Jim Crow” and by the sorts of regulations discussed in NCPA Enterprise Programs report.

    http://www.ncpa.org/pdfs/Enterprise-Programs-Freeing-Entrepreneurs-to-Provide-Essential-Services-for-the-Poor.pdf

    Let’s consider the situation of poor black households in most American cities, taking our cues from the NCPA report.

    Restrictions on jitneys make it hard to get from home to work or even to a decent grocery store. If you are a single parent, you cannot afford childcare because of legal restrictions there and may be corresponding unable to work. You are stuck in your crummy neighborhood because zoning laws and various restrictions drive price of decent housing out of reach. And your health may be spotty because of licensing restrictions make that vital service hard to afford as well. Even basic police protection be a problem. Page 51 of the report quotes out a bit of NYC’s Mollen Commission report of 1994 that may help to suggest why policing is a problem for many poor black and hispanic youths. Here is that bit:

    ————————–
    New York City’s 1994 Mollen Commission Report on police corruption records an illustrative
    exchange between a testifying police officer and a commission member:
    “Q: Did you beat people up who you arrested?
    “A: No. We’d just beat people in general. If they’re on the street,
    hanging around drug locations. It was a show of force.
    “Q: Why were these beatings done?
    “A: To show who was in charge. We were in charge, the police.”
    The City of New York, “Mollen Commission Report,” July 7, 1994, page 48.
    ————————————-

    In this sort of environment it is very difficult indeed to find a place within the network of trade. And, as Michelle Alexander carefully demonstrates, if you are unfortunate enough to be convicted on drug charges or and imprisonable offense, you are fully marginalized. You just about cannot get work as an ex-con.

    You are not allowed to contract with your neighbors to share childcare responsibilities, you cannot start a humble business such as braiding hair without a license requiring expensive training, you cannot get to where the work it because the busses don’t go, taxis don’t go in your neighborhood, and jitneys are prohibited. AND you are subject to stop-and-frisk, random harassment, and even random beatings by the police. But Aid to Dependent Children does send you a small check to feed your children and we will put you up in substandard housing that, nevertheless, costs a lot to the taxpayers. I think the net effect here is to reduce income at the bottom.

    Oh, and for any readers who may have felt anger over “welfare” payments: Who should be angry with whom in this story?

  21. Jon Says:

    Does anyone think progressives are interested in “fixing” this inequality issue? If it were in fact “fixed” who would they go after to ‘pay’ for the programs they so desperately desire. Anyone ever ask Robert Reisch, Warren Buffet, etc., why, if they truly believe the ‘rich’ are insufficiently taxed and their concern about the deficit and the debt were as intrinsic as they make it out to be, they don’t send a check to the treasury above and beyond what their accountants say they owe?

  22. John Says:

    Roger, great response regarding what effects are swamping what.

    I don’t think libertarians can say enough about some of the topics you mention.


  23. Roger,

    First-rate analysis. Lots of complex issues. I strongly agree that classical liberals should be focused on the many ways that interventionism dis-coordinates economic activity.

    Director’s Law argues that income redistribution takes from the upper and lower ends of the income distribution, and directs resources to the middle class. But it is not to the productive, market-oriented middle class, but the unrpoductive, government-dependent middle class. There is redistribution within “classes.” Likewise, the working poor suffer at the hands of the welfare-dependent poor.

    Sowell argues that we ditch focusing on income quintiles (classes), and instead track the IRS data that follow actual individuals over their lifetimes. The case for rising income inequality disappears using that data set. He argues income mobility is still the story.

    Like I said, lots of complex issues.

  24. Neel Says:

    Liked it a lot, Roger.


  25. [...] Roger Koppl argues this week at ThinkMarkets that “Income inequality matters.” He thinks it matters so much that he says it twice. He believes “Austrian,” pro-market, economic liberals should be speaking up more on this “central issue.” I think Koppl could not be more wrong. The issue deserves all the inattention we can muster for it. [...]

