Video: The inequality myth explained

As Power Line says, someone at PBS screwed up by allowing Richard Epstein to explain why the current sturm und drang over “income inequality” misses the point. Epstein argues that whatever income inequality exists is the result of productiveness and success in the markets, and that imposing redistributive government policies to “correct” for the inequality will mean much less innovation and economic success. When Epstein’s interviewer points out that marginal and capital-gains taxes were much higher in earlier periods of economic growth, Epstein points out that the tax code had more shelters for investors that shielded capital from seizure — and that government was much less redistributive than it is today:

Watch Does U.S. Economic Inequality Have a Good Side? on PBS. See more from PBS NewsHour.

While we cogitate over hearing this at PBS, of all places, James Pethokoukis reminds us that the central premise of “income inequality” is flawed anyway:

5. The Minneapolis Federal Reserve concluded — after taking into account household size and differing price index – median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.

6. As technological change accelerates and becomes more pervasive, the market will reward workers with more education and skills. As CBO notes: “Numerous researchers have concluded that, on balance, the technological changes of the past several decades— and perhaps the entire past century—increased employers’ demand for workers with higher skills and more education. That increase, along with a smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated worker. In the past decades, inequality has been going up everywhere.” It is a global phenomenon.

7. And why did the top 1 percent do particularly well? One potential explanation from CBO: ”The compensation of ‘superstars’ (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in income for such people.” The CBO also mentioned ”changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities” as possibilities.

My bottom line: a) income inequality has increased somewhat in recent decades, but not exploded; b) that increase is natural given technology and globalization; c) incomes could have risen faster with a better educated workforce (that also didn’t have to compete with an influx of workers from Asia), but did OK; d) we need to boost education to keep up with advancing technology and productivity; e) the past decade was one of slow growth followed by a nasty recession. No argument there. Looking forward, America will need a pro-growth tax system, smarter regulation and far better human capital (helped by higher teacher pay in exchange for eliminating tenure, more skilled immigration, etc.). That way, incomes won’t just be more equal, they’ll be growing.

“Income inequality” has always existed. It exists in every economic system ever invented. Does anyone doubt that income inequality exists in communist China, or existed in the Soviet Union? If you don’t want to argue from the extremes, take a look at western Europe, which has relied on massively redistributive policies for decades. The difference between these systems and the American experience is that membership in an economic class has never been static, but is changeable depending on one’s innovation and effort. That goes to the heart of American exceptionalism, and American success — or at least it did before we tried turning ourselves into a version of Europe’s sclerotic nanny states.