Is the "inequality" issue a cover for something else?
By Scott Sumner
Consider the following thought experiment. The Democrats take control of Congress and the Presidency. With more than 60 seats in the Senate, they can do as they like. Do they go after the root cause of inequality in income?
Let’s make it more specific. Lots of the growing inequality is due to the winner-take-all nature of the modern economy, where marginal costs are extremely low and markets are protected by intellectual property laws. Huge profits go to the knowledge-based industries, and the financiers who finance them. We used to need armies of workers to produce GM cars, but we obviously don’t need many workers to produce the “products” of Google, Facebook, etc.
You can find lots of economists on both the left and the right who favor weakening the IP laws. They argue that the protections have gone far beyond what could be justified by the need to encourage innovation. Companies like Disney rake in billions in rents from trivial creative innovations like Mickey Mouse, invented many decades in the past. So it would seem like a no brainer that a future Democratic administration would want to weaken these laws. And yet I don’t think any reasonable person would expect them to do so. Why not?
One answer is that a weaker set of IP laws would benefit relatively poor Asian consumers in places like China against rich US companies. And while Democrats may care a little bit about inequality, they care far more about national self-interest. Because the US dominates the global market for high tech/biotech/movies and lots of other IT intensive industries, cracking down in IP abuses would hurt the US.
But why should Democratic politicians care about the welfare of big US corporations? Because they pay lots of taxes. And big government is an issue that Democrats care about even more than inequality.
Even formerly moderate Democrats like Larry Summers are now calling for much higher levels of government spending. But that takes money, and if we reduce inequality in such a way that US businesses make less money and Chinese consumers pay lower prices, then there will be fewer geese to lay the golden eggs needed to finance big government.
And it’s not just about the potential loss of wealth to foreigners. Even within the US, inequality helps foster big government. More and more Americans make too little to pay income taxes, and an increasing proportion of total tax revenue is paid by the wealthy. This is also true in big spending states like California and New York, where tax revenues are highly dependent on fat profits in Silicon Valley and Wall Street. It’s easier to raise revenue when there are fewer taxpayers to squawk.
I suppose you could argue that just as much revenue could be raised from a country with the same GDP, but more equal income. But in practice this won’t work in the US. When income was much more equal in the 1970s, tax revolts broke out in states like California and Massachusetts. Recently the Democrats have made a big deal about helping the middle class. You obviously cannot help the middle class by instituting the sort of 20% VAT that you see in Europe. If you combine their preference for a progressive income tax, with the need to raise huge sums of money for their wish list of big government programs, then perhaps inequality isn’t really the problem the Democrats claim it is, but rather the hidden key to achieving their real agenda, big government.
A few years back London elected a socialist mayor, who governed as a moderate. The reason is obvious; the success of London depends on the success of a set of highly inegalitarian knowledge-based industries. The same is true of places like New York, Chicago, Boston and California. That’s why any left-winger elected in those places will eventually start to look more like a neoliberal.
Just to be clear, I’m not saying the Democrats don’t care at all about inequality. I’m saying there are other things they care about much more than inequality, including the national interest and big government. When the goals conflict, look for the inequality agenda to be tossed aside.