Rosen: Populists equalize poverty

Friday, January 19, 2007

With the Democrats back in power in Congress and with the 2008 election campaign already upon us, you'll be hearing much more about "income inequality." This is a major issue for "progressives" (when you hear that word, think "socialists") like Speaker of the House Nancy Pelosi. Populism is back in fashion.

By populism, I mean the exploitation of the uninformed, angry impulses and unfiltered passions of the masses. That anger and resentment has historically been directed at the usual villains and cardboard stereotypes: bankers, insurance companies, "big pharma" (that means drug companies), agri-business, "the military-industrial complex," free trade, free markets and, of course, "the rich." This mentality feeds on conspiracy theories and simplistic fantasies about the way the world works. It seeks to impale the minority of "haves" on the pitchforks of the more numerous "have nots." When you do the political calculus, it can seem like a seductive winning formula for many politicians.

Complaints of income inequality are nothing new. Will Durant traces its history to ancient Rome. He observes that: "The concentration of wealth is a natural and inevitable result of the concentration of abilities in a minority of men and regularly recurs in history . . . Despotism may for a time retard the concentration; democracy, allowing the most liberty, accelerates it."

Along the way, societies have dealt with income disparities, as Durant puts it, through "legislation redistributing wealth or by revolution distributing poverty." Alexis de Tocqueville, writing in Democracy in America in the 1830s, cautioned that democracy could be taken too far, noting that "there exists also in the human heart a depraved taste for equality, which impels the weak to attempt to lower the powerful to their own level, and reduces men to prefer equality in slavery to inequality in freedom."

The French Revolution consumed itself on populist excesses and atrocities on persons and property in the name of "egalitarianism." The difference between a prosperous free society like ours and impoverished, collectivist despotisms is the difference between our notion of equality of opportunity and the self-destructive egalitarian notion of equality of outcome.

To be sure, there are some very rich people in America who earn and possess hundreds or thousands of times what poorer people earn or possess. But the poor in this country are only relatively poor. We have no abject poverty. On the contrary, America's "poor" have cars, TVs, appliances, computers, $200 basketball shoes and own their own homes. Their lifestyle would be the envy of most of the world's population.

As long as there's relative wealth, there will always be relative poverty. The only alternative is an impossible one: absolute income and wealth equality. In a market economy like ours, the state of the economy will be never be good enough for some and never bad enough for others. In a dynamic economy, there will always be relative winners and losers. Some industries will be ascendant and others will be in decline. For the vast majority of Americans, today's income disparities are mostly related to differing levels of education and skills of marketable value.

Be wary of misleading economic statistics glibly tossed around by populist politicians. A flood of low-skilled immigrants, many illegal, has had a downward influence on average wages. Increases in nonwage compensation - like employer-provided health insurance or deferred compensation in the form of generous defined-benefit pension plans for government employees - are frequently ignored in the wage data. Then there's the discrepancy between reported incomes and consumption, with consumption data - a much better measure of living standards - showing far less inequality.

Politicians and the U.S. government have long been in the business of redistributing income through progressive taxation (the top 10 percent of Americans pay two-thirds of all income taxes; the bottom 50 percent pay only 3 percent) on the one hand, and transfer payments to the poor and middle class on the other. Remarkably, the official income-distribution figures don't subtract income taxes paid by heavily-burdened net taxpayers. Compounding the distortion, cash transfers and the cornucopia of government services and subsidies obtained by net tax receivers are also ignored. Even though we spend hundreds of billions on this, it's like those benefits don't exist.

Individual incomes are determined objectively in the marketplace. When politicians or labor unions don't like the results, they meddle in people's lives and businesses in pursuit of power while invoking the name of "social justice," today's name for egalitarianism. Excessive concentration of income and wealth can destroy a society politically. We're nowhere near that point. Excessive redistribution of income and wealth - without regard for talent and productivity - can destroy a society economically. That's the more tangible danger.

Mike Rosen's radio show airs daily from 9 a.m. to noon on 850 KOA. He can be reached by e-mail at mikerosen@850koa.com.