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Equal is Unfair

America's Misguided Fight Against Income Inequality

St. Martin's Press

WHO CARES ABOUT INEQUALITY?

THE DEFINING CHALLENGE OF OUR TIME?

A few years ago, one of the authors of this book, Yaron Brook, was invited to give the keynote address at the Virginia Republican Party State Convention. Here's how he started.

I was not lucky enough to be born an American citizen. I became an American citizen by choice. I immigrated to this country. I was born and raised in Israel. I served in the Israeli military where I met my wife of twenty-seven years. And when we got married, after we had fought for our country, we sat down and said, you know, you only live once and we want to make the most of our lives, we want to be someplace where we can enjoy freedom, where we can make the most of the life that we have, where we can pursue our happiness, where we can raise our children to the best of our ability. And we looked around the world. We weren't committed to any particular place, so we looked around the world and we said, "Where are we going to go?" We chose this country because America is the greatest nation on earth, and really is the greatest nation in human history.

Of all the questions Yaron considered before he made his decision, one that never came up was how much economic inequality there was in America. Like millions before him, Yaron came to America seeking to make a better life for himself and his family: he wanted to experience the American Dream, in which he would be free to set his own course and rise as far as his ability and ambition would take him. Would that put him in the top 1 percent or the bottom 10 percent of income earners in America? It would never have occurred to him to ask, and if someone had asked him, his answer would have been: "Who cares?"

Yaron is not unique in this regard. Polls consistently show that inequality is very low on Americans' list of concerns. Even people who live in rural Michigan and struggle to make their mortgage payments apparently don't care that, hundreds of miles away in New York, a handful of hedge fund managers fly on private jets and dine at Nobu. What we do care deeply about is the opportunity to make a better life for ourselves — and we are more likely to celebrate the fact that this allows some people to succeed beyond their wildest dreams than lose sleep over it.

But hardly a day goes by in which we aren't told that our attitude toward economic inequality is wrong — that even if we don't care about inequality in and of itself, we should care, because it threatens the American Dream. In one of his most celebrated speeches, President Obama declared that "the defining challenge of our time" is "a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America's bargain — that if you work hard, you have a chance to get ahead."

Obama is hardly a lone voice on this issue. Nobel Prize — winning economist Joseph Stiglitz writes of "the large and growing inequality that has left the American social fabric, and the country's economic sustainability, fraying at the edges: the rich [are] getting richer, while the rest [are] facing hardships that [seem] inconsonant with the American Dream." Journalist Timothy Noah warns that "income distribution in the United States is now more unequal than in Uruguay, Nicaragua, Guyana, and Venezuela, and roughly on par with Argentina. ... Economically speaking, the richest nation on Earth is starting to resemble a banana republic." French economist Thomas Piketty, in his celebrated work, Capital in the Twenty-First Century, warns that "capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based," and so "the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed." The bottom line, according to Obama, is that the "combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe."

In his 1931 book The Epic of America, James Truslow Adams introduced the phrase "the American Dream" into the lexicon, referring to "that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement." The American Dream is about opportunity — the opportunity to pursue a better life, where one's success depends on nothing more (and nothing less) than one's own ability and effort, and where, as a result, innovators can come from nowhere to spearhead limitless human progress.

On the face of it, that dream would seem to entail enormous inequality: in a land where there are no limits on what you can achieve, some will earn huge fortunes, many will earn a decent living, and others will fail for one reason or another. Yet critics insist that economic inequality is at odds with the American Dream. Their specific arguments vary, but they all boil down to three general claims: in one way or another, inequality conflicts with economic mobility, economic progress, and fairness.

1. Inequality vs. Mobility. The best proxy for opportunity, according to the critics, is economic mobility. There are different ways of assessing mobility, but however you measure it, they say, the fact is that if you're born poor in America, chances are you'll stay poor, and if you're born rich, you'll probably stay rich. Some critics argue that rising inequality is a result of the same forces that are limiting mobility, such as the decline of unions or the minimum wage. Others paint inequality as a cause of declining mobility — citing, for instance, the ability of affluent Americans to send their children to exclusive schools that poorer parents cannot afford. In many cases, the connection between rising inequality and declining mobility is never fully spelled out: we are simply told that, for instance, the highly unequal United States has less economic mobility than our counterparts in Europe, and that we can increase mobility by molding ourselves in the image of European social welfare states.

