In part I of this series, I argued that I do not deserve my standard of living. Though I’ve worked hard and had a few good ideas in my career, it can be argued that much if not all of my material success comes from things I had no part in — who my parents were, the rise of the internet, the importance of economists these days and so on.
In part II I argued that equalizing material well-being — extreme egalitarianism — or what might be called pure socialism, is a non-starter. It would damage incentives for hard work, destroy the role that wages play in signaling value and steering people into various tasks, some of which are either unpleasant or require a great deal of time to prepare for and execute. Pure socialism would likely make poor people poorer. Without a strong preference for equal outcomes relative to an absolute standard of living, pure socialism would make most if not all people worse off relative to the status quo.
In this final part of the series, I want to tackle the harder question that I avoided in part II. Sure, pure socialism is a bad idea for large societies of millions of strangers, but doesn’t the logic of part I — the acceptance that my standard of living is in some fundamental way unearned — justify what I will call Gentle Socialism — a dramatically larger redistributive effort than what we currently have in America? Shouldn’t the top rate of income tax be at least 70%? Isn’t a wealth tax of 2% or more, a good idea? Shouldn’t we consider a maximum level of income, say $1 million or maybe $10 million and have a tax rate of 100% of everything above that cap? Any of these proposals would go beyond Sweden say, and take us closer to something more egalitarian.
Spoiler Alert — my answer is going to be no. Maybe this is just my self-interest talking. I am well-paid — so of course I’m against it. But I’m going to try and make the case that it’s not just bad for me. It’s bad for you, even if you make something near the middle or if you’re poor.
Let’s start with the material consequences of Gentle Socialism. Some people seem to confuse material well-being with money. If you’re not careful, you might come to think that there’s a fixed amount of money in the world and the rich have a disproportionate share of it. Justice means simply reorganizing who has that money. This is the world of zero-sum economics. It is not the real world or at least not the one with real-world consequences.
So what’s the confusion? While wealthy people may have a fairly large amount of cash on hand, most of their wealth is usually in the form of assets. Wealth is a result of investment in assets, the result of people spending less than they receive in income and the using the difference to buy shares of companies or to lend out money in return for interest. Those investments create capital — it’s what fuels innovation. Capital assets are expected to yield benefits in the future. So an investor is giving up consumption today for more consumption tomorrow — the return or their foregoing of consumption.
Capital makes workers more productive. Innovation makes our lives better. Not just the people who funded the innovations who often earn large returns for taking risks, but the people who enjoy the products and the workers who use the machines that make those workers more productive. If everyone has no more than an ox and a plow and has to farm to stay alive, no one is rich. And every once in a while, the rains don’t come and some people starve. Investment and innovation lets a lot of people get rich. Once someone invents a grain combine and the other tools of modern farming, you get a lot more food, the price of food is a lot lower, not everyone has to be a farmer and the person who invented the grain combine has enough money to fund some new companies that can find new ways to make people more productive.
If you start taxing wealth and if you tax income at really high rates, you’re probably going to get less of it. But it’s not just that the super-rich will have to share their money with the rest of us. They’re going to save and invest less because the tax system is going to take some of the gains away. If that happens, it won’t just hurt the rich. It will hurt people who benefit from the savings and investment that rich people make in making the rest of us more productive.
How big is that effect? I don’t think we have a very good idea. Maybe the effect is small so that we can do lots of redistribution and the poor and middle will be a lot better off. Or not. Maybe we’ll all get a lot poorer but we’ll be more equal. It’s hard to know. It depends on the size of the tax increases and how responsive people are to changes in tax rates.
You might believe that all of the above is just some theoretical fantasy, that under the current world where American tax rates are relatively low to the rest of the world, the claims I’m making about the benefits accruing to the non-rich don’t happen any more, even if maybe, they did happen in the past. I think this is a fundamental misreading of the data on material well-being. I think material well-being has been shared across the board. I summarize the arguments here.
But even if I’m right, it’s certainly the case that the gap between the top and bottom has gotten bigger and that there are people who are not sharing in economic prosperity. The Gentle Socialist wants to close that gap and bring the bottom up as well.
