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Do too few people own too much of America’s wealth? Should we even think about wealth or income inequality as a problem? If so, what policies would be most effective? Returning to the podcast to explore these questions and more, is Michael Strain.
Michael R. Strain is the John G. Searle Scholar and director of economic policy studies at AEI. Previously, he worked in the Center for Economic Studies at the US Census Bureau and in the macroeconomics research group at the Federal Reserve Bank of New York.
Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on iTunes or Stitcher, or download the podcast on Ricochet.
Pethokoukis: What’s your reaction to this popular idea that our system is rigged — or that the economy is unjust because of the existence of billionaires?
Strain: When people look at the outcomes that markets deliver, they’re not always happy. And that’s reasonable. Very few people would argue that markets delivers precisely the outcomes that we would want as a society — the distribution of income, of wealth, of consumption, et cetera. And we have a pretty extensive system of tax and transfer payments that are designed to correct the outcomes that markets produce. So one reaction that I have is that there seems to be a strawman. Nobody is saying that capitalism produces perfect outcomes.
Another more substantive reaction I have to it is that we’re in a moment of a lot of populist frustration. And on the political left that frustration manifests itself, in part, through concern about inequality and the fact that some people have really high incomes.
But what’s the problem with using public policy to bring down the people at the top, especially if it’s easier than bringing up the bottom?
You can hold that view, though I don’t share it. We are seeing comfort among the political left at using public policy to tear down people at the top. And it’s in a way that strikes me as unseemly and imprudent, especially with wealth tax proposals.
There’s no question that there are some really wealthy people who hold a disproportionate share of all the country’s wealth. That doesn’t strike me as socially unjust or morally offensive in any way, because I think we should look at how they made their money when we think about outcomes.
The richest person in the United States is Jeff Bezos. Jeff Bezos has done enormous things for society and the economy. Jeff Bezos is fabulously wealthy, but he has captured only a small share of the total value that he’s created. So that doesn’t strike me as unjust at all.
Is the system just for less wealthy people, though? As in, could a modern family still live like a normal middle-class family in 1965?
They’d have a much better life! They’d be earning more money than that family in 1965, and they would have a lot more economic opportunity — particularly for women and minorities. And they would have air conditioning, antibiotics, and all sorts of stuff. The idea that there is a broad group of people for whom life was better in the 1960s than it is today borders on the absurd.
No matter which inflation measure you use, you see historic increases in wages for typical workers, and if you look at how those wages have grown, you see 20, 30, 35 percent growth.
So if policymakers are truly concerned about inequality, and they want to fix it by bringing the bottom end of the economy upward rather than cutting off the top, what should they do?
I think that the place to start is encouraging people to work, and helping people raise their incomes. That gives them a larger flow of resources every month that they can save. I think we should also think about how to help people save, with policies that make saving easier or the need to save more salient. We could have things similar to health-savings accounts for a wider variety of things. So right now you can put money into an account tax-free and use it for health expenses. We could allow more programs like that for children’s education, unemployment, or retirement.
Also, we certainly should make it easier to build houses in cities. That would lower the price of housing, which would reduce wealth for people who currently own homes. To the extent that owning a home is a forced-savings mechanism, the number of people with savings would likely increase.
Another area where peoples’ moral compasses get confused is with heirs of billionaires. They contribute to overall inequality, and people feel especially hostile towards them because they didn’t build a billion-dollar company themselves. Do the Elizabeth Warren wealth tax-types have a point there?
Well, when we’re thinking about whether or not the distribution of wealth is a socially just outcome, I think it certainly makes sense to think about inventors and entrepreneurs differently than their heirs. But when I think about their heirs, I’m quite comfortable with their heirs having inherited money.
I mean, what’s the alternative? Should billionaires spend as much money as possible while they’re alive to leave less inheritance? I don’t know why that’s better. The money’s not sitting under the mattress, right? If they’re not spending it, it becomes available for people to borrow and that helps people, and the economy. Should the government reach in and take it? I have problems with that type of punitive, confiscatory tax. And so if it’s not being used for consumption and it’s not being paid for in terms of tax revenue, then it has to be saved. And if it’s saved it has to be given to somebody.
I think it’s quite laudable that some billionaires want to give their money to philanthropic causes, but it’s their money — they earned it. If they want to give it to their kids, that strikes me as a perfectly reasonable thing to do.
Michael Strain speaks on why proposals that combat inequality come at the expense of the rest of the economy, not to mention peoples’ well-being.
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