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Why Should the Government Fix Economic Inequality? Because the Government Created It

by Michael Austin, published
"As riches increase and accumulate in few hands. . . the tendency of things will be to depart from the republican standard."--Alexander Hamilton at the New York Ratifying Convention, 1788

One of the most pernicious myths of modern political discourse is that, in a complex society of 300 million people, it is even theoretically possible for the government to “do nothing” with respect to the economy. This was barely possible for a tribal chieftain ruling 200 or so people in the early days of agriculture; it is fundamentally impossible in the kind of complex global economies that exist today.

One of the roles of a government is to create the playing field that economic activity occurs upon—and there is no way to do this neutrally. Every decision that a government makes about taxation, regulation, economic policy, educational opportunity, and the legal environment is a decision to do something that will result in advantages for some people and disadvantages for others. That is simply how complex societies work.

Take a fairly straightforward example. According to one kind of political logic, the government acts “intrusively” when it regulates and fines companies that release pollution into the environment and “fairly” when it does not. But when the government (through which we the people act to regulate our common resources) allows private companies to pollute those resources at no cost, it actually socializes the costs of a private economic activity by compelling everyone to accept increased illness, missed work days, shorter life spans, increased risk of death, etc. without any corresponding socialization of the revenue.

Economists use the term “rent seeking” to describe activities that capture wealth without creating it. Economic activities that socialize costs or risks, while keeping revenues in private hands, are forms of rent seeking that end up shifting wealth and income from those on the lowest  end of the socioeconomic spectrum to those on the highest.

Environmental concessions are one form of rent seeking. Others include no-bid government contracts, special tax incentives, sanctioned monopolies, competitive barriers, legal immunities, infrastructural improvements, and regulatory relief that shifts resources away from one part of the economy and towards another. Countless industries--from pornographers to investment bankers to for-profit colleges--realize profits far in excess of their value by shifting costs (failed marriages, increased economic risk, and student loan defaults) to the members of society, who are forced, by the coercive power of the state, to pick up the tab.

There are possible economic arguments in favor of some rent-seeking activities, but one of these arguments is not that the government should keep its hands off of the free market and let wealth-creators create wealth. For it is only from the perspective of the “wealth creators” that loosening regulations and cutting taxes constitutes “doing nothing.” For the rest of us, these supposed inactions are anything but laissez-faire, as they use the power of the state to force us to bear the socialized costs of somebody else’s privatized profits.

And this kind of social inequality founded on rent-seeking has real consequences, which we are just now starting to see. Inequality in America is worse now than it has been since the late 19th century, when factory workers were paid in company scrip and the most important industry in the Southern states was sharecropping. The distribution of wealth in the United States (as measured by the Gini coefficient) is about as unequal as it is in Iran and far less equal than it is in nearly every other country in the Industrialized West.

And it does not have to be this way. Too many people have swallowed the myth that socioeconomic inequality is the inevitable result of liberty and free markets. That is simply not true. The profound inequalities that we see today were created by things that the government did.

We have allowed people with a lot of skin in the game to build the playing field, write the rules, and provide the referees--all in the name of "liberty." The stated objective of those who have done this is to make as much money as the rules will allow. Is it really any surprise that they are winning the game?

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