  26. Glen Says:

    I want to push back here. I totally agree with Roger that rent-seeking, regulation, drug laws, etc. hurt the poor and (sometimes) privilege the rich. As classical liberals, we oppose those laws, and we should draw more attention to that fact.

    But I flatly deny that inequality *per se* is a problem. I do not care at all about inequality as defined by, say, the Gini coefficient, or by the difference (or ratio) between the top and the bottom. What I do care about is the *absolute* well-being of the poor — and for that matter, everyone else. I oppose the bad laws that Roger cites because they damage the absolute well-being of the poor (and others), *not* because they induce greater dispersion in the income distribution.

    Many things can cause greater income inequality. Some of those things are bad (such as the policies that Roger cites). And some of them are just fine, such as skill-biased technological change. Changing the laws to allow greater entrepreneurship might well encourage economic growth at the bottom of the income distribution, as Roger suggests — but it might also encourage even faster growth at the top of the distribution, as more people like Bill Gates and Steve Jobs take advantage of greater opportunities. And as a result, we would see increasing inequality, even as the whole distribution shifts to the right. That’s clearly a good thing (the Pareto criterion at work), and yet a concern with inequality per se makes it look bad.

    If both good and bad things can contribute to inequality, then inequality is at best a weak barometer of bad policy. And focusing on getting greater inequality will end up justifying both good policies and bad ones.

  27. Glen Says:

    Correction: focusing on greater greater *equality* will end up justifying both good policies and bad.

  28. koppl Says:

    Hi Glen,

    I guess it just seems to me that when we “flatly deny that inequality *per se* is a problem” the words “per se” strip out all context.

    What am I supposed to imagine when I consider whether “inequality *per se* is a problem”? I guess we’re saying that the ideal political system would not respond to inequality “per se,” but only to poverty. Even that plausible suggestion seems dubious to me if only because the definition of “poverty” shifts with the wealth of nations. As I recall, Adam Smith defined substance income as the level consistent with “common humanity.” That’s a moving target. Anyway, that interest in poverty relief looks like a concern for income inequality to me. More importantly, perhaps, I’m just not that keen on working out the particulars of an imagined ideal system. I don’t think we are clever enough to really sort that out from a vantage point so very distant from the ideal. We don’t have enough experience with system close to the ideal, for almost any definition of ideal.

    Whether the ideal system includes a concern for income inequality “per se,” we are damned far from the ideal. In this rigged system, it seems to me, income inequality is a big deal and we should say so.

    When we emphasize the supposed principle that inequality *per se* is a not problem, I think we create the impression that the current system is basically free, fair, and fine. We feed into the error that our current system is “capitalism” or “free market,” which is very far indeed from the truth.

    Maybe I’m just being obtuse or something, but I really don’t see any good reason to qualify or withdraw my claim that “inequality matters.”

  29. Glen Says:

    Roger, I’m not talking about some hypothetical ideal. I’m talking about my actual values. Equality of outcome is just not something I value at all. I value a number of other things, most importantly freedom and prosperity (including the prosperity of the least well off). I think the rhetoric matters here because we need to get our goals straight. If we don’t, then the resulting reforms may be ill-targeted, as I indicated in my last comment. We will be led to adopt some policies that increase equality while diminishing freedom and prosperity.

    And I disagree that saying inequality per se is not a problem means that are thereby affirming the justice of the current system. If I say, “X isn’t the real problem; Y is the real problem,” how can I be read as saying there’s not a problem? Vis-a-vis the left, we need to keep on hammering the point that *we* are the ones who care about reducing poverty, whereas some of their policies would impede that goal in the name of equality.

    Your point about “poverty” being a moving target is well-taken if we think of poverty purely in terms of falling below an arbitrary poverty line. But if we simply think about upward movement over time in the living standards of the worst off (and everyone else), I think that concern largely disappears.

  30. koppl Says:

    I think “income inequality matters” is a pretty mild statement. I don’t really see how you could deny it while upholding poor relief or a negative income tax. As I said above, I nowhere said incomes should all be equal. Once we let subsistence depend on “common humanity” (not an “arbitrary poverty line” BTW) then we are really saying that we have *some* distributional concerns. Social insurance and unemployment relief, it seems to me, also reflect at least *some* concern over distribution. So I stand by my very mild statement. Now when I look around the US today and see the injustices I have flagged, my mild statement that income distribution matters takes on greater urgency and passion. In the present context income distribution is a very important issue indeed.

