Inequality Might Matter

James Taranto forwarded an article by Arthur C. Brooks of Syracuse University's Maxwell School. Professor Brooks makes several good arguments against the left's misguided obsession with income equality. In his research, Professor Brooks has found that inequality does not make poor people miserable and that:

"...the evidence reveals that it is not economic inequality that frustrates Americans. Rather, it is a perceived lack of opportunity. To focus our policies on inequality, instead of opportunity, is to make a serious error..."

Professor Brooks notes that some left wing academics hold that the wealthy should be taxed so that they will not work. The proponents of this theory believe that the only significance of high incomes is high earners' ability to make whoopee and spend money. This, of course, fails to grasp that high earners create consumer surplus, so that discouraging the productive wealthy from working would devastate national welfare.

Think of it this way. Let's say Albert Sabin and Jonas Salk had become wealthy as scientists. The left would argue that because they had made money in prior work, they should have been discouraged from doing further work because their high incomes might have been irritating to low-income Americans. However, the low-income Americans who would otherwise have suffered from polio might have been more irritated at the economists than at Sabin's and Salk's high incomes. Advocacy of broad policies based on narrow findings about reactions to income inequality puts academics making such generalizations into the quack category.

Brooks adds that the general level of happiness has not changed since 1972 and that economic mobility rather than equality creates happiness among Americans:

"An accurate and constructive vision of America sees a land of both inequality and opportunity, in which hard work and perseverance are the keys to jumping from the ranks of the have-nots to those of the haves. This vision promotes policies focused not on wiping out economic inequality, but rather on enhancing economic mobility."

Amen. But there are reasons to be concerned about inequality. Increasing income inequality may not result from free market sources. Rather, increasing income inequality may result from federal policies that liberal economists have previously advocated. These include (1) indirect effects of the income tax and (2) credit policies of the Federal Reserve Bank.

Marginal tax rates may discourage effort of low-wage workers, increasing inequality. Because income taxes discourage saving, they reduce capital formation. Capital formation increases wages, especially for blue collar workers.

Federal Reserve Bank policy may be the ultimate source of increasing income inequality. Professor Brooks ought to ask whether wages of low-wage workers relative to high-wage workers are increasing at the rate they did before the Fed was established in 1913. They likely are not. Since the 1970s there has been a flattening in real wage growth.

The reason the Fed's credit policies might result in more rapid income increases at the upper end of the distribution is that cheap credit increases the available investment opportunity set. Low interest rates increase profits. Increased profits help the wealthy. They may hurt low-income Americans if low interest rates expand the expected present value of returns on cost-strategy type investments such as moving plants overseas, reducing demand for domestic labor. Such investments might not be made in a high interest rate environment if they do not impact the expected present value of future earnings sufficiently. This could easily be the case.

An error that the American Enterprise Institute makes in its various media statements is the claim that credit expansion and interest rates are costless to the public. This is not true. Low-income workers may pay twice. First, because they do not participate in profit growth due to low interest rates because they are less likely to hold assets (stocks and real estate, for example). Second, if high earners are not like Sabin and Salk and are earning their high incomes because of Federal Reserve policy rather than because they create of consumer value. If easy money has resulted in extraction of wealth through "malinvestment", credit expansion may cause inequality and also result in inflation. Credit expansion is not free--it results in a declining dollar, high import costs, economic dislocation, and likely ultimately inflation. In the 1970s the sum of unemployment and inflation was called the "misery index".

In order to gauge the effects of increasing income inequality, Professor Brooks would need to look dynamically into the future, when Americans are confronted with inflation and economic dislocation due to the same Fed policies that have contributed to increasing income inequality. Although the claim that taxation is the solution to this problem is preposterous, the issue is more important than the American Enterprise Institute would like us to believe.

