“Income Inequality” – Missing the Point

President Obama, Paul Krugman tells us, has declared war on income inequality. In fact, income inequality is at the root of just about everything wrong with the economy, according to the left. If we could somehow shrink that ratio, everyone would be happier, except for a few bloated plutocrats. Krugman’s first example for a great policy is the new overtime regulations. The trouble is, as my colleague Trey Kovacs points out, the overtime regulations aren’t designed to give people the “pay raise” that its cheerleaders celebrate. They’re designed to stop employers asking people to work more than 40 hours a week. That will put a big crimp in aspiration. Even the US Public Interest Research Group knows that it will badly affect their operations (this may be a first for me, saying US PIRG is right!).

The overtime rule will do little to reduce inequality. More importantly, it will do very little to improve the status of the poor and middle class. In fact, the whole concentration on that ratio between rich and poor misses the point. Income inequality could worsen even as everyone gets better off. Suppose that the incomes of the poor and middle class tripled overnight. If on the same night the incomes of the rich just doubled, then income inequality would have worsened and Elizabeth Warren would be demanding heads on spikes.

This is why my Competitive Enterprise Institute co-author Ryan Young and I have together released two new studies today that call for an end to this meaningless concentration on ratios and instead a look at three fundamental questions:

  • How are the poor actually doing?
  • Is their economic situation improving over time?
  • What policies can make the global poor better off over time?

The answers to these questions point us in a very different direction from Krugman and the President. The first study, People, Not Ratios, looks at the first two questions and finds that people are doing much better than headline figures suggest (something backed up by a new study from the Federal Reserve of San Francisco). The second study, The Rising Tide, looks at policies touted by Krugman and co as good for reducing inequality, such as the minimum wage and collective bargaining and finds that they merely benefit some while hurting many more, resulting in net welfare losses. Instead we propose a series of institutional reforms that have been shown to benefit the poor in particular. they include:

  • An honest price system, promoted by a monetary policy rule and, if possible, competing currencies
  • Ensuring access to capital by removing artificial restrictions on lending
  • Ensuring access to affordable energy by concentrating on what delivers most benefit to people
  • A new set of “rules about rules” that reduce the barriers to people earning a living

You can read more about the papers here.

In general, it would be nice if people talking about the plight of the poor and middle class actually treated them as ends rather than the means to political ends. Our set of policies is designed to do just that. It’s time for real questions (and answers) to the poverty and inequality debate.

Originally posted to National Review