The Economics of Inequality

July 21, 2021 by Dan Mitchell

In my four-part series on inequality (here, here, here, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.  One reason is that some of them don’t care.  As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.