What Can the Private Economy Do to Address Inequality?

>> Joshua Rauh: Okay, third one, I want to or kind of number, I guess C, I've got A,B,C,D,E and F. So I don't know if we'll get through all of them, but third, justification for government intervention, redistribution to address inequality. So this is something you hear a lot. And what are the different ways that you can redistribute money to address inequality.

Well, we have the anti poverty programs. We can have regulatory policies like the minimum wage, progressive income taxation, which means that higher income people contribute a proportionately larger share to the government's budget than lower income people. So let's start with some facts about inequality. All right, so get out your devices again.

Okay, question. Approximately what percent of federal adjusted gross income does the top 1% of taxpayers earn? Okay, I asked the question in a formal way. You could just think of approximately what percent of total income in the economy is earned by the top 1% of taxpayers? So here are your choices here, 1%, 10%, 20%, 30%, or 40%.

So, 1%, just to fix your ideas, 1% would be we have no income inequality, 10% would be that the top 1% of people earn 10% of the income, and so on. Okay, so think through that for a moment. All right, I see the response is going up. Don't Google, don't think about it too carefully.

What percent of total income is earned by the top 1% of taxpayers? Okay, we're over 100 responses, so I think I'm gonna move it along, and let's see what the answers are. Okay, so I'm gonna lock it, learn my lesson. Show the responses. Okay, so here we have 38% of you said 40% of the income is earned by the the top 1%, 31% of you said 30%, 18 of you said 20%, 13% said 10%, and 1% of you said there's no income inequality.

Okay, so it turns out that the answer is 20.1%, and these are federal government statistics. So, turns out that the top 1% are earning basically about half what the majority or what the plurality of you thought that they were earning as a share of total income. Okay, next question is gonna be not a factual question, but in your mind, you'll wanna bear in mind what the correct answer to this question was that the top 1% of taxpayers earn 20% of the income.

Given that, I'd like to know from you what percent of total federal taxes should the top 1% of taxpayers pay? Okay, you've learned that they earn 20% of the income. I'd like to now know from you what percent of total federal taxes you think they should pay? They earn 20% of the income, this is not a factual question.

This is an opinion question. What percent should they pay? If you were managing tax policy for the United States of America, what would you say? They earned 20% of the income, so they should pay 1% of the taxes, 10% of the taxes, 20% of the taxes, 30, 40 or 50.

Okay, good, I like the participation. It's great, I see you're answering it. 97, 90, 100 of you have answered. All right, so just gonna give you a few more seconds, three, two, one, okay? Opinion questions are always good because there's no right answer. So let's lock it and let's see what you said.

All right, so 44% of you said, well, they earned 20% of the income, therefore they should pay 20% of the taxes. That was the modal answer. Some people wanted even more progressivity on that, saying 30%, 40%, 50% of you, 8% of you said more than 50%. 10% of you said 13%.

Okay, so this is pretty balanced, I mean, I can't pull a Ludwig von Mises when he walked into the Mampelleran society and said, you are all socialists. I can't say that. So let's have a look one more question, though, which is what percent of federal taxes does the top 1% of taxpayers pay in the US?

What percent of the federal taxes does the top 1% pay in the US? So let's get the answer that. 9%, 19%, 29%, 39% or 49%, what percent does the top one, you say, not all of you, there's not agreement, everything. But the modal answer was you wanted them to be paying 20%.

What percent do they pay? Okay, good you've answered very good. All right, let's get the locket and get the responses. So it turns out that the answer is 39%. So they pay 39% of the taxes. So these are facts. These are facts from the IRS and the CBO.

And they're non disputable facts. So I see now people are. Come on, I mean, okay, so there you have. So I think, what's the point, right? The point is that, in general, people do tend to overestimate what percent of the income the top 1% earn. And they tend to underestimate the percent of taxes that they pay.

They earn about 20% of the income and they pay about 40% of taxes, okay. 20.1% and 39%, to be exact, okay. And another narrative that we often hear is inequality is exploding over time. Therefore, we need more redistribution in the economy. Inequality is exploding over time. Okay, this is from the Congressional Budget Office.

It's an agency of the US government. They've been providing these statistics for many, many years. There's nothing that you could possibly claim would be politicized about these statistics. And here are two graphs showing income inequality over time. One is what's called the Gini coefficient. So people who've taken director economics will know what that is.

It's kind of a summary number between zero and one about inequality. And on the right is the top percentile share of income under a slightly different definition. The CBO actually includes in their income definitions the fact that there are a number of things that don't appear in what was called federal adjusted gross income in the poll that I gave you.

So under this measure only, the answer was only 16. The top 1% earned only 16% of the income. And what the CBO also tracks is what happens after the taxes and transfers are done. So how much redistribution is there, actually? And you can see that the redistribution, the gap between the two lines on the right here.

The gap between the dashed line and the solid line, has actually gotten bigger over time cuz there's been more redistribution pushing in the opposite direction to the increase in income inequality. And also important to note that the increase in income inequality is mostly a story of the 80s and the 90s.

So it's not so much the last 20 years top percentile share some increase. Gini coefficient, really not that much, especially when you base it on income after transfers and taxes. In any case, the narrative that inequality is exploding, not true. Maybe you're not happy with the level of inequality that we have, but it's not true that it's exploding.

So I feel like I have to dispel some myths here. Okay, going through our kind of litany of justifications for government intervention, right? So one of them, I think we already talked about, and I'm gonna be kinda quick on, which is just, what if the private economy just cannot efficiently provide certain types of goods or services?

