Too often, public policy discussions about economic redistribution do not make a clear distinction between the goals of helping those in poverty and reducing inequality. The implied assumption is that policies that reduce inequality also help those who are most in need.
That premise is not necessarily true. It is easier to reduce inequality by bringing down people at the top than helping lift those at the bottom. My subject today isn’t whether policies to reduce inequality are beneficial to those who are least fortunate—sometimes they are; sometimes they are not—but rather why the left tends to focus on inequality rather than trying to help out those who need it the most.
My thoughts on the left’s emphasis are sparked by the work of French economist Thomas Piketty, whose 2013 book, Capital in the Twenty-First Century, rose to the top of the New York Times best-seller list. Along with two co-authors, he has a 2019 article in the American Economic Review on rising inequality in China, which embodies the same assumptions about inequality that appear in his book. As a prominent left-leaning academic economist, Piketty seems like an accurate representative of certain left-leaning views on inequality.
The first assumption is the most direct: When looking at income and wealth, the most appropriate subject for study is inequality, not poverty.
In his 2019 article on China, Piketty reports data showing that income per person in China was nearly six times as high in 2014 as in 1990 (p. 2470) although over that quarter of a century the income share of the bottom 50 percent has fallen by about half (p. 2485). This implies that over those years, economic growth in China led to an approximate tripling of the incomes for the bottom 50 percent.
Although Piketty’s article contains data to show the increase in material well-being of those in the bottom half of China’s income distribution, it never discusses this progress. Rather, the article shows how China’s distributions of income and wealth have become more unequal as China has moved toward a more capitalist economy.
The article never makes use of its data to show how actual incomes of Chinese households have increased. Rather, it reports data on how, when private ownership of property increased, inequality of wealth and income also increased.
Did the poor in China become better off after the nation began its move toward a market economy? The article never says, even though this question could be addressed with the data it uses. Instead, it looks only at inequality without considering the welfare of those in poverty.
The second assumption is less obvious but also important—that there is no income or wealth mobility. Piketty analyzes the shares of income and wealth accruing to the top 1 percent, the top 10 percent, the bottom 50 percent, and so forth, as if the same people always stay in the same income and wealth percentiles.
The assumption that there is no income or wealth mobility is never explicitly stated, and it is obviously wrong, but it is implied because all his analysis shows are changes in the shares going to different groups over time. But think about college students, who are relatively poor but will have higher lifetime incomes—and retirees, who have little income compared to when they were working. Any analysis of income and wealth inequality that does not take income and wealth mobility into account is misleading.
The third assumption Piketty makes, more explicitly in his book than in his article, is that people do not earn the income they receive. In his 685-page book, he never says people earn income. Instead, they “receive” income, they “get” income—somehow it just comes to them. He never says they earn it.
This is especially apparent when he talks about income people receive from capital. He just assumes that capital receives a rate of return. He fails to consider that more productive investments earn a higher rate of return, and often, unproductive investments can lead to bankruptcy. Money does not just accrue to investors; how the money is invested makes a difference.
But if, like Piketty, one assumes that capital receives a rate of return regardless of how the capital owner invests it, then it would seem that the recipients of capital income do not deserve their return and that it would not be unfair to tax it away. And, if capital just receives a return, then taxing it away would not affect the productivity of the economy. (But, the first assumption makes productivity irrelevant anyway, if the issue is inequality rather than poverty.)
Rarely will the left explicitly state any of these assumptions that underlie their focus in inequality: (1) The issue is inequality, not poverty. (2) Income and wealth mobility are not relevant, so they are not considered. (3) People do not earn the incomes they receive, especially when that income comes from investment.
These assumptions cannot simply be dismissed as the result of superficial thinking by uninformed voters, because they also underlie the thinking of well-known academic economists.