  31. Young Back Says:

    Roger, you consistently equate injustice and inequality. I agree that we should fight against injustice. But trying to play the inequality card is unbecoming of a liberal.

    People can become less well off for all sorts of reasons. You argue that the fact that disproportionate number of Blacks and Hispanics are poor is the evidence of injustice perpetrated against them. This is copying the rhetoric of the progressives. Thomas Sowell points out that not all Blacks are in the same boat. Some Blacks, for example, those migrated from Caribbean Islands and their descendants tend to do rather well. Many Hispanics are recent immigrants with lower level of education. Do you think the Japanese and Chinese did not suffer discrimination and many other things you mention done to Blacks? Yet, as an ethnic group the Japanese are the highest earning group, whites included!

    That a group is not doing well cannot be used as evidence of a concerted effort to keep a group poor. In Europe, Gypsies make up a near permanent underclass. They are discriminated against, for sure, despite legal protections for them. Are Gypsies simply innocent victims?

    Many suffers from misguided policies, regulations, and kleptocracy.These should become the object of our scorn. Is there any need to drag in inequality as an issue?

  32. koppl Says:

    Maybe it’s just me, Young Back, but your tone seems downright accusatory, as if “deep down” I could not “really” believe what I say. I am “trying to play the inequality card,” which is “unbecoming of a liberal.” Is it really that hard to believe that I mean what I say?

    Maybe I’m just not reading you right. However that may be, I’d like to seize this opportunity to quote a famous liberal named Adam Smith. (All quotes below from Theory of Moral Sentiments, which is searchable here: http://www.econlib.org/library/Smith/smMS1.html)

    Smith said, “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” Far from mortifying the moral sentiment of sympathy (“our fellow-feeling with any passion whatever”), we should extend it to all humans, as Smith and J.S. Mill both emphasized.

    Smith was really quite clear about this principle. He used China as an example at one point precisely because its people were distant, alien, and racially distinct. I refer, of course to the thought experiment in which he imagines “that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake.” For a person distant from the tragedy, unfortunately, “The most frivolous disaster which could befal himself would occasion a more real disturbance.” And yet “reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct” prevents us from acting selfishly on “our passive feelings [which] are almost always so sordid and so selfish.” It is the “impartial spectator” who “who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves.” These are true liberal sentiments.

    At one point Smith makes it very clear that our moral sympathies should favor the poor more than the “rich and powerful.”

    —————
    This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.
    —————

    Smith wants us to have more sympathy for the poor and weak than the rich and powerful. If we do, must we not agree with the very mild claim that income inequality matters?

  33. Young Back Says:

    Roger, I may sound over reacting to your claim that inequality matters. You mildly suggest, with quotations from Adam Smith, that I am in more sympathy with the rich (or even admire them) and despise the poor. I just want to say that I do not worship the rich, nor do I despise the poor. The poor comes in all shapes and sizes. You have chosen to single out Blacks and Hispanics for special consideration as victims of organized squeeze by the state.

    As a first generation immigrant (I did not come to this country as a foreign student) I started from the very bottom, I have been subject to all manner of discrimination, including what you say the police do to Blacks and Hispanics. It is not as if I don’t know really goes on on the ground. But I never dreamed of asking for special protection; I only demanded an equal protection.

    Often what happens on the ground is beyond the reach of the state. They reflect the prejudices of the policemen and citizens at large, which at best can be described as statistical discrimination. Can the state really force people to be moral? I see no other way than a long drawn out processes in which the victims of discrimination prove their worth and put discriminators to shame.

    The Amnesty Internal report on the Roma that you refer to reports state repression of Gypsies in Eastern European countries (from the former soviet Block). But in Western Europe where there is currently no state repression of Gypsies, they are still form the underclass. You are familiar with the situation in Italy. Ask yourself why. Even in countries that are known to be liberal, such as Sweden and Norway, Gypsies are discriminated against and shunned at the individual level. Do you think about reasons? Do you ever think Gypsies’ own modus operandi have at least something to do with it?

