Henderson on Economic Inequality
By David Henderson
[L]et us consider two historical figures of twentieth-century American history. The first came to prominence in the late 1940s, when he invented a light one-man chainsaw, and sold more than 100,000 of them at a price that made him quite rich. That added slightly to wealth inequality. But although the wealth gap between this man, inventor Robert McCulloch, and his customers was higher than it was before, the customers got a product they valued that made their lives easier. In economists’ terms, the wealth of these customers increased slightly. Is that increase in wealth inequality a problem? When I’ve asked college students this question, the vast majority says no–and I agree.
Now let’s consider the second figure. In the early 1940s, as a Congressman from Texas, this man defended the budget of the Federal Communications Commission when a more senior member of the House of Representatives was trying to cut it. So the FCC owed him a favor. One FCC official suggested the politician have his wife apply for a license for a radio station in the underserved Austin market. She did so and within a few weeks, the FCC granted her permission to buy the license from the current owners. She then applied for permission to increase its time of operation from daylight-hours-only to 24 hours a day and at a much better part of the AM spectrum–and the FCC granted her permission within a few weeks. The commission also prevented competitors from entering the Austin market.
These moves made Lyndon Johnson and his wife very rich. When he ran for President in 1964, the radio station accounted for over half of his $14-million net worth. This increase in his wealth added slightly to wealth inequality. But customers in the Austin market were, due to the FCC restrictions on further radio stations, slightly less well off than if more stations had been allowed. When I tell this story to college audiences and ask them if they think there’s an important difference between McCulloch’s and Johnson’s methods of increasing wealth inequality, virtually all of them do, and few will defend the latter way.
This is from by David R. Henderson, “Income Inequality Isn’t the Problem,” Defining Ideas, Tuesday, February 20, 2018.
Here are the final two paragraphs:
If the problem we care about is poverty, then the calls to tax the rich and reduce income inequality are misguided. Instead, we should be cheering for policies that lead to higher economic growth. One other important measure is increased immigration. Allowing more immigration into the United States would allow people to move from low-productivity jobs in poor countries to higher-productivity jobs in America. That would dramatically improve the plight of the poor while also improving, but by a smaller margin, the well-being of the rich. Piketty, for all his faults, put his finger on how to do so. He wrote: “A seemingly more peaceful form of redistribution and regulation of global wealth inequality is immigration. Rather than move capital, which poses all sorts of difficulties, it is sometimes simpler to allow labor to move to places where wages are higher.”
Thanks to Emily Esfahani Smith for doing an excellent job of editing.