So, like, national defense is an obvious one, I think we would agree. It's gonna be really hard for us to, without having a government to sort of pool together and write contracts that's gonna lead to an efficient source of national defense. We can argue about how much we should have or not, but that's gonna be tough.

The gray areas are things like health, transportation, infrastructure and a lot of the debate about how big government should be has to do with how much of that stuff you think the government should be providing. And so there are both private and public models for all of these.

For education, obviously, US K-12 public education, public universities in the US. For the private model, there are a lot of private schools in the US, and there are a lot of private universities. So we have a hybrid model. Are we doing things right? What's the right mix in education?

There was a Gallup poll, 54% of Americans said they were dissatisfied with US K-12 education. Most of it is still public. Some say, well, it's simple, there's just not enough money in the system. We just need to give the government more money and then they would be okay.

I mean, in California, okay, we spend 20,000, $855,000 per student per year. And in another poll by the Public Policy Institute of California, also a nonpartisan, if anything, may be left leaning organization, people were asked in California. If costs were not an issue, would you send your kids to a public school, a religious or a private school or a charter school?

And 48% say they send their kids to a religious or private school. So something is going on here. With the amount of money that we're spending on education and the quality of education, questions deserve to be asked. We're gonna have two sessions on education in the coming days, so I'm not gonna try to spend a lot of time on that.

But, other things like healthcare, right? The US has Medicare for the elderly, Medicare for the poor. We also have a system of private insurance. Maybe Scott will talk a little bit about some of this during his talk. There are real questions about the efficiency of healthcare delivery in the public versus private model.

So that's a debate to be had. Infrastructure, we rely on the government for a lot of infrastructure, yet there is other types of infrastructure that is privately financed. Freight railways, pipelines, telecommunications networks, utility power stations, things like that, and things that are financed through usage fees. And so usage fees are a situation where you can have people paying for the infrastructure they use and not taxing people for infrastructure that they don't use.

Okay, next justification that I'm going through is crisis management and the smoothing over of shocks. So with both the great financial crisis and with COVID there was this motivation. We need to increase government spending a lot because otherwise the economy is gonna tank, people are gonna lose their jobs, companies are gonna go bankrupt, and it's gonna be terrible.

There is clearly some role for not wanting people to be out of the labor force for a super long time, losing skills. If that's the case, then the unemployment insurance strategies that we've taken on with these multi, these extensions and increases are if anything, paying people to stay in the labor force for longer.

We don't want capital sitting around idle. We don't want bankruptcies to occur. If re-contracting is costly on the other hand, the costs of bankruptcies are dramatically overstated. I mean, I don't know what airlines you all flew here on, but most of them have had a chapter 11 bankruptcy sometime during the last 20 years.

A bankruptcy in the United States is simply a re-contracting procedure. And so when the United States government bailed out the airlines in the Cares act, what they were doing is they were really bailing out the investors in those airlines. It's not the case that if there's a bankruptcy, the airlines are gonna stop flying.

Similarly, you have tons of problems with moral hazard and ex post bailouts that are going on of private capitalists who have actually taken on risk. When the federal government bailed out banks, they were saying they were doing it to save employment in the economy. It doesn't really look like employment really rose as a result of this bailout.

I'm sure their argument would be, well, it would have been a lot worse if we hadn't done it. But one thing they surely did was they bailed out wealthy investors who had voluntarily taken risk by buying the stocks and bonds of these financial institutions. And they were happy because hey, the stock market recovered.

And something similar happened during COVID, the COVID episode began here. This blue line is the stock market and the red line is employment. And look, the government intervention around COVID was great for the stock market, not so great for employment. The stock market is now way far above where it was before COVID Incredible.

And I think a lot of that is due to federal government intervention. So just some sort of pictures of global financial crisis. What happened? The housing bubble burst and financial institutions said, we're gonna fail. The government bailed everybody out. They extended unemployment insurance, did all these things. Their stated justification was these entities are too big to fail.

We got to stimulate the economy, we got to lower unemployment. And the criticism is that there was a lot of moral hazard and a lot of crony capitalism. So moral hazard is what kind of incentive does this set for banks and financial institutions to take risk if they think that the taxpayer is always gonna bail them out?

Seems problematic. Same thing with the COVID crisis, right? So COVID crisis, you know what happened? Economic shutdown, due both to government lockdowns and also to fear, led to a rapid rise in unemployment, declining consumer spending and production. What happened? There were kind of two big piece of legislation.

One was in March 2020, the CARES Act. I calculated a total of $6 trillion. John Cochrane said 5 trillion, I get 6 trillion, 900 billion went to state and local governments. Social safety nets were expanded. This is the ARPA Act in 2021. State justification, we have to do this, we need to ease the effect of falling incomes.

We need to prevent bankruptcies. But again, what about incentives? What about the idea that maybe you don't want to pay people to be out of the labor force for an incredibly long time? What about the fact that it's highly debatable whether state local governments even needed the money?

State local governments have not shown any deficits at all, even without this additional 900 billion infusion. They would say, well, we didn't know at the time. Things didn't look, we weren't sure. Well, but you actually have to be sure before you spend a trillion dollars, I would say.

I mean, that's just my kind of fiscal prudent, fiscally prudent approach. And then there's the fact that investors apparently bore a few to no costs. I don't think it's a problem that somebody who invests in airlines, stocks or bonds might lose money when there's a pandemic. I don't think that's a problem, I think that's part of a free society.

Those people were bailed out. And let's face it, after this COVID episode, the rich have done incredibly well and the poor are not doing that well. So it's very unclear to me whether the government's actions were actually helpful to meet their stated justifications. And it's pretty clear to me that they've done much more for the wealthy than for the poor.