Government Policy Impacts Inequality

An organization called the World Inequality Lab recently published The World Inequality Report 2018. Based upon data for income, wealth and fiscal data from taxes on income, the report determined that since 1980, income inequality has increased rapidly in North America, China, India, and Russia. Inequality has grown moderately in Europe. The authors of the report place their findings in context:

Economic inequality is widespread and to some extent inevitable. It is our belief, however, that if rising inequality is not properly monitored and addressed, it can lead to various sorts of political, economic, and social catastrophes.

Slow economic growth since the Great Recession, on top of increasing inequality over nearly four decades, have indeed been associated with the trend in western economies toward populism. Political parties of the left and the right have been ineffective in establishing economic policies that benefit lower- and middle-income families.

The World Inequality Lab report cites government policy as impacting inequality either positively or negatively. For example, the recent U.S. changes to its tax code are expected to benefit wealthier Americans and worsen the wealth gap, while European policies which provided more support for education benefitted lower- and middle-income families.

The Captured Economy, a 2017 book by Brink Lindsey and Steven M. Teles, identifies government policies in the United States that undermine economic growth and increase inequality, but receive far less attention than tax policy. Lindsey, a libertarian, and Teles, a liberal, diagnose the economic and political impacts of four such policies.

–  Government policies that subsidize financial institutions have been under debate going on ten years. The authors find these policies encourage excessive risk-taking, reduce long-term economic growth prospects, and generate excessive financial gains for financial executives and professionals.

 

– The authors fault monopoly privileges that are granted by copyright and patent law, citing in particular the entertainment, software and pharmaceutical industries. They charge that such laws encourage industry concentration and inflate corporate profits.

 

– Occupational licensing is ideally created to protect the public from incompetent or unethical service providers. The authors find huge variation from one jurisdiction to another, suggesting that licensing requirements are highly arbitrary. With competition being limited by licensing, incumbents enjoy higher incomes.

 

– Finally, land-use regulations are cited for placing major constraints on the supply of new housing. The authors note that the most dynamic, high-growth cities in the U.S., where high paying jobs are to be found, discourage newcomers by limiting housing construction. They attribute these limitations to successful pressure placed upon local governments on behalf of current property owners.

 

The authors fault wealthy special interests with capturing the policy-making process for their own benefit. They conclude:

The rise in inequality is, to a significant extent, a function of state action rather than the invisible hand. And this state action, by suppressing and misdirecting entrepreneurship and competition, has rendered our economy less innovative and dynamic as well as less fair.