2. Inequality vs. Progress. According to the critics, economic inequality is at odds with economic progress. The dominant view is that the last forty years have been marked by a startling rise in income and wealth inequality, as the rich got richer and the poor and middle class stagnated. Some argue that this rising inequality is a telling symptom of underlying economic problems, such as tax and regulatory policies that favor "the rich." Others claim inequality causes economic progress to slow, citing statistical correlations between high inequality and lower growth. Explanations for how inequality slows growth are all over the map, ranging from the claim that it reduces consumer spending, supposedly the driving force of economic growth, to the claim that inequality makes workers less happy and therefore less productive.

3. Inequality vs. Fairness. One of the reasons we value opportunity is that it reflects our commitment to fairness. We believe that a person's level of success should be tied to merit, and that if you lie, cheat, or steal — or simply make dumb decisions — your "privileged position" shouldn't protect you from failing. But rising inequality, the critics claim, is at odds with fairness.

Sometimes the claim is that inequality undermines fairness by giving "the rich" the power to rig the political system in their favor. "Ordinary folks can't write massive campaign checks or hire high-priced lobbyists and lawyers to secure policies that tilt the playing field in their favor at everyone else's expense," President Obama tells us. In other cases, the claim is that rising inequality is the result of injustice. According to Stiglitz, "Too much of the wealth at the top of the ladder arises from exploitation. ... Too much of the poverty at the bottom of the income spectrum is due to economic discrimination and the failure to provide adequate education and health care to the nearly one out of five children growing up poor."

Often, however, the underlying message is that economic inequality, at least beyond a certain point, is inherently unjust. In Obama's words, "The top 10 percent no longer takes in one-third of our income [as they did prior to the 1970s] — it now takes half. Whereas in the past, the average CEO made about 20 to 30 times the income of the average worker, today's CEO now makes 273 times more. And meanwhile, a family in the top 1 percent has a net worth 288 times higher than the typical family, which is a record for this country." These ratios, the president assumes, are self-evidently unjustifiable.

Whatever account any given critic endorses, the conclusion is always the same: if we care about the American Dream, we have to reduce inequality by propping up those at the bottom and by bringing down those at the top. And so along with proposals to increase the minimum wage and bolster unions, the inequality critics also advocate top marginal income tax rates well above 50 percent, huge taxes on inheritances, vast amounts of regulation designed to restrain big business, salary caps on CEO pay, and campaign finance laws to constrain political speech by the wealthy, to name only a few of their schemes. In Piketty's runaway bestseller, Capital in the Twenty-First Century, the chief proposals for fighting inequality are an annual global wealth tax of up to 10 percent a year, and a self-described "confiscatory" top marginal income tax rate as high as 80 percent.

For some, even this doesn't go far enough. There are critics of economic inequality who are largely indifferent to its impact on opportunity and want to level down society even if it means crippling economic progress. In their popular critique of economic inequality, The Spirit Level, Richard Wilkinson and Kate Pickett tell us that "we need to limit economic growth severely in rich countries," because "[o]nce we have enough of the necessities of life, it is the relativities which matter." Similarly, best-selling author Naomi Klein argues that to truly deal with the problem of inequality, we must reject capitalism altogether, give up on the idea of economic progress, and embrace a decentralized agrarian form of socialism. Left-wing radio host Thom Hartmann will settle merely for banning billionaires: "I say it's time we outlaw billionaires by placing a 100% tax on any wealth over $999,999,999. Trust me, we'll all be much better off in a nation free of billionaires."

SHOULD WE BE SUSPICIOUS OF INEQUALITY?

The inequality critics paint a bleak picture of modern America — one so bleak that many of us do not recognize it in our daily experience — and offer up solutions that many of us find deeply troubling. But at the same time, these critics are addressing issues of profound concern, and their claims come backed by seemingly persuasive evidence: statistics, studies, and books by some of today's leading intellectuals and journalists. We want America to be a land of limitless opportunity, and so their claims warrant serious consideration.

But right at the outset there's a huge obstacle to assessing their claims objectively: namely, the inequality critics have smuggled into the discussion a perspective on wealth that tacitly assumes that economic inequality is unjust.