ACLU Aims to Give Right of Habeus Corpus to Enemy Combatants

Vigilant Freedom has distributed the following alert:

>"The ACLU has announced a strong push to end the US government’s ability to detain terrorists seized on the battlefield and try them under Military Commissions for their actions as enemy combatants. The Bush Administration has expressed its belief in the importance of preventing Islamist fighters from abusing the American civil judicial system. Now Senate Amendment S.A 2022 proposed by Senators Leahy and Specter seeks to undo that effort. The ACLU Washington Legislative Office is urging their members to lobby their Senators to institute the right of habeas corpus, a right of citizenship, for all enemy combatants. The ACLU writes: No president should ever be given the sole power to call someone an enemy and lock him or her away …but that is exactly the power the Bush administration has claimed.

"Write or call your Senators and let them know how you feel about awarding American civil rights to terrorists captured overseas and encourage them to consider carefully their vote on S.A 2022."

I wrote the following e-mail:

Dear Senator Schumer: I oppose Senators Leahy's and Specter's SA 2022 that would prohibit the president from detaining enemy combatants. The taking of military prisoners is a normal occurrence in war, and encouraging terrorist fighters to make use of the American legal system would guarantee their success. If there is another terrorist strike in the United States, Senators Leahy and Specter will deserve credit.

Congress Is Inept at Waging War

Frank Gaffney of the Washington Times writes:

"Some of Capitol Hill's...armchair generals propose to "relocate" the forces removed from Iraq to Kuwait or some other, "over-the-horizon" location. We are told they could then be reintroduced if things get ugly in Iraq — say, if al Qaeda's friends or Iranian-backed groups fill the vacuum of power created by our bailing out. Fat chance.

"First of all, it is certain that one or both of these predictable results will eventuate. Few, if any, of those insisting on our troops' extrication from a less-bad mess will be willing to support their renewed exposure to even greater dangers. And who's to say Kuwait will be willing to take our displaced legions, making the emirate the next battleground for the Islamofascists' "liberation" of Arab and Muslim lands?<

One of the considerable risks that confronts a republic is the legislature's inept interference in military issues. The public ought to ask Congress for a clear description of any strategies that it proposes and what its goals in implementing the strategies are. This one sounds like pure stupidity, much like the ideas in the New York Times. The public deserves a coherent SWOT analysis together with an explicit contingency plan as to what Congress expects given strategic moves such as this. Frankly, I do not see why this strategy is better in any way than President Bush's current strategy and expect that it will cause new problems. I do not hear a coherent Congressional argument or coherent discussion.

Oppression in Vietnam

I just received an e-mail from a group that calls itself VietnamVote.net concerning serious political suppression in Vietman.


>"In 1989 the Tiananmen Square protests were a series of protests led by students, intellectuals, and labor activists in China. In 2007 history may be about to repeat in Vietnam with over 1700 Vietnamese peasants from 19 provinces peacefully protesting the illegal confiscation of their land and properties.

"Since June 22nd, 2007, a growing number of peasant farmers have protested outside of the office of Vietnam Congress, at 194 Hoang Van Thu Street, Saigon. Their requests for meeting with communist officials went unanswered. While being disappointed, the protesters vowed not to give up as additional protesters from other provinces are coming in Saigon to join in the protest.

"By protesting, they all became homeless, sick, tired, and hungry and to discourage them, Vietnamese communist have shut down public restrooms and stopped other fellow countrymen from offering the protesters food, beverages and medicine.

"According to sources from within Vietnam, Vietnamese communist has deployed armed police in uniformed in marked and unmarked vehicles surrounding the protestors, ready for an attack.

"Vietnam communist government has turned off electricity, scrambled cellular phone signals, restricted media coverage, and deployed hundreds of military personnel with heavy equipment and military tanks ready for the crackdown and slaughter of the protesters.

"The Vietnamese communist could begin the massacre at any moment.

"Vietnamese Americans are pleading with all Americans, President Bush, Vice President Cheney, members of US Senate and Congress, and members of the media to take immediate actions in order to prevent another Tiananmen Square massacre from happening.

"Thank you and God bless America!!!"

The group urges that we e-mail the White House supporting the protestors.