Trial And Error And Income Inequality

A recurrent theme here is the fallacies of the progressive world view.  The top fallacy is the idea that one or a few really smart people can so thoroughly understand the world that they can redesign and restructure the arrangements that have been arrived at through voluntary exchange and thereby make everything fair and perfect.  They don't realize that no one person, or even group of people, is smart enough to come up with any of the thousands of inventions and advances that we take for granted and are critical to our lives.  These things take a vast system of trial and error, in which everyone engages, and where workable incremental advances get shared by market exchange to be combined with other advances and voila! a thousand years later you have the computer.  Of course the trouble with trial and error is that you don't get paid for the errors, only the success; and people who make big successes get paid a lot.  This is known as how the economy works in the whole country except Washington, where the pay for failure and success are the same (if you can think of any success, which I cannot right now).

And into this mix let us throw the latest progressive talking point of "income inequality."  Somehow, talk of the crisis of income inequality is suddenly everywhere.  Is it because President Obama started it and his house media just pick up and circulate his official talking points?  Anyway, we now have William Galston in today's Wall Street Journal writing about what he calls a "bipartisan consensus" developing on the subject of income inequality.  Galston cites a lot of data from a Pew survey conducted in January and available here.

And what is the so-called bipartisan consensus?  Galston is not overly specific.  But he does cite Pew as finding that 27% think the government should "do a lot" to reduce poverty, and 37% think it should "do something."  OK then, what?  As to "signs that some convergence is developing" Galston then cites a speech by Robert Putnam of Harvard given at a recent conference on economic inequality at Kenyon College.  Says Galston:

Putnam spoke movingly about the differences between growing up in securely middle-class families and in families living on the edge of poverty.  Middle-class children are far more likely to grow up in two-parent families, to be talked to and read to by their parents, and to benefit from family investments in enriching activities.  Many more poor and working-class children grow up with one parent who often engages in alcohol or drug abuse.  As they move into middle school and high school, the children of the middle class are more likely to engage in extracurricular activities -- including sports -- that enable them to develop the soft skills of cooperation and teamwork that matter so much in today's economy.

Now really, in all of that is there anything that the government can do a single thing about?  How exactly is the government supposed to force parents to stay together in two parent families, or to talk or read to their children?  Or to stop abusing alcohol or drugs?  Is Galston (or Putnam) suggesting that if only the government hands out more money to those at the bottom that they will suddenly get their kids into extracurricular activities?

In terms of government actions that might supposedly reduce income inequality, the only one that Galston mentions is increasing the minimum wage.   Anyone who knows anything about the income inequality statistics knows that increasing the minimum wage will increase rather than decrease measured inequality as determined by the most common measures.  That's because minimum wage earners, contrary to what might be your instinct, are not actually at the bottom of the income distribution.  The bottom of the distribution consists of zero and near-zero earners (who could be the unemployed, or unpaid interns, or graduate students, or people changing careers, or drug dealers who don't tell the government about their income, or many other categories), and increasing the minimum wage increases the number of zero earners by rendering some people unemployed.  Meanwhile, some minimum wage earners are in the next-to-bottom decile of the income distribution, but most are higher up, including at the very top, because income distribution goes by "household" not individual, and most minimum wage earners are in multiple-earner households.

And then of course there's that evil top 1%.  In large part, they are the ones who have scored a success in the trial and error game.  As Galston's source Pew points out, the gap between the top 1% and everybody else has been growing for decades.  Since when exactly?  Actually since the late 70s, the time of Jimmy Carter's "malaise" speech (July 15, 1979).  Were you around for it?

I want to talk to you right now about a fundamental threat to American democracy. . . . The threat is nearly invisible in ordinary ways. It is a crisis of confidence. It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation.  The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America.

The share of national income of the top 1% was under 10% in the Carter years, having fallen from a peak of over 20% in the 1920s.  Oh, and the top federal marginal tax rate was 70%.  People stopped innovating, the trial and error game slowed to a crawl, and nobody reported high incomes to see the government just take it all.  Today the share of the top 1% is back in the low 20s%, as the innovation machine has cranked back up.  Is the Carter-era model one we should go back to?

So I guess the "bipartisan consensus" is that the government must "do something," but there's no remotely plausible proposal on the table that would actually meaningfully move the income inequality numbers without seriously degrading economic performance to everyone's detriment.  But anyway, let's stir up some resentment!