Implicit in gentle socialism is the idea that the gap in the material well-being between the rich and the poor is what needs fixing. To some people, that seems like a tautology. If inequality is the problem, taxing the rich and giving it to the poor has to reduce inequality, right? And giving poor people money reduces poverty almost by definition.
Almost. The problem is that poverty is sometimes the symptom and not the cause of the problem. Focusing on the symptom distracts you from getting at the root of the problem. If the heater in your house is broken, it’s not a bad idea to put on a jacket and get under a blanket, but it’s better to fix the heater. Especially if all you achieve by the jacket and the blanket is to stop being cold. If it means you won’t be able to do much of anything else than trying to get warm because you’re covered up, it’s much better to fix the heater.
Only an economist or someone who thinks like an economist would see giving people money as the same thing as getting rid of poverty. But I would argue that what we should really care about is human flourishing — the opportunity for people to grow their skills and apply those skills to the real world as they see fit. The opportunity to grow as human beings. The opportunity of agency and autonomy that yields dignity and pride.
Surely, standard of living isn’t the only thing we care about. Some economists might argue that getting a tax-free check once a year for $50,000 is better than earning $50,000 after-tax by working. But for many people, work is a source of deep satisfaction. Depending on others comes at an emotional cost.
Of course, if you’re hungry, the satisfaction of self-sufficiency may be something you can’t afford. But is reducing the gap in consumption between rich and poor what we ought to focus on? And focus on it is what economists do. Mainly, I suspect, because dignity is not in the data set. So we ignore it.
I would suggest that the world would be a better place if we spent more time as economists looking for ways to allow the poor the chance to flourish and to lead lives of dignity and agency rather than trying to measure the gap between rich and poor and proposing ways to close that gap with money.
And that brings me to my third and final argument. Perhaps the rich don’t deserve what they have. But it does not follow that we want the government to have that money for the purposes of spending it as politicians see fit. This tweet from Bernie Sanders sums up the problem for me:
Is $100 billion all that stands between ending homelessness and giving everyone in America clean water? If that’s true, what a brutal indictment of our government’s ability to solve problems. In 2019, according to the Congressional Budget Office, the federal government spent $4.4 trillion. If only taxes had been set high enough to raise $4.5 trillion! Then we could have cured homelessness and provided everyone with clean water.
In fact, taxes weren’t really the problem at all. In 2019, the federal government collected $3.5 trillion running a deficit of $900 billion. Sanders’s claim is that an increase in the 2019 deficit of a mere 10% could have ended homelessness and provided everyone with clean water.
What should we conclude? One possibility is that homelessness cannot be solved by spending more money. I think this is true. I also think that the other “socialist” solutions on the table lately like free college, free universal health care, free child-care and so on would not be particularly effective in solving the problems they are meant to solve. The government doesn’t have the best track record of spending money effectively.
But the other reason that we don’t “solve” the problem of homelessness is that the political system responds to political power. Homelessness just isn’t at the top of most politician’s to-do lists.
Of that $4.4 trillion worth of federal spending in 2019, about $700 billion went to defense spending. Would the nation have been unsafe if spending had been a mere $600 billion? The $4.4 trillion the government spent included subsidies to wealthy farmers, subsidies to the education of wealthy individuals attending college via federal student loan programs. It also included Social Security and Medicare payments to individuals many times about the poverty line.
In other words, even though I do not deserve what I have, it is far from clear that increasing the size of government revenue by raising tax rates dramatically will lead to a better world even if I thought giving poor people money would improve their lives. We are likely to get a bunch of other stuff that we will not particularly like.
Here is another way to see the problem. In the most recent analysis of the Congressional Budget Office, the average household in the top 20% has income of $291,000. The average household of the bottom quintile is $21,000. That’s a ratio of about 15–1.
The average household in the top quintile pays $77,000 in taxes pulling that $291,000 to $214,000. The average household in the bottom quintile gets about $15,000 in means tested transfers. So top quintile gets $1,000 per household in means tested transfers. So the ratio of the top quintile to the bottom quintile after accounting for taxes and means-tested-transfers after government has intervened is only 6–1.
One could argue that we’re at Gentle Socialism. We just need to make it a little less gentle.