  34. koppl Says:

    Look again, Young Back. Italy does come in for a mention in one of the linked documents. Sadly, the notion that liberal residents of Nordic countries are free of racial bigotry is mistaken.

    I’m sorry to learn that you were frequently stopped and frisked by the police as a youth, spread-eagled on wall, fence, or police cruiser, and that you were sometimes beaten by the police for no reason. That’s truly horrible.

  35. Young Back Says:

    Roger, your sarcasm is noted. Of course, then, you know for fact that every single low income Black or Hispanic person (or is it simply all Blacks and Hispanics?) has been “frequently stopped and frisked by the police as a youth, spread-eagled on wall, fence, or police cruiser, and that you were sometimes beaten by the police for no reason.” I have no more to say.

  36. koppl Says:

    Young Back, I was not being sarcastic! I guess I’m not tracking. You said, “I have been subject to all manner of discrimination, including what you say the police do to Blacks and Hispanics.” I took you to mean what you said, which would have implied some pretty rough treatment of you from the police. Now, I gather, I am not to think that you were beaten or subjected to stop-and-frisk. Okay, that’s good. But then I don’t know what you meant. Sorry if I’ve gotten our conversation off the rails here; I guess I was being too literal minded?

  37. Current Says:

    Roger Koppl,

    I think your view is overly romantic. You concentrate on how the poor are restricted by modern states, but you don’t concern yourself with how they’re helped. You seem to believe that every restriction has no benefits.

    We must not tell pretty lies, we much each tell ourselves the truth no matter how ugly it is. If we do otherwise then we’re not taking economics or politics seriously. The first thing we must remember is that the governments of all developed countries redistribute income to a huge extent. About 57% of the US Federal budget is transfer payments and that federal budget is ~25% of GDP, so >13% of GDP is redistributed. The vast majority of this is redistributed as payment for medical care or direct cash payments. That’s before considering state budgets which are also redistributive. You may be thinking of a world where that redistribution continues, but the other actions of the state you criticize don’t. In that case I agree with you, though I can’t imagine such a world ever coming into existence.

    I agree with you about regulation. I don’t agree with your view on bailouts. Bailouts are only a recent issue, there weren’t many bailouts in the last 20 years, until the last ~5. But, in those previous 15 years there was plenty of inequality. I also don’t agree about public schools. Are you comparing with a world where the state continues to run schools or one where all schools are private? If the former, then you’re really arguing for more redistribution like a progressive. If the latter then poor people would be less able to pay under that system too, and many may choose not to pay and leave their children uneducated.

    You consider every aspect of the drug war except the drugs! If drugs are legalized or decriminalized then supply will increase and the price of them will fall. That will increase the number of addicts and people taking overdoses. Much of that increase will fall on the poorer sections of society. There will be benefits in not criminalizing so many people, but there’ll be significant downsides too. We can’t really tell what will happen overall until more countries decriminalize or legalize drugs.

    In my view if the had a more libertarian state the levels of inequality would be much higher than they are now. That was how things were in the 19th century, and I don’t think that much has changed. But, like others in this thread I’m not that concerned with inequality, I’m much more concerned with growth. The main cost of all those interventions is to limit growth, and therefore the happiness of our descendents. That is the big issue, inequality now is a side-show.

  38. koppl Says:

    I think the facts are my side, Current. Let me try to briefly address each of your points.

    1) The Federal government does lots of redistribution. You bet! But the fraction that goes to the (otherwise) poor isn’t all the great. Don’t forget that we have lots of middle class welfare. Anyway, I think my earlier remarks addressed this point. I think we tend to underestimate the obstacles to self improvement for those of low income. When we an unemployed single mother paying for her groceries with food stamps we not think “Damn those zoning restrictions on childcare!” We do not think “Damn those legal restrictions on jitneys!” But we should. Local regulations are a *huge* burden on the poor. In addition to the NCPA report I edited and cited above (http://www.ncpa.org/pdfs/Enterprise-Programs-Freeing-Entrepreneurs-to-Provide-Essential-Services-for-the-Poor.pdf) See the good work of the Institute for Justice:

    http://ij.org/city-studies-on-barriers-to-entrepreneurship

    Again, if I burn your house down and give you a pup tent, do I get credit for keeping a roof over your head?

