Paul Krugman recently "penned" an op-ed called A Tale of Two Moralities in the New York Times that was intended to address the ideological divide between so-called "liberals" and "conservatives" on the issue of economic "fairness". What Mr. Krugman did, however, was he perpetuated the single most harmful meme in American economic thought. He framed the debate, as the majority of liberals wrongly do, as a moral conflict between the notion that "it's not right for rich people to be so rich while poor people are so poor" and the notion that "people deserve to keep the money they have earned, no matter how rich they are."
"One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.
The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty."
Framing the debate in this way and seeing the issues in this way, again, as American "liberals" commonly do, is completely wrong and fundamentally fails to recognize what is really going on in the American economy. Framing the debate in this way is the single biggest reason why, as Mr. Krugman points out, both sides end up talking past each other and the discussion goes nowhere.
What Mr. Krugman has done here, and what most liberals do when they talking about economic inequality in moralistic terms, is grant a starting assumption that the underlying economic system is fair in the first place, starting from the basis that the incomes of the super-rich are in fact "earned". Instead of challenging the fundamental validity of incomes in America, they grant the presumption that incomes are fundamentally valid, and then go on to claim that people who "earn" huge incomes should "be nice" and "give" some of their "earnings" to "less fortunate" people.
But all of this is complete nonsense.
The fundamental reality is that #1) the incomes of the super-rich are not earned and #2) there is a direct relationship between one's income and the benefits that one receives from society, such that the higher one's income the greater the benefits that one receives from society. Thus, there is an obligation to pay an increasing amount of one's income toward the funding of public goods the higher one's income is, and when one doesn't, they are in fact freeloading.
Let's start by simply addressing the income issue. The way that Mr. Krugman and most other liberals frame the issue is as follows:
Paul goes out into the woods with his ax and he chops down 2 trees a day, and after he chops down 2 trees he calls it a day and goes home to relax and drink beer. Every week Paul brings his 10 trees to market to sell them.
Peter goes out into the woods with his ax and he chops down 10 trees a day, staying out into the evening to finish his work. Every week Peter brings his 50 trees to market to sell them.
Peter has a much higher income than Paul.
But says Mr. Krugman, it's "not fair" for Peter to have so much more than Paul, so Peter should give Paul some of the money he has earned so that Paul won't be so poor, and if Peter won't give it to him, then we should "rob Peter to pay Paul".
Now you see, the problem we have in American economic discussion is that both the conservatives and most liberals are basing their arguments around this exact scenario. When economic conservatives talk about fairness and about redistribution, what they do is they frame the economic discussion around the scenario that I just provided. They frame the issue as two people who have equal types of incomes and equal opportunities, where one is just a harder worker and thus has a higher income purely because of their harder work, and thus it wouldn't be fair to take from Peter to give to Paul.
If you start with those assumptions, then the conservatives are exactly right. In the scenario that I just provided it would be unfair to take from Peter to give to Paul, in fact even Karl Marx would agree that it would be unfair to take from Peter to give to Paul.
In the scenario that I just provided, the income inequality is a product of fairness, and making the incomes more equal would require "redistribution". This is exactly what conservatives go on and on about.
The problem is that the economic framing of the debate by conservatives, which most liberals, including Mr. Krugman, just blindly go along with, is complete nonsense. That's not how our economy works and that's not the root cause of the vast income inequality that we see in America.
In our economy the major causes of economic inequality are not simply the differences in productivity of individuals. It's not that someone with an income of $40 million a year works 1,000 times harder or is 1,000 times more productive than someone with an income of $40,000 a year.
To claim that is to claim that a single movie star or CEO or hedge fund manager creates as much value as 1,000 school teachers or construction workers or nurses etc. Certainly we can easily agree that there is no person on earth who can work thousands of times harder than an average full-time working person, that simply is impossible, so differences certainly can't be chalked up to a matter of effort.
If we agree that a doctor with an income of $400,000 creates about 10 times more value than a plumber or a school teacher with an income of $40,000, and we agree that doctors are among the hardest working and most highly trained professionals in our society, it is hard to conceive how a doctor, whose income is only 10 times higher than a plumber (which perhaps seems about right), still has an income tens of thousands of times lower than those with the highest incomes in America. There are individuals in America with single yearly incomes in the $4 billion range (hedge fund managers). That would be to say that someone with an income of $4 billion in a single year contributed as much value to our society as 10,000 above average doctors. Is that believable to you? It certainly isn't to me.
What would benefit America more, 1 more super hedge fund manager, or 10,000 more doctors? What do you think?
Once you realize that incomes in America are not fundamentally tied to actual value creation, and that incomes, especially of the super-rich, are often grossly disproportionate to actual contributions, this means that there is a tremendous amount of "redistribution" taking place within the compensation system in the economy in the first place and the overwhelming majority of that redistribution is a redistribution from the working poor and middle-class to the super-rich.
The question then becomes: how does this happen and what are the mechanisms?
