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John C. Goodman / Jan. 19, 2014

In Defense of Inequality

During the 2008 presidential election, Barack Obama was asked if he would favor a higher capital gains tax rate, even if the government received less revenue as a result. His answer: Yes. When you stop to think about it, that's a remarkable answer. By hypothesis, everyone is worse off. The owners of capital are worse off. The government is worse off. Poor people who depend on government are worse off.

During the 2008 presidential election, Barack Obama was asked if he would favor a higher capital gains tax rate, even if the government received less revenue as a result. His answer: Yes.

When you stop to think about it, that’s a remarkable answer. By hypothesis, everyone is worse off. The owners of capital are worse off. The government is worse off. Poor people who depend on government are worse off.

Yet Obama’s answer wasn’t remarked upon. It was generally ignored. The reason: I think most people in the mainstream media took it as aberration. Maybe even a misstatement. And that is because the mainstream media doesn’t take the president seriously when he says he is against inequality – an understandable attitude, given that the first family just finished a 17 day, $4 million vacation in Hawaii.

But I have it on good authority that the president repeated that answer to the very same question in private fund raisers. So I’m willing to entertain the idea that he really means it. That implies that for Barrack Obama equality is a serious value – one that should be pursued even if it requires the destruction of wealth, less revenue for government, less welfare for the poor and compromising on other things that are also of value. Not only am I willing to take Barack Obama seriously, I’m willing to give the benefit of the doubt to Paul Krugman, Joe Stiglitz, Robert Reich and others.

Let’s admit it folks. Maybe these guys aren’t the hypocrites many of you think they are. Maybe they are really serious.

OK. So what does that imply?

Let’s take expatriation. After John Templeton renounced his citizenship and moved to Nassau (where there is no income tax), the federal government imposed penalties – to discourage other wealthy people from doing the same thing. That was because the government wants to tax them. But when a wealthy person expatriates, the distribution of income and wealth becomes more equal. Should we reverse course and encourage the John Templetons of this world to get out of town. If equality is a serious goal, we should at least relax the penalties.

At the other end of the income ladder, consider poor immigrants. Every time one comes to our shore, the distribution of income becomes more unequal. But the same could be said if the immigrant is rich. Any immigrant who isn’t earning close to the average income is going to make the distribution less equal as a result of his immigration. If equality is a serious goal, we definitely need a different immigration policy.

Then there is federal aid to the students at Harvard. Granted, many of them may be poor right now. But if they were smart enough to get into Harvard, their lifetime expected earnings are way above average. And what’s true of Harvard is true of Yale, Princeton, etc. In fact, an argument can be made that all aid to college students everywhere contributes to inequality. If equality is a goal, at least there should be a lot less of it.

Then there is he welfare state. To the degree that it encourages people to be poor or have children who will grow up to be poor, it is certainly not performing an egalitarian function. Instead of paying welfare mothers more money when they have another child, perhaps there should be financial penalties.

More generally, all means tested entitlement benefits contribute to inequality of income and wealth. The reason: they discourage work and income earning. Unemployment insurance benefits, Food Stamps, Medicaid – all these programs and more contribute to inequality. They encourage people to have less income and fewer assets than they otherwise would.

And as we have previously mentioned at this site, it’s hard to think of an institution that causes more inequality than the lottery, even though lotteries are a favorite source of funds for Democratic legislatures and Democratic governors.

But before we rush out and change all these laws let’s stop and reconsider. If inequality is a bad thing, there must be victims. Yet if penniless immigrants come to our shore, knowing that their arrival makes the distribution of income more unequal than it was and knowing that they will be at the bottom of the income ladder initially, then it’s hard to argue they are being victimized.

I know I would much rather live around billionaires than people who earn what I do. People with a lot of money create business opportunities, employment opportunities and even social opportunities that I would otherwise miss out on. If there were no rich people around, I would never have been able to sit in a box at Cowboy Stadium, or sail in a yacht, or drive as Aston Martin. In fact, if there were no rich people, there wouldn’t be any sports boxes or yachts or Aston Martins.

For almost any skill or attribute, think of a bell curve distribution. Most people are near the middle of the distribution, while the most accomplished 2% are way out on the right tail. Now think about how your life is richer and more fulfilling and enjoyable because of the 2%. If you could take a magic wand and remove the 2% who are the best football payers, how enjoyable would Sunday’s TV football games be? Would you watch at all if the players on the field were all of “average” ability?

The same principle can be applied to other sports (baseball, basketball, hockey, etc.), to music (what if there were no Beethoven, Mozart or Rachmaninoff?), to film (what if there were no Betty Davis or Humphrey Bogart?) and to singing (no Beyoncé or Bob Dylan or the Beatles?)

The most important inequality however is intelligence. What we loosely call “genius” is a person with an IQ in the top 2% of the IQ distribution. Have you ever thought what would have happened if some freak accident of nature prevented the top 2% from ever being born. If nature’s distribution of IQ were only slightly narrow than the one we experience, we never would have had a Euclid, a Galileo, a Newton or an Einstein. In the business world, we never would have had a Thomas Edison, a Steve Jobs or a Bill Gates.

Not everyone with a high IQ is a high flyer. In fact the vast majority are not. But all the great scientific discoveries and all the great innovations came from people out there on the right tail. Without them, life for you and me today would be little different than it was in medieval times.

So the next time you say a prayer of thanks be sure to thank whatever Gods may be for the fact that we are not all the same.

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