    2) Bailouts are not a recent issue. (And even if they were . . .) The bailout of Continental Illinois was 1984. Chrysler was bailed out in the Carter years. Reagan bailed out Harley Davidson. It’s an old problem.

    3) Some of our public schools are prison-like and very bad indeed. Parents are pretty much stuck with that and can’t get out of it. That makes it hard to give you children a better life.

    4) There were few prohibitions on “drugs” before Prohibition and yet folks managed to work and run their lives anyway, sometimes even while addicted to cocaine, morphine, and other narcotics. Think of Freud (a real guy) and Sherlock Holmes (fictional guy)!

    Yes, absolutely, I could be wrong to think that a relatively free economy would produce a more equal distribution of income. But I think the evidence favors the hypothesis that it would. However that may be, income inequality *today* in the US, income inequality *in the current system* is a very big problem indeed, IMHO.

  39. Glen Says:

    “Yes, absolutely, I could be wrong to think that a relatively free economy would produce a more equal distribution of income.”

    Okay, so suppose you were wrong. Would that constitute an argument against a more free economy? Or would you instead say something like, “No, because I’m okay with inequality as long as it’s happening for the right reasons”?

  40. koppl Says:

    Glen,

    Hold on now. That’s certainly a fair question and I will momentarily lay out my more or less affirmative answer. But first please note what I said immediately after: “However that may be, income inequality *today* in the US, income inequality *in the current system* is a very big problem indeed.” I reeeally have not grasped why this point is a stopper for some people. We have this ongoing set of injustices creating an income distribution that *is* planned to a significant degree, and the net flow of funds is up the income ladder such that a lot of folks in the lower rungs are being impoverished by systematic exclusion from the network of trade and a few at the top are being systematically *protected* from market competition. Why is it so strange to say in this situation “income inequality matters”?

    As you know, I do not consider myself a libertarian. (While “gushing over libertarians,”

    http://www.newappsblog.com/2013/03/gushing-over-libertarians.html

    Eric Schliesser has recently called me a “a kind of fellow-traveler” to bleeding-heart libertarians. Whatever.) Anyway, since I am not a libertarian, I do not share the concern many libertarians seem to have to stake out this supposed principle that income distribution *per se* is immaterial. Even if I were to concede this relatively abstract point of political philosophy, I just don’t see how it enters our discussion. Okay, I might concede, income inequality per se is not an issue. So what! In our system, here and now today it *is* an issue precisely because the cronies big and small have got the system rigged to shovel a lot money up the system, and it’s so bad that we have created an oppressed underclass and an immune elite.

    Okay, but I owe you a straight answer to your straight question. Yes, absolutely, if a relatively free economy would produce a less equal distribution of income, that would indeed constitute an argument against a more free economy. BUT, that argument would not negate other arguments to the effect that “free markets” deliver the goods, interventionism tends to go awry, and the attempt to fully plan the distribution of income would give us a cure worse than the disease. In this imagined scenario, how does one balance the arguments? Well, how about some old-fashioned liberal measures such social insurance, guaranteed minimum income, and negative income tax? Such measures can be applied without destroying the rule of law. So income inequality matters even in an imaginary world of thoroughgoing laissez faire. And we can do something about it even in that imaginary world.

    Maybe I should complain about your question, though. Maybe “constitute an argument against” is too strong a statement, suggesting that we would have to pitch out laissez faire altogether. And then the alternative you suggest is that we disregard distribution altogether as long as we got laissez faire. Bah! False dichotomy alert! You gotta have markets and not too much intervention. But you can still have redistributive elements that do not choke off growth.