The answer to this question will explored in depth in my upcoming article on American capitalism, but the basic answer is fourfold: through the inherent mechanisms of capital ownership that capitalism is founded on, through market distortions in the economy via mechanisms such as monopolistic power, asymmetric information, etc., through outright manipulation and favoritism via things like government contracts, tax loopholes and tax evasion, government subsidies, collusion, cronyism, etc., and lastly through differences in social starting points of individuals, i.e. through the advantages that some people and groups start out with vs others, such as whites having generations of accumulated wealth and positions of social power over groups like blacks, where most individuals are born into families of lesser means, who have been families of lesser means for generations going back to slavery, etc.
And so the picture of the economy that we arrive at is not one in which those that are exponentially more wealthy than the majority are people like Peter, who have exponentially more wealth simply because they have worked exponentially harder than the average person, and created exponentially more value than the average person, but rather the super-rich are orders of magnitude richer than the average person due to redistribution in the first place. Value created by the average person is being redistributed to the super-rich to start with, and the super-rich are super-rich not just because they "worked harder", but also, and in some cases only, because we have an economic system that funnels value created by the many to the few, with various levels of distortion and redistribution, such that super-rich individuals have received varying levels of "unearned" wealth through the system.
It is important to note here that we do have a "semi-meritocratic aristocracy", which is to say that the aristocrats are not all completely undeserving of their wealth (some of them are), most of them have made real contributions and have earned a meaningful portion of their wealth, it's just that the rewards are amplified beyond even their actual contributions. In the best of cases in America the incomes of the super-rich are amplified only by the mechanisms of capital ownership and nothing else, but even this alone is very significant. It means that while the difference in contribution between the richest 0.1% and those at the 98th percentile is actually more like 5 times or 10 times, the difference in reward between the richest 0.1% and the 98th percentile is more like 100,000 times.
It's as if someone who comes in first place in a competition for cutting logs cuts 10 logs in an hour, and the one in second place cuts 9 logs in an hour, and the value of each log is $100, but the first place competitor receives a reward not of $1,000, but rather a reward of $100,000, while the second place person gets a reward of $900, and the person in 3rd place gets $500 for their 7 logs, and everyone that came in under 3rd place gets something between $10 and $50, but the value of their logs is what's used to pay the first place winner. Yes, the first place winner did do the best job, but nevertheless his reward is actually grossly disproportionate to the actual difference between his performance and everyone else, and that disproportionate reward is enabled by taking the value created by the majority of the people and redistributing it to the first place winner. And again, this is assuming the best case scenario, where there are no market manipulations, there is no collusion, no tax evasion, no government favoritism, and the winner wasn't born on 3rd base to start with, etc.
So now that we've covered the inherent biases in the American income system in the first place, let's move on to issue #2, which is who benefits the most from society and thus has the greatest the obligation to pay for public goods.
What many conservatives would have us believe is that the poor receive the most benefits from society and from the existence of government and public institutions, and that the wealthy are victims of society, whose individually created wealth, which they would have even independent of society, is taken from them to subsidize the lives of those with lesser means.
This Ayn Randian view is completely upside down, and it is quite easy to demonstrate how this is so, even if we disregard what has just been said about incomes and we assume that all incomes are fully earned. The measure of the benefit that one receives from society is the difference between one's condition within that society and what one's condition would be if they lived alone in isolation, as if on an island.
From this perspective, clearly the condition of the homeless is hardly different within society than if they lived alone, indeed in some cases the homeless would be better off without society. In other cases they may be dead without society (as would many people), but regardless, the level of their wealth would be little changed in any event. In other words, the homeless have essentially nothing to lose from the dissolution of society and receive very few benefits from its existence.
As we go on up the ladder it is apparent that the more wealth one has, of course the more one has to lose from the dissolution of society. Those that would be hurt the most from a total collapse of government would be the wealthy, those that would be hurt the least would be the poor. If America defaulted on its debt, if our money became worthless, if the rule of law were to become null and void, it's not the poor who would suffer most, it is the wealthy, whose property rights would then be meaningless and whose property would become prey to the force of the masses.
But even more than that, there is a direct relationship between the benefits that one receives from society and one's income. Generally, the higher one's income the more that income is dependent upon a larger array of economic transactions and public goods.
Let's take Bill gates for example. Bill Gates' income is, and was, hugely reliant on American public education. The products of his company (Microsoft), are only valuable to a literate and educated society. Given that roughly 85% of Americas are educated in public schools, the literary and general education of those Americans is a product of public resources. Given that Bill Gates arguably benefits more from the institution of public education than any single individual in America, since without it the products produced by Microsoft would be largely worthless, Bill Gates has an obligation to pay a larger portion of his income to support public schools than those with lesser incomes. (Even Bill Gates himself acknowledges this)
And this gets to a key point: Many people think, "Well if I don't have kids in public schools then I shouldn't have to pay taxes to support them." Wrong, because everyone benefits from public schools, whether you have children in them or not, and again, those with higher incomes are receiving the highest benefits. This goes for all public goods, not just education. Public infrastructure, law enforcement and emergency services, military power, regulations, etc.