But there’s a funny thing in the data. The federal government collects $111,000 of revenue per household with over 90% coming from the top 40% of households. But the average amount of means-tested transfer is only $28,000. So about 25¢ of every tax dollar is spent fighting poverty. The rest goes to everything else the federal government does. That’s on average. I am not sure that another trillion dollars of taxes collected will lead to an extra $250 billion for the poor.
But suppose the federal government used a larger level of revenue created by higher tax rates to actually help the less fortunate? What if the federal government used the increased revenue from higher tax rates to help the less fortunate in ways that gave them more agency, responsibility, and dignity? What if a larger federal budget meant better schools for the poor, better job training for the unemployed, and more effective health care rather than new weapons programs and more subsidies to Big Agriculture and Wall Street?
Unfortunately, many of the barriers that prevent the poorest among us from rising are not the result of inadequate spending. Increasingly onerous licensing requirements make it hard for unskilled people to find work. For decades, per student spending on education corrected for inflation has risen dramatically with little impact. This suggests the money has not been spent wisely or that other factors are what are holding the poorest children back that are unrelated to the level of spending. In fact, I believe, by changing the structure of the public school system, we could have better results and spend less money.
Government helps the poor in the bluntest of ways — by giving the poor either money or subsidized housing and health care. Stuff. This strategy strikes at the effects of poverty rather than its root causes. I would much prefer we help those who struggle by giving them more skills and opportunity. The use of money makes it easy to ignore the more fundamental problems facing the poor.
Private efforts to help the poor often do a much better job than government programs. The Harlem Children’s Zone, for example, is an extraordinary effort, mostly privately funded, to transform the lives of poor children in Harlem. Its founder, Geoffrey Canada had the idea of what I would call a full-court press to help the poorest children. It wasn’t enough to create a first-rate school. The Harlem Children’s Zone also creates neighborhood programs for parents and children as well as working on every aspect of the challenges faced by poor parents and their children rather than just creating a good school.
The Harlem’s Children Zone, like the Success Academy — the phenomenally successful charter school system in New York City run by Eva Moskowitz — is funded by voluntary donations and most of them come from very rich people. I like that there are people rich enough not just to fund the next Silicon Valley unicorn but also the next Harlem Children’s Zone.
When I interviewed Paul Tough for EconTalk about his book How Children Succeed, he argued that the Harlem Children’s Zone is handicapped by the need to convince rich people to donate and by the uniqueness of Geoffrey Canada. He argued it would be better to have the federal government fund efforts like the Harlem Children’s Zone to avoid the need to find someone as charismatic as Canada. Paul Tough argues we should raise taxes and create government-run programs that replicate what Geoffrey Canada does.
This fundamentally ignores what creates excellence. Call it the Recipe Fallacy. Geoffrey Canada has figured out the recipe to help poor kids thrive. Now we just need to share the recipe and give officials enough money to buy the different ingredients to create the dish that remediates poverty. This ignores the power of the feedback loops that sustain first-rate performance in helping poor children or running a great company. If Geoffrey Canada does a bad job, he will have a harder time collecting money from donors. Those same incentives also work on his employees who he can choose to fire or promote or reward based on their performance and their devotion to the task.
Of course, Canada wants to staff the Harlem Children’s Zone with people who aren’t just attracted to money. But the connections he is free to establish between their effort and their reward helps sustain the excellence of the Harlem Children’s Zone. Duplicate its structure and turn into a government-run program and its unlikely to have the effect it has now.
If I don’t deserve what I have, then you can argue that justice requires that I pay higher taxes. I see the argument as I hope I’ve made clear. But we don’t want public policy to pursue justice if the results lead to a worse world for the people we’d like to help.
Does Gentle Socialism lead to a better world especially for the least fortunate? It might. That’s the question, not whether I deserve what I have.
I would rather see our passion and commitment to human flourishing focus on root causes rather than effects.
So let’s revitalize our schools, especially in our poorest neighborhoods. Let’s get rid of barriers like licensing and the minimum wage that make it hard for the poor to get on the ladder of economic well-being. And let’s remember that the goal isn’t just about money, but about the less tangible aspects of our life experiences that give us meaning and satisfaction.