  41. koppl Says:

    “shovel a lot of money up” the *ladder*, not the *system*. Facepalm

  42. Roger McKinney Says:

    “Don’t forget that we have lots of middle class welfare.”

    Excellent point! Most redistributed money goes to the elderly, most of who are middle class: SS and Medicare go mostly to middle class elderly. Only Medicaid and some welfare payments go to the poor and they are relatively small. But don’t forget that healthy young people subsidize insurance premiums for the elderly by state, and now federal, law. Military spending is welfare for engineers. Research spending is welfare for scientists. Most regulations protect large corporations from competition by smaller companies and is a form of welfare

  43. Roger McKinney Says:

    We have to distinguish between the short and long runs. Yes, in the short run greater freedom can produce greater inequality, but in the long run that can’t possibly be true or everything we know about economics is false and we have no explanation for how the West grew so rich over the past 300 years. And history has shown that greater the reduction in pre-industrial revolution inequality correlates highly with greater freedom.

    We should be concerned with how inequality results and not so much with the level of inequality. If inequality results from harder work, intelligence or just plain luck, there is nothing wrong with it. If it happens because of state actions then it is evil and should be fought.

    People who are concerned with the level of inequality regardless of the cause should be content with giving their own money to the poor and refrain from forcing others to do so through the power of the state.

  44. Young Back Says:

    Roger Koppl,

    You say that “(one) can still have redistributive elements that do not choke off growth.” The redistributive elements you have in mind are “some old-fashioned liberal measures such social insurance, guaranteed minimum income, and negative income tax”. And the old-liberal measures are motivated by the fact some ethnic groups suffer the injustice of being systematically kept down as a permanent underclass. You are saying that inequality brought about by injustice needs to be countered by re-distribution.

    How is what you advocate different from what most liberals, including Paul Krugman, advocate? Most re-distributionists would wholeheartedly agree with you that greater equality should be had without choking off growth. Liberals of last generation used to acknowledge a trade-off between equity and growth, however. Many liberals of this generation don’t seem to see the trade-off; they even regard greater equality effected by redistribution as a precondition for growth. (Robert Frank, Alan Krueger, Dani Rodrik)

    Do you think there is any trade-off? If you don’t, it would clear where you stand. If you do, then you need to explicate the extent of agreeable trade-offs, which would require that you talk about specifics. You advocate “some old-fashioned liberal measures such social insurance, guaranteed minimum income, and negative income tax.” But aren’t these what we already have in ample measure in the U.S.? Do you want more, or different, or in modification? How?

    Another point: You mention the state in the U.S. has not enforced the rule of law, and instituted various policies that are injurious to the minorities. (Only to minorities?) I think you are exaggerating and presenting only one-sided view. But even if what you say is true, is that the reason to enlist the state as the ultimate insurer on no fault basis and compensate the victims of the state malpractice? (In this case the victim-hood consists of having less income than others.) Playing victims could be quite lucrative. Surely, such advocacy would be extremely popular. Explosion of torts and populist promises by politicians are proofs.

  45. koppl Says:

    I’m not saying “that inequality brought about by injustice needs to be countered by re-distribution,” Young Back. I’m saying that we have injustices now that should be corrected by eliminating them. Also, since I was asked, I shared my favorable view of redistributive measures such as social insurance and a negative income tax. Nor did I mean to deny that transfer programs typically have unfortunate incentive effects. Bummer that. But I am indeed willing to pay an efficiency price for poverty relief and social insurance. I suspect you were thinking of Arthur Okan’s leaky bucket analogy. Maybe someone wants to get water from A (rich people) where it is plentiful to B (otherwise poor people) where it is scarcer, but the bucket leaks. One might want to avoid leaks altogether by not having any governmental transfer programs. But I think most Americans would prefer at least some transfers be made, especially to the “most needy,” however defined. Milton Friedman’s negative income tax is a not-very-leaky bucket. It minimizes the efficiency cost of a guaranteed minimum income. In my “Austrian” view, socialist planning is a bucket with no bottom. Sure, I think Okun got it right about leaky buckets. Personally, I want “welfare” in forms such as the negative income tax, but mostly a “free market” with little “intervention.” Crony capitalism is a very leaky bucket that takes water *from* B and delivers it *to* A. That’s been my complaint.

