Do Americans agree on the cause of economic inequality?

by Russell's Rants

Originally published May 4, 2014


According to last week’s Pew Research Center poll on income inequality, the number one cause that both Democrats and Republicans identified for why the gap between the rich and everyone else has increased as of late is, surprisingly, the same: taxes. Among Democrats and left-leaners, 26% volunteered the tax system or tax loopholes as the main culprit for income inequality. The number shrunk to 14% among Republicans and right-learners – but was still the top vote getter. It is fortuitous then that Pew released its poll the same week that the French academic economist, Thomas Piketty, was here in the United States on a speaking tour to promote his new book, “Capital in the Twenty-First Century.”

5689f24d4a28d7dd014f74db31c64e47Piketty does not exactly argue that tax policy is the “cause” of income inequity. Rather, he attributes such inequality to the ability of the rich to save and invest, thus earning a return on capital greater than the growth in the economy, But taxes are certainly part of Piketty’s solution to the problem. He prescribes higher taxes on income and a new global tax on capital, the latter of which no one sees as political viable.

As summarized by the New York Times’ David Leonhardt,

“Piketty’s First Law of Inequality [… is based upon t]he fact that the rich earn enough money to save money allows them to make investments that other people simply cannot afford. And investments — whether stones, land, corporate stock or education — tend to bring a positive return. Piketty describes the relationship formally as r > g: the rate of return on capital usually exceeds economic growth.”

In speaking about the rate of return on capital, it occurs to me Piketty is espousing a theory akin to the liberal mirror image in reverse of Supply Side Economics – in other words, that the supply of capital is the most important factor determining wealth. And his necessary corollary is to see increased taxation as the main remedy to the ever-increasing concentration of capital at the top – to which I would introduce Professor Piketty to that other Thomas: Thomas Friedman.

In his 2011 book, “That Used To Be Us,” Friedman argues that’s it not just about raising taxes. It’s about what you do with the proceeds of those taxes. He recommends that America “invest in education, infrastructure, and research and development, as well as open our society more widely to talented immigrants and fix the regulations that govern our economy.”

Friedman is focused on the Demand Side – government spending that will spur economic growth through adding to the gross domestic product. When this spending is designed at its best, these include investments in human capital that will pay dividends as educated people from all classes of society enter the workforce and earn (and spend) a decent living (which hopefully also allows them to also save and get in on that higher return on capital!).

Friedman’s spending is reliant on Piketty’s revenues, so their economic policies support each other. The problem, of course, is that both Thomases, Piketty and Friedman, require more sound fiscal policies than has been politically achievable with the U.S. House of Representatives, which is still under the fever of Tea Party minority control.

That fever was evident in the Pew Research Center poll, where 9% of Republicans and right-learners cited “the work ethic of the poor and government assistance programs” as the main cause of inequality. Almost none of the Democrats and left-learners cited this “blame the victim” cause. The Pew Research Center poll found that both parties pointed to Congress and undefined “government policies” as the second most popular cause of income inequality. But presumably in classic Supply Side fashion, conservatives likely favored less government and fewer taxes, which both Piketty and Friedman agree would only increase that inequality.

So yes, Americans agree on the main cause of income inequality, but draw opposite conclusions as to what should be done to address it – to which our introduction to the French professor may prove helpful.