Week of October 20, 2014

DOES INCOME
INEQUALITY
PINCH OUR
DREAMS,
TOO?

A preview and debate

Is income inequality discouraging?

Inevitable? Dysfunctional?

Fixable?

The most recent Intelligence Squared debate was about that on Wednesday, October 22 (a peppery preview is below), and you can watch it (now as a replay) - and comment to classmates about the preview and the debate - right here. See and hear the replay now and add your thoughts to our classmate comments area below the replay.

You might also want to eavesdrop here on earlier comments we got about the earlier debate on national security vs. privacy. Scroll down below the photo. Some guys aren't afraid to stick their necks out, and their views are good reading.

      Cordially,
      Chris Cory

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PREVIEW
To Improve Income Inequality
Raise The Tide
By Arthur Laffer

"Some of you in the Yale Class of 1962 may actually think income inequality is a 'problem' worthy of government redress (i.e., Piketty in Capital). To you, I just sigh and wonder what's to happen to the world if the very best and the brightest, as you are, are so misguided."

We all owe a huge debt of gratitude to Bob Rosenkranz, Y '62, for sponsoring the Intelligence Squared debates on seminal issues of public policy. I personally have participated in two and loved the interchange.

The upcoming debate on income inequality portends to be a barn-burner. I can't think of any issue more ubiquitously controversial. The words "income inequality" by themselves have been elevated to political code-word. As you might imagine, I personally think the issue is a red herring providing political cover for real issues.

Just for starters, I would prefer inequality over less inequality if reducing inequality entailed everyone (high and low incomes) earning less. I would also prefer less inequality if it were achieved by everyone's income increasing but low income earners' incomes rising by more than high income earners' incomes. Income inequality isn't the correct issue; raising all incomes is. And in this regard, I would prefer every American to be better off individually and collectively. To quote our commencement speaker, President Kennedy, "No American is ever made better off by pulling a fellow American down, and every American is made better off if any one of us is made better off. A rising tide raises all boats."

Secondly, even though I recognize jealousy, envy and covetousness as innate human emotions, I believe them to be lowly characteristics unworthy of encouragement in a civilized, educated society. The mere fact that we engage in a debate on the role of government and income inequality only serves to energize the worst demons of our nature. A debate on the pros and cons of income or wealth inequality is akin to debating the pros and cons of various skin colors, levels of intelligence, degrees of attractiveness, telling the truth, or sexual practices. It's wrong. Those who are wealthy are presumed prima facie to be unworthy of that wealth while those who are poor are seen as star-crossed.

My view of the issue matches President Theodore Roosevelt's description of his "Square Deal," favoring neither capital nor labor, rich nor poor. "If the cards do not come to any man, or if they do come and he has not the power to play them, that is his affair. All I need is that there be no crookedness in the dealing."

My third point is that in practice, the debate on inequality often boils down to torrents of contradictory data, each side picking and choosing the facts they wish to use. In any debate wishing to move the ball forward, income data should be after-tax, adjusted for numbers of people (tax returns and family sizes aren't all the same), after government benefits, after employer-provided benefits, adjusted for where people live (i.e., the cost of living), and inclusive of changes in wealth. Income data are notoriously misleading. For example, Warren Buffet in 2010 reported income (AGI) of approximately $40 million on his tax return, and yet his wealth increased by $10 billion during the year (Forbes) and he gave away almost $2 billion tax-free to the 501(c)3's of his friends and children. In other words, Warren Buffet's income exceeded $12 billion and yet was reported in the Statistics of Income of the United States as $40 million (see Buffett's August 14, 2011 op-ed in The New York Times).

Mobility of specific individuals from one income group to another over time is also crucial to any serious discussion.

And, as a final point, I'd like to point out that some of you in the Yale Class of 1962 may actually think income inequality is a "problem" worthy of government redress (i.e., Piketty in Capital). To you, I just sigh and wonder what's to happen to the world if the very best and the brightest, as you are, are so misguided.


Government policies to reduce income inequality invariably take income from those who have more and give income to those who have less, supposedly making those who have less better off, which they desperately need while making those who have more worse off, but they can afford it. But now, let me introduce some economics.

Whenever governments take from those who have more, those takings reduce those people's incentives to work, leading them to produce less. Likewise, by giving to those who have less, governments provide those people with an alternative source of income other than working, causing them also to work less. The theorem is as simple as it is non-partisan. Any income redistribution reduces total income, and total income redistribution reduces total income to zero.

To see this clearly, imagine a policy of total income redistribution, whereby everyone who makes above the average income is taxed 100% of the excess and everyone who makes below the average income is subsidized up to the average income. I will stipulate today, counselor, that if done completely and without exception, everyone will have the same after-tax, after-subsidy income - and it will be zero.

Good luck, debaters. Thank you, Bob, and Boola Boola to my fellow classmates.

Click here to comment on the preview and on the debate replay.

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To read comments on Intelligence Squared debates held earlier this season, click here.