Politics & Policy

Owning the Income-Inequality Issue

The GOP approach should focus on using competition and markets to fight cronyism.

Democrats are obsessed with income inequality. They are determined to exploit the issue in this midterm-election year. It is a strategy that will no doubt be aided and abetted by the media. Pope Francis was named Time magazine’s “Person for the Year” for his critique of what he called “trickle down” capitalism.

The likely Republican response, to the extent there will be one, should note the lack of hard evidence that income inequality (as opposed to, say, family breakdown) hurts economic growth; argue that income inequality is a crass political attempt to distract from a continued weak job market; and offer a worthy substitute to what President Obama has labeled the nation’s “defining challenge.”

On that last point: The problem is not too much income inequality, the GOP will say, but too little upward mobility that endangers the American Dream. As Senator Marco Rubio said last week in an important anti-poverty speech, “upward mobility and equal opportunity is not a partisan issue, it is our unifying American principle.”

Rubio is right. It would be a political and policy mistake, however, for the GOP to let Democrats own the income-inequality issue. In his speech, Rubio tossed out a couple of dramatic statistics on the growing income gap and then commented, “These are indeed startling figures, and they deserve attention.”

They do deserve attention. But what kind, exactly? Democrats, predictably, blame the growth in high-end inequality on greedy CEOs and bankers — and on their tax-cutting, union-smashing, minimum-wage-suppressing Republican allies in Washington.

Well, no. Inequality has increased across advanced economies. Macro factors such as globalization and technology deserve most — but maybe not all — of the “blame.” Big Government loves to pick winners and losers in the private sector. Some lucky ducks owe their place in the 1 percent or 0.1 percent or 0.01 percent to federal favoritism. Conservatives shouldn’t mind at all when value-creating innovators and entrepreneurs strike it rich while crony capitalists do not. The precious tax breaks and subsidies that go to rent seekers, such as those in the agriculture and alternative-energy sectors, should get the ax. Sorry, Big Sugar and Big Solar.

At its core, such an anti-cronyism, anti-inequality agenda would use competition and markets to fight Washington’s natural bias for elite and entrenched interests. What might such an agenda look like?

First, no strings-free bailouts for Big Business. If Obamacare causes huge losses for insurers, taxpayers shouldn’t ride to the rescue of their complicit CEOs — if at all — without pro-market health-care reforms in exchange.

Second, no more “too big to fail” subsidizing of Wall Street. Despite Dodd-Frank — maybe because of it — Big Finance continues to grow in size, complexity, and concentration. Bankers shouldn’t get rich because they can privatize profits while socializing losses. The federal safety net — deposit insurance and the Federal Reserve’s discount window — should be exclusive to traditional commercial-banking activities. And to avoid using that safety net, make megabanks fund their loans much more heavily with unborrowed money, or equity capital.

Third, create a more even playing field for challengers on Main Street by reforming patent and copyright law. Not every entrepreneur with a smart innovation should be rewarded with a lengthy patent. As George Mason economist Alex Tabarrok points out, it is nonsensical to give the same kind of patent to a pharmaceutical with billions in R&D costs that we give to, say, the inventor of one-click shopping. Copyright protection has become an indefinite monopoly, one expansively enforced, that stifles creativity and innovation. Policy analyst Derek Khanna suggests ending punitive damages for violations, expanding fair use, punishing false claims, and dramatically limiting copyright terms. In short, copyright law should more closely reflect the intent of the Founders as expressed in the U.S. Constitution.

Fourth, Republicans should point out that nothing boosts inequality like the nation’s complex tax code and regulations. Loophole-ridden laws are a cash cow for lobbyists and lawyers and go a long way toward explaining why five of the nation’s wealthiest counties are in the Washington, D.C., area. Smaller, simpler government would reduce the kind of income inequality that comes from leeching off the productive parts of the economy.

Fifth, the GOP should expand its focus on cronyism beyond D.C. Bad corporate governance leads to all manner of ills in the country, including outsized executive pay and incumbent managers sheltered from competition. As University of Chicago economist Luigi Zingales explains in A Capitalism for the People, it should be much easier for shareholders to get independent, outside candidates on corporate boards, even initially reserving some seats for them.

Finally, some tough talk is in order. In Coming Apart, Charles Murray’s landmark book on America’s growing class divide, Murray urges that people in the “new upper class” preach what they practice when it comes to marriage and work. But elites must also end self-imposed isolation in wealthy enclaves or “Super ZIPs.” As Murray writes: “Such priorities can be expressed in any number of familiar decisions: the neighborhood where you buy your next home, the next school that you choose for your children . . . whether you become involved in the life of your community at a more meaningful level than charity events.”

If the millionaire policymakers of either party really think inequality threatens the American way of life, then maybe they should set an example and change the way they live, too.

James Pethokoukis, a columnist, blogs for the American Enterprise Institute.


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