Even when we look at a small business, the dependence on public goods is apparent. Let's take a local clothing sore for example. The existence of public schools means that the business owner is able to hire employees that already have some basic level of skills, such as being able to read and do at least basic math, etc. Public education also raises the productivity of others in society, thus raising their incomes, thus giving them resources to spend on the goods that the store owner sells. The existence of roads and rail lines all around the country are needed in order to ensure that the goods for the store can be shipped there. The existence of local roads allows employees and customers to come to the store. The existence of banking regulations ensure that the financial transactions and holdings of the company are reliable and insured. The existence of other regulations ensures that the store owner can have some confidence that problems with products will be minimal and that certain types of problems can be legally taken up with the suppliers with an expectation of resolution. The legal system again insures that transactions and ownership of goods can be enforced by the state. Police and emergency services provide a secure environment that reduces the risk of theft and assault, etc.
So there are all kinds of benefits from public goods, just for the proprietor of a local clothing store. The variety of public goods and the extent of their benefit generally scales up exponentially with income. The extent to which a corporation like Wal-Mart, and thus Sam Walton and his heirs, and Wal-Mart executives, etc. benefits from public goods is tremendous, far more than say, a local plumber. Wal-Mart is hugely dependent upon the national infrastructure for shipping, the vast majority of their employees have a public school education, regulation of food and product manufacturers reduces the liability for goods that they sell, like all businesses they are huge beneficiaries of a regulated and relatively secure financial system, they are beneficiaries of law enforcement systems, etc.
Yes, virtually all of us benefit from these things, but the degree to which one benefits from them generally increases as one's income increases. There are essentially no examples today where an individual produces increasing amounts of wealth independent of society and independent of interaction with all of the public goods provided by government.
When a higher portion of one's income is not paid toward the funding of public goods as one's income increases, this is in fact freeloading. Since the benefits an individual receives from public goods increases with income, if higher portions of income aren't paid to fund those public goods then individuals are receiving benefits that they aren't paying for. In fact, this is also a significant reason for growing income inequality in America today. Not only are the super-rich receiving undue income via redistribution from the working class, but they also aren't paying enough taxes to pay for the benefits they receive from public goods, so they are getting too much income and paying too little in taxes to support the public institutions that they benefit from. Thus 99% of the population is heavily subsidizing the super-rich on both ends of the ledger.
The income of every single super-rich individual in America today is or was a product of collectively created value. Throughout all of human history, vast wealth has always been the product of collective labor, and those who owned vast wealth were always recipients of the products of collective labor. This was true of the Egyptian pharaohs, the Roman emperors, and the medieval Kings and Barons. No individual can create vast wealth, it requires a society and hundreds, thousands, or millions of people working together to do it. Any time that an individual possesses vast wealth, whether thousands of years ago or today, it is through a system of redistribution, where wealth created by thousands or millions of people is transferred to a few.
What has been true in every human era is that some small number of individuals, by one means or another, has found a way to confiscate value created by the majority and transfer it to a ruling minority, and nothing has changed today.
"Liberals", "progressives", "leftists", whatever, have to stop treating the issue of economic inequality as a "moral issue", and start treating it as an issue of justice. Yes, justice and morality are highly related, but it has to be made clear that the issue is not that it's immoral for some people to be rich while others are poor, the issue is that the wealth of the wealthy is unearned in the first place, and the wealth of the super-rich is a product of redistribution from the working poor and middle-class to begin with.
What we have to be clear on is that we are not saying that we should rob Peter to pay Paul, what we are saying is that Peter is currently stealing from Paul to begin with, that's why Peter is so rich. We demand putting a stop to the robbing of Paul to pay Peter! (Actually in the example scenario with Peter and Paul no one is robbing from anyone, but in this context I'm equating Peter to the American super-wealthy)
The problem we face is that any time this argument in made in America the discussion killing reply is simply that anyone making such an argument, "is a Marxist," end of discussion. When such an argument is made the reply is: CLASS WARFARE! MARXIST! MARXIST!
But the reality is that it doesn't matter. These are the facts and you can't allow the the debate to be framed on a false premise that completely obfuscates the economic realities and the fundamental basis of economic inequality just to avoid being called names, but yet, that is exactly what "mainstream liberals" have done in America over the past 30 years, and it's one of the major reasons why the case against growing economic inequality in America has had such little traction with the American public.
The majority of the America public still sees arguments against the current level of economic inequality in America the way that Mr. Krugman portrayed it: As arguments that it is simply "not fair" for some people to be so rich while others have less, thus we should "rob from the rich to give to the poor."
As long as that is how the case against economic inequality is perceived, there will never be actionable support for addressing the fundamental injustices in the American economic system and for taking action to substantially reduce economic inequality.
Stop calling economic inequality a moral issue. Stop saying we should take from the rich to give to the poor, and make it clear that it is the super-rich who are stealing from 99% of the population right now. What we demand is not to redistribute the wealth from rich value creators to poor leaches, but to stop the on-going redistribution of wealth from the working-class value creators to the wealthy leaches.