Why Inequality Is the Democrats’ Dilemma
Strike up a conversation with any taxi cab driver or any fry cook at a roadside diner and the word "inequality" is unlikely to ever come up.
Strike up a conversation with any taxi cab driver or any fry cook at a roadside diner and the word “inequality” is unlikely to ever come up. That’s not on the list of top concerns for middle class America. It’s also not on the list of concerns for the world’s poor. Millions of people are willing to risk life and limb just to come here and start out at the bottom of the income ladder.
(Don’t the immigrants realize how unequal things are? Yes, they want to live in a country where a poor immigrant can become a billionaire.)
So why is anyone claiming that inequality is our most important problem? Because the chattering class has decided that stoking envy is the only way to energize the Democratic Party. Think about the problems we really do have: runaway entitlement spending, poor public schools, welfare dependency, an overly burdensome tax system and anemic economic growth. In every case the solutions we are debating come from the right: Privatization, school vouchers, tough love, a flat tax and lower taxes on capital.
The left has no solutions, or at least none that anyone takes seriously. So, over the years of the Obama presidency the topic of inequality has emerged front and center. Democratic candidates could rail against the super rich and imply that their high incomes are the cause of everyone else’s stagnating income, without ever saying what exactly they would do about it.
Until Bernie Sanders came along. Sanders actually has a few concrete proposals — including the idea that we should become like Denmark, a high tax welfare state. Once the discussion turns from pure demagoguery to serious conversation, inevitably we are forced to look at what economists have to say. (Warning: it’s not good for Democrats.)
In a Brookings Institution study, Peter Orszag (former chief economist for President Obama) and his colleagues discovered that if you raised the top tax rate from 40 percent to 50 percent and redistributed that money to people at the bottom, the top 1 percent’s share of income would only decline from 16.4 to 15.6 percent. The Gini coefficient (the numerical measure of inequality) would change so little you would have to squint to see it.
In other words, you can’t solve the problem by taxing the rich. If taxation is your only tool, you have to break again one of Barack Obama’s frequently broken promises and raise taxes on the middle class.
Then there is the question of why we have increasing inequality in the first place. Another study by Orszag and current Obama chief economist Jason Furman found that a primary source of inequality among people is inequality among firms. Take a look at the chart below. If you happened to be working for one of the top 10 percent of most successful companies over the past two decades your salary, bonuses and other compensation probably soared. If you have been working for the median firm, your income has probably risen modestly. If your employer is in the bottom half of the distribution, your income has probably been stagnant.
So what can be done about that? The idea of arresting the growth of highly successful companies is silly. But that isn’t necessarily a deal breaker for the left. The problem for Democrats is that Silicon Valley is heavily Democratic. It’s one of the places Democrats go to get mega gifts. My bet is that you won’t hear a peep about inequality among firms in the coming election.
That leaves Denmark. People on the left are fond of citing the Nordic states — Denmark, Sweden, Norway, Finland, and Iceland — as examples of countries with higher taxes and less inequality. It’s easy to see why. As Matt Yglesias writes
Danish mothers enjoy 18 weeks of guaranteed maternity leave at 100 percent of their ordinary pay. Danish students leave college free of debt. Everyone is covered by a national health insurance system and can take advantage of subsidized child care; plus, thanks to a generous welfare system, Denmark’s child poverty rate is about a quarter of America’s.
So how do the Danes afford all that? With high taxes. As Yglesias makes clear, it’s not just taxes on the rich. The top tax rate in Denmark is 57 percent, about the same as it is in California. If California wanted to become like Denmark, it would basically leave the rich alone. But it would have to sock it to the middle class with effective tax rates averaging from 35 to 48 percent. Then the state would need to pile on with 25 percent value added tax — which is basically a form of sales tax and every bit as regressive. Car addicted Californians would also experience a huge spike in the price of gasoline and a 180 percent tax on the price of a new car!
So how does Denmark keep from looking like Greece? Answer: They believe in privatization, deregulation and free enterprise. Denmark is rated as one of the best places in the world to do business. It scores higher on the Heritage Economic Freedom ranking than the United States does. Unlike the US, public sector unions in Denmark don’t control public services and push up costs with job protecting regulations. For example, a private, for-profit company is currently in charge of 65 percent of municipal fire departments and 85 percent of ambulance services in the country. According to Yglesias:
In Copenhagen … the metro is driverless, the suburban rail network features one-man train crews, and many urban bus lines are run by private companies. These are all kinds of measures that US labor unions would normally oppose….
Øresund Bridge from Copenhagen to Malmö was constructed at a drastically lower price than the United States is prepared to spend to replace the Tappan Zee Bridge in New York even though the Nordic bridge is substantially longer and includes a major train component along with the roadway.
The Danish model is awfully hard to emulate if public sector unions are the backbone of your party.
Finally, there is Yale law professor Stephen Carter’s observation that the word “inequality” was used eight times by the candidates and once by the moderator in the Democratic debate the other night. In every instance the focus was on taxing the rich, not on helping the poor. In fact, the word “poverty” was used hardly at all. Apparently, envy sells better than charity when communicating with Democratic voters.
Yet Carter, himself a bona fide liberal, notes that we don’t really have an inequality problem. We have a poverty problem.
That Democrats ignore it is hardly surprising. When is the last time you heard a Democratic candidate for president talk about the poor in any respect? The last one I can remember was John Edwards and that was eons ago.