The Dangerous Inequality Meme

The inequality of wealth and income has become a meme loaded with danger. A “meme” is an idea that gets propagated like genes in biology. Economic inequality has long been a topic of interest, but during the past few years, and especially during the 2015-2016 American elections, the inequality meme has erupted into a major political issue among those who identify as progressive, liberal, and socialist.

The facts about inequality in the USA are clear. Since 1970, income inequality has increased. As national income has grown, most of the gains have gone to the rich. Average incomes have even dropped since the recession of 2007-2009.

During the 1800s, the first economist to analyze equality and inequality was Henry George. Karl Marx had touched on economic inequality by saying that the surplus from production was due to labor but was captured by the capitalist, the owner of the firm and its tools. Thus, the proletariat, the workers, stay poor and the capitalists get rich, creating inequality. But Marx and his followers focused on the conflict between labor and capital rather than the inequality.

Henry George pointed out that the surplus from production is not in wages, nor in business profits, but in land rent, which is a pure surplus, since land has no cost of production. George showed how land rent captures the gains from economic progress, creating the inequality in wealth and income between workers and the landowners. Competitive firms make normal profits, which has no surplus. Of course monopolies can capture surplus also, but the profits from entrepreneurship are a bonus to society, rather than a social problem, as entrepreneurs drive innovation and economic progress.

Unfortunately, when the classical economics of the 1800s turned into the neoclassical doctrines of the 1900s, both by design (in opposition to the Georgist remedy of taxing land value) and for mathematical convenience, land was dropped as an input factor, and mainstream economics became the two-factor production function Q=f(K,L). It is illogical that land rent gets included in the distribution of income in the return on K, but excluded on the production side, as the models are based only on the two inputs, labor L and capital goods K. This contradiction is not questioned by graduate students in economics, who are too busy learning the calculus of “math econ” to bother asking if the whole system makes sense.

Therefore the inequality meme is now blended with the labor-capital meme, ignoring the real source of economic inequality, unequal land tenure. Politicians exploit the all-too-real economic inequality with a superficial, simplistic, and dangerous remedy: tax the rich and transfer the funds to the poor. Of course governments are doing that already, and that has not reduced inequality, but the welfare-statists insist that government should do more of it.

Conservative opponents of greater redistribution point out, correctly, that higher taxes and takings from the rich will stifle entrepreneurship and savings, reducing the economic growth. But other than eliminating some of the tax deductions and generating more growth by reducing the top tax rates, the conservatives have no effective remedy. Their call to flatten the tax rates play into the political agenda of the redistributionists who call for higher, not lower, tax rates on the rich.

The danger in the inequality meme is the confiscation of the wealth not just of the rich but also of the middle class. A family that spent all its income and now has no wealth would be given welfare aid, while the family with the same income but frugally saved its income for retirement or to provide for their children would have their wealth taken away, not just by ordinary and predictable taxation, but by a sudden taking, as happened in Cyprus in 2013. Government chiefs facing a debt crisis can kill two birds with one stone: confiscate savings and use some of it to pay off debt and the rest to transfer to the poor. Such confiscation has been suggested by the International Monetary Fund, which lends funds to countries bogged down in debt. In its publication Fiscal Monitor Report, the IMF stated (pdf):

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).” There we have the proposition that such confiscation of wealth can be “fair” (49).

This IMF capital-levy proposition was presented in Forbes with the title, “The International Monetary Fund Lays The Groundwork For Global Wealth Confiscation.” The Wikipedia article on “capital levy” shows that this meme is getting some traction, such as by Germany’s Bundesbank. The concept of a capital levy, confiscation of savings and investment, comes from the meme of economic inequality that looks only at the superficial existence of unequal wealth and not to the source.

It has been well pointed out by British journalist and economist Fred Harrison in his Youtube video “Ricardo’s Law: the Great Tax Clawback Scam” that while the rich pay much in taxes, many of them get the tax back, as a clawback, from government’s public goods, which generate higher rent and land value.

The effective and equitable remedy for economic inequality is not redistribution but the proper initial distribution of income. Wages and capital yields should be kept by the workers and investors, while land rent should be equally distributed either as cash or in public services. Public revenue from land rent would equalize income while promoting growth and raising wages. We need to bring land back into economic discourse, but that requires penetrating the appeal of superficial thinking. That’s what Henry George tried to do, and the Georgist meme had reached up to the heads of state in China, Great Britain, and Russia (after the first revolution with Kerensky), but World War I blasted the impending tax reforms to bits.

The candidates who now rant against inequality, the corporations, and the billionaires, even if they don’t win the election, will influence policy and generate calls for more redistribution and, perhaps in the next financial crisis, a capital levy. While alarmists often exploit impending doom for their own gains, sometimes they are right.

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This article is also in progress.org under the title “Tyrants Exploit Income Inequality”

[Ed. note: I added tags, categories, and links, and patched up some grammar – BC]

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8 thoughts on “The Dangerous Inequality Meme

  1. “…the inequality meme has erupted into a major political issue among those who identify as progressive, liberal, and socialist.”

    As one of the few progressive liberals who drops by here, I think you may actually be underestimating just how much income inequality has erupted….Go to the Daily Kos, arguably the biggest website for Democratic activists, and you’ll see much of the discourse focused on income inequality. The other big issue there is civil rights ala the Black Lives Matter people. The pie fights between Sanders supporters and Clinton supporters is pretty much Occupy Wall Street versus Black Lives Matter. If Sanders wins [unlikely in my opinion] you can count on a capital levy of some sort in the platform.

    You’ve convinced me that land valuation taxation is the way to go but I don’t see it happening in the current political climate regardless of how the 2016 elections turn out.

  2. I do believe that the question of land is something that Piketty discusses in “Capital in the 21st Century”? I might be mistaken on this, though.

    I would note that many of the Marxist revolutions that we have seen so far have ironically been related to the question of land, and relied on peasants as the key revolutionary constituency (ironic since classic orthodox Marxist theory argued that urban workers would be the key instigators of revolution, and that peasants were inherently conservative and backwards). Land has typically, in the Third World, been a key variable in revolutionary unrest, and challenging the control of a powerful elite over land has been the strategy for movements across Latin America, Africa, and Asia. Land conflicts in Brazil and the leadership of the Movement of Landless Workers (MST), and the question of land during the People’s War in Nepal, 1996-2006, are two great examples of this. Also, protesting and resisting exploitation by landlords was a key, but under-studied, strategy in urban areas of the ’60s that was spearheaded by groups like the Black Panther Party and the Young Patriots Organization.

    All of which goes to say, yes, I agree that my fellow leftists-in-arms are not as attuned to the question of land as they should be!

  3. Heh. It just hit me till now that you’re a lecturer at SJ State. I considered the MA program there; I ended up down in LB state. Is land ignored in the SJ graduate courses? In my courses we introduced land as a fixed cost during maximization problems and later touch upon it when considering how firms place themselves in a limited spatial plane.

    As for the Georgian tax, I am sympathetic but my knee jerk reaction is to be concerned about who will distribute the collected taxes.

    • Responding to Michelangelo Landgrave, the same governments that distribute today’s taxes would distribute the land value tax, since LVT would replace current taxes. The political pressure would be to decentralize government, contrary to today’s pressure to create a federal tax cartel to avoid tax competition.

  4. This post was really clarifying, thank you. I knew all that at some vague level, but had never bothered to articulate it for myself, and probably couldn’t have.

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