Desperate for a diversion from the disasters of Obamacare, the president has conjured up the old leftist “income inequality” cliché. His court-pundits complain that “the richest nation on earth is starting to resemble a banana republic,” according to The New Republic, while Berkeley Professor Robert Reich has thundered against “casino capitalism,” blaming it for “the greatest concentration of the nation’s income and wealth at the very top since the Gilded Age of the nineteenth century, with the richest 400 Americans owning as much as the bottom 150 million put together.” Democrats, no doubt cheered by left-over-leftist Bill de Blasio’s election as mayor of New York, and excited by his Occupy Wall Street rants, apparently believe that such class-warfare rhetoric is a political winner. So be prepared for more of the same, and for demands to raise the minimum wage and gouge even more money from the “millionaires and billionaires.”
Fretting over income inequality, however, has little to do with economic reality. It’s a statistical sleight-of-hand that counts only “money income” and ignores non-cash transfers in order to decry how much more income the top 1% are earning compared to everybody else. In fact, when the value of government transfers such as Medicaid and the Earned Income Tax Credit are included in calculating income, income inequality actually declined 1.8% between 1993 and 2009. Equally revealing is the fact that in 2005 those in the bottom 20% of earners consumed almost twice their income, again because of the value of non-cash transfers. And that doesn’t count the underground economy, everything from working for cash to more unsavory occupations. That’s why the statistical poor enjoy living standards higher than the average European. And that’s the real point––not how much the rich have, but how much everybody else does.
So what is all this hyperventilating about, apart from political demagoguery? Don’t underestimate the sheer ignorance of some people about how free-market capitalism works. They seem to think of wealth in medieval terms, as fixed resources like land, herds, forests, or precious metals that can be divided only so many times, a zero-sum process that requires some to have less for others to have more. Capitalism, of course, creates new wealth that is widely distributed, the riches of one leading to a higher standard of living for many. Microsoft founder Bill Gates is worth $78.5 billion, but his company and related businesses have created 14.7 million jobs globally. For every dollar Microsoft earns, affiliated companies earn $7.79. That’s the genius of capitalism, which allows a few to get rich and in the process make millions of others not necessarily rich, but better off than they were.
More important than ignorance of kindergarten economics, though, is the radical egalitarianism that has always been the bane of democracies since ancient Athens––the notion, as Aristotle said, “that those who are equal in any respect are equal in all respects; because men are equally free, they claim to be absolutely equal.” Genuine equality––the equality of all under the law, and the equality of opportunity––will not satisfy the radical egalitarian. He must have equality of result, and since the most obvious and galling sign of inequality is that of property and wealth, he will then demand redistribution of property to move closer to that aim.
The American Founders understood this nexus of egalitarianism, the unequal distribution of property, and political strife. As James Madison put it, “The diversity in the faculties of men from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of Government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results: and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.”
Notice that Madison assumes that the unequal distribution of ability, hard work, virtue, or even luck, all of which create the inequality of wealth, is an unchanging fact of human nature. As a result, those with more wealth, and those with less, will form different factions that will attempt to dominate the government in order to advance their interests. The Founders were particularly wary of the majority dominating the government and using its power to redistribute the property of the better off, at the same time they understood that the rich would use political power to their advantage. As Gouverneur Morris said during the Constitutional convention, “The Rich will strive to establish their dominion and enslave the rest. They always did. They always will. The proper security [against] them is to form them into a separate interest. The two forces will then control each other . . . By thus combining and setting apart, the aristocratic interest, the popular interest will be combined [against] it. There will be a mutual check and mutual security.”
Hence the Constitutional order of checks and balances was created on this foundation of clashing interests in order to keep one faction from tyrannizing over everybody else.
Obviously, this harping on income inequality is just another example of how progressivism has discarded the philosophical foundations of the Constitution. Rejecting the unequal distribution of ability and virtue among people that Madison recognized, the Progressives under Woodrow Wilson believed that unjust social and economic institutions accounted for inequality of income, and they wanted to increase the power of the state to correct this injustice. Thus early in the 20th century Progressives pursued what in 1918 economist E.R.A. Seligman called “fiscal justice” by successfully pushing for the Income Tax. Seligman was commenting on the 1917 Tax Act, which lowered exemptions and raised rates. This increase came a year after the 1916 Revenue Act, which had nearly doubled the 7% top rate established 3 years earlier by the Sixteenth Amendment, and created an inheritance tax. The New Republic called this expansion “a powerful equalitarian attack upon swollen incomes.” Since then the income tax has become the ever-expanding revenue stream for achieving the progressive aim to “pass the prosperity around,” as Albert Beveridge said at the 1912 Progressive Party presidential nominating convention. A hundred years on, the progressive Democrats are still attempting to use federal taxing power to defy human nature, the free market, and the Constitution in order to mount an “equalitarian attack on swollen incomes” and to “spread the wealth around,” as Obama famously said.
The rhetoric of class warfare, however, exploits a more unsavory dimension of democratic man’s desire for absolute equality, one noticed by Alexis de Tocqueville in Democracy in America. “It cannot be denied,” Tocqueville wrote, “that democratic institutions strongly tend to promote the feeling of envy in the human heart; not so much because they afford to everyone the means of rising to the same level as others as because those means perpetually disappoint the persons who employ them. Democratic institutions awaken and foster a passion for equality which they can never entirely satisfy.” Equality of opportunity means the chance to rise as high as one’s talents, virtues, and hard work can take him. Too often those who fail will refuse to accept their lack of these qualities and blame those who possess them, and in the “acrimony of disappointment,” Tocqueville writes, find “superiority, how legitimate it may be” to be “irksome in [their] sight.”
This envy and resentment is readily fostered and exploited by politicians seeking support for increasing spending on welfare and entitlements in order to maintain their own power and increase that of the state. Meanwhile, welfare destroys the virtues and habits necessary for success, while punitive taxation, deficit spending, bloated government, and intrusive regulation all hurt economic growth and reduce opportunities for those who do want to better themselves.
Obviously, modern “income inequality” rhetoric is a political smokescreen, which explains its inconsistencies. We do not hear Obama and the Democrats decrying the bloated incomes of progressive actors, television talk-show hosts, rap moguls, or sports stars. Their demonization of Wall Street doesn’t stop them from accepting campaign contributions from investment bankers or working for Goldman Sachs after leaving government. Worse yet, they are completely indifferent to the assault on the Constitutional order this rhetoric represents, or the divisiveness sown among the citizens by stirring up destructive passions like envy and resentment. All they care about is keeping their own power and privilege no matter what the social and economic costs.
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