Reducing Income Inequality

At The Hill Nicholas Sargen analyzes the Biden Administration’s strategy for reducing reducing income inequality:

A key priority of the Biden administration is to lessen the disparity in income between the wealthiest U.S. households and the rest of the populace: The top 10 percent today account for one half of pre-tax national income.

Emmanuel Saez of U.C.-Berkeley contends that income inequality is the greatest since the Gilded Age of the 1920s. It has resulted in strains between “the haves,” who are collage educated, and “the have nots,” who are less well-educated and tend to live in rural areas or inner cities.

As America has become more polarized, there is growing recognition that the latter groups can no longer be ignored. Still, many wonder what can be done to lessen the disparities in income and wealth.

The measures he considers are direct payments, increasing income taxes on the wealthiest, and increased federal spending on infrastructure, R&D, and education.

He lost me with this claim:

What is clear is that there are no easy fixes.

Actually, there are some easy fixes. It’s just that the policies that have created the disparity aren’t related to direct payments that are too low, inadequate taxation, or not enough spending on infrastructure, R&D, or education and have constituencies of their own. Let me offer some examples.

One of the biggest reasons for accelerating income and wealth inequality is the massive subsidies that the federal government but even more importantly the Federal Reserve has been lavishing on the wealthiest people in the society over the period of the last 20 years. They range from direct subsidies to the banking industry especially during the financial crisis to being able to borrow at little or no interest and use the proceeds to purchase stocks and bonds. The solution to that is like the old vaudeville joke:

Man to doctor: It hurts when I do this (he rams his head into the wall).

Doctor to man: Stop doing that!

I’ll give you another one. Presently, about 15% of the population is composed of immigrants, many with limited English and few skills that employers will pay more than minimum wage for. Besides, why pay more? There are plenty more where those came from. My preferred strategy for dealing with that is to limit immigration to people who can actually pay their own way and a few genuine refugees. Make it practically impossible to work in this country without permission with serious, strenuous workplace enforcement. That would make our system resemble that of Canada, Australia, and New Zealand, countries we resemble in other ways, rather than the mess we have now. Unless you have some clever way of ensuring that uneducated non-English speaking peasants from Third World countries can arrive here and immediately start earning above median income, our present system is guaranteed to increase income inequality.

Another one. When income inequality really began to take off was during the Clinton era when tax reform encouraged companies to reward executives with stock options or other deferred income. Not only did that increase the incomes of top executives by an order of magnitude it changed their incentives in perverse ways. I think we can consider that an experiment that has failed. Time to shut it down.

Fourth, disincentive offshore outsourcing by making companies that do so ineligible to bid on government contracts.

Finally, remember H. L. Mencken’s wisecrack: there is always a well-known solution to every human problem — neat, plausible, and wrong. Stop proposing simple-minded solutions: give people more money, raise taxes, spend more on education. Those solutions are neat, plausible, and wrong.