The "fixed pie" assumption. The inequality critics often speak of economic success as if it was a fixed-sum game. There is only so much wealth to go around, and so inequality amounts to proof that someone has gained at someone else's expense. Arguing that "the riches accruing to the top have come at the expense of those down below," Stiglitz writes:

One can think of what's been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 percent would get 1 percent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone gets a smaller slice.

What this ignores is the fact of production. If the pie is constantly expanding, because people are constantly creating more wealth, then one person's gain doesn't have to come at anyone else's expense. That doesn't mean you can't get richer at other people's expense, say by stealing someone else's pie, but a rise in inequality per se doesn't give us any reason to suspect that someone has been robbed or exploited or is even worse off.

Inequality, we have to keep in mind, is not the same thing as poverty. When people like Timothy Noah complain that "income distribution in the United States is now more unequal than in Uruguay, Nicaragua, Guyana, and Venezuela," they act as if it's irrelevant that almost all Americans are rich compared to the citizens of those countries. Economic inequality is perfectly compatible with widespread affluence, and rising inequality is perfectly compatible with a society in which the vast majority of citizens are getting richer. If the incomes of the poorest Americans doubled while the incomes of the richest Americans tripled, that would dramatically increase inequality even though every single person would be better off. Inequality refers not to deprivation but difference, and there is nothing suspicious or objectionable about differences per se.

The "group pie" assumption. In his speech on inequality, President Obama said, "The top 10 percent no longer takes in one-third of our income — it now takes half." (Emphasis added.) This sort of phraseology, which is endemic in discussions of inequality, assumes that wealth is, in effect, a social pie that is created by "society as a whole," which then has to be divided up fairly. What's fair? In their book The Winner Take All Society, economists Robert Frank and Philip Cook begin their discussion of inequality with a simple thought experiment. "Imagine that you and two friends have been told that an anonymous benefactor has donated three hundred thousand dollars to divide among you. How would you split it? If you are like most people, you would immediately propose an equal division — one hundred thousand dollars per person." In their view, if the pie belongs to "all of us," then absent other considerations, fairness demands we divide it up equally — not allow a small group to arbitrarily take a larger share of "our" income.

But although we can speak loosely about how much wealth a society has, wealth is not actually a pie belonging to the nation as a whole. It consists of particular values created by particular individuals (often working together in groups) and belonging to those particular individuals. Wealth is not distributed by society: it is produced and traded by the people who create it. To distribute it, society would first have to seize it from the people who created it.

This changes the equation dramatically. When individuals create something, there is no presumption that they should end up with equal shares. If Robinson Crusoe and Friday are on an island, and Crusoe grows seven pumpkins and Friday grows three pumpkins, Crusoe hasn't grabbed a bigger piece of (pumpkin?) pie. He has simply created more wealth than Friday, leaving Friday no worse off. It is dishonest to say Crusoe has taken 70 percent of the island's wealth.

It's obvious why the fixed pie and group pie assumptions about wealth would lead us to view economic inequality with a skeptical eye. If wealth is a fixed pie or a pie cooked up by society as a whole, then it follows that economic equality is the ideal, and departures from this ideal are prima facie unjust and need to be defended. As Piketty puts it, "Inequality is not necessarily bad in itself," but "the key question is to decide whether it is justified, whether there are reasons for it."

But if wealth is something that individuals create, then there's no reason to expect that we should be anything close to equal economically. If we look at the actual individuals who make up society, it is self-evident that human beings are unequal in almost every respect: in size, strength, intelligence, beauty, frugality, ambition, work ethic, moral character. These differences will necessarily entail huge differences in economic condition — and there is no reason why these differences should be viewed with skepticism, let alone alarm.

If we keep in mind that wealth is something individuals produce, then there is no reason to think that economic equality is an ideal and that economic inequality is something that requires a special justification. That doesn't mean the claims about mobility, progress, and fairness are necessarily false. That remains to be seen. But it does mean that we have no reason to suspect at the outset that economic inequality is at odds with the American Dream. On the contrary, if we look at what made America the land of opportunity, there is every reason to think that opportunity goes hand in hand with economic inequality.

THE IDEAL OF OPPORTUNITY

If you want to understand what made America the land of opportunity — and what threatens opportunity today — the thing to know is that this was the first country that celebrated and protected the individual's pursuit of success.

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Excerpted from Equal is Unfair by Don Watkins, Yaron Brook. Copyright © 2016 Don Watkins and Yaron Brook. Excerpted by permission of St. Martin's Press.
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