    You said, “then you need to explicate the extent of agreeable trade-offs, which would require that you talk about specifics.” Sorry, Young Back, I’m not going to do that. My whole point has been the very modest one that income inequality matters and that we have these injustices today creating not merely greater income inequality than we would likely have under a more (“classical”) liberal regime, but even an underclass and an elite. Working out how much “welfare” or whatever is ideal is not that easy. I don’t think I put myself under an obligation to work out that ideal by acknowledging that I am fine with social insurance and some transfer programs to mitigate poverty. Yes, we have social insurance and, with EIC, something like a negative income tax. I have no considered opinion on whether we have too much or too little of that. My considered opinion is that we have more urgent distributional issues to talk about and could we please to do so?

    You say, “But even if what you say is true, is that the reason to enlist the state as the ultimate insurer on no fault basis and compensate the victims of the state malpractice? (In this case the victim-hood consists of having less income than others.)” Again, I am not asking for new redistributive programs (or more of the old) to compensate people for being excluded from markets. I am asking us to eliminate the legal restrictions that prevent many of our brothers and sisters from joining the network of trade. And I am asking us to eliminate the laws and policies that protect the elite from competition, from financial losses, and from liability for their actions. Less power and more trade, please.

  46. koppl Says:

    Okun, not Okan

  47. Glen Says:

    We may be hitting diminishing returns here.

    For what it’s worth, I agree with pretty much everything you said in your last reply to Young Back.

    Where we disagree is when you invoke inequality per se as your justification for action, when responding to injustices would be sufficient.

    Let’s go to the ideal case again, because I think it’s instructive. I said to suppose we discover, contrary to expectation, that a free(r) market actually leads to greater inequality. Would that constitute an argument against having a free(r) market? And you said, ” Yes, absolutely, if a relatively free economy would produce a less equal distribution of income, that would indeed constitute an argument against a more free economy.” This is where we differ, because the inequality of the income distribution is not my concern at all. I would have to ask a different question: “What is the absolute condition of the relatively poor?” If the answer were, “They’re in an abominable state,” then I might support policies like those you suggest (negative income tax, etc.). If the answer were, “They’re doing okay — they’re clothed, fed, decently educated and housed,” then I would not support those policies.

    But here’s the key point: at no point would my decision turn on the *difference* or *ratio* between the well-being of the best and worst off. The well-being of the rich would matter only insofar as it affected the answer to the “can we afford it” question. But under a relatively free market system, the answer to that question is probably “yes” whether the ratio of high-to-low incomes is 1000:1 or 1,000,000:1 (or more).

    Let me use some specific (unrealistic) numbers to clarify further. Suppose it turns out that a free market society yields a situation where the poorest people make $100,000 a year, while the richest people make $100 billion a year. That means the richest earn a million times as much as the poorest. Do I care? No, because the “poor” are still doing fine. On the other hand, suppose it turns out that the poorest make $10 a year while the richest make $1 million a year. That means the richest earn 100,000 times more than the poorest. This is a smaller ratio than in the first scenario, but here I *would* seriously consider some redistributive policies — not because of the ratio, but because (a) the poor are living in absolute privation, and (b) we can probably afford to help them.

  48. koppl Says:

    Your express our difference of opinion quite clearly, Glen. Compared to the rest of the world, however, there’s scarce little daylight between us. With that thought in mind I’ll take your hint by not pursuing our relatively minor difference of opinion. That difference is minor relative the the current injustices I complain of. I very much hope my post draws at least a little more attention to them.


  49. [...] Roger Koppl an Austrian declares, “Income Inequality Matters” (via tofias) [...]


  50. [...] TED talk on the issue I’ve started to change my opinion. And then along comes this interesting piece from self-described Austrian economist Roger Koppl hammering the point home: income inequality matters. (Austrian economists are the libertarian guys, [...]


  51. […] “Income Inequality Matters,” at ThinkMarkets […]


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