Politicians aiming to reduce inequality end up unintentionally making it worse.
Redistribution of wealth schemes lead to more not less to the income gap between rich and poor
Ronald Bailey | February 20, 2015
Income inequality has been attracting the attention of politicians, policy wonks, pundits, and the public. In 2013, President Barack Obama declared that “a dangerous and growing inequality” is the “defining challenge of our time.” On 60 Minutes last month, Speaker of the House John Boehner argued that “the president’s policies have made income inequality worse.” Senator Mike Lee of Utah has said that “the United States is beset by a crisis in inequality” and that “bigger government is not the solution to unequal opportunity—it’s the cause.”
In his 2013 speech, Obama also said, “We need to set aside the belief that government cannot do anything about reducing inequality.” He’s right, but not in the way he thinks. Several recent economic analyses show that the best thing government can do to reduce income inequality is to get out of the way.
For example, according to a study comparing outcomes in all U.S. states in the January 2014 issue of Contemporary Economic Policyby Illinois State University economist Oguzhan Dincer and his colleagues finds that reducing economic freedom actually tends to increase inequality. “On average, as the size and scope of government increases, so does income inequality,” Dincer tellsReason.
The authors go on to establish “Granger causality.” Simplistically stated, this means they show a causal feedback loop, in which economic intervention produces economic inequality, which in turn leads to more economic intervention. Politicians often react to rising inequality with policies that, on average, end up making inequality worse—say, by increasing the minimum wage. (That is not to say that some policies, such as raising the top marginal tax rate, could decrease inequality. But taken as a whole, the effect moves in the other direction.)
First consider the big picture. Progressives are fond of citing data that shows that income inequality in the United States was falling throughout the 1950s and 1960s. The trend seemed to be following a hypothesis proposed by the economist Simon Kuznets. As economic growth takes off, Kuznets argued, income inequality initially increases as some workers move from low-productivity sectors into higher-productivity sectors. As the higher-productivity sectors absorb a growing proportion of workers, income inequality then begins to decrease, producing the famous inverse-U-shaped relationship between income inequality and economic growth.
https://reason.com/archives/2015/02/20/less-economic-freedom-equals-more-income#.8gw9uv:sDWF
