By Jonathan B. Wight
My previous post focused on Warren Buffet’s humble interpretation of his own good fortune. A related article appeared today in TPM, “Five Tycoons Who Want To Close The Wealth Gap.”
Their reasons for desiring to close the wealth gap are varied, but a common point is that capitalism must be good for the masses or it won’t be viable politically in the long run.
Hence Ron Unz, a Republican who made his millions in Silicon Valley, is working to raise the minimum wage in California to $12/hour by 2016. The quid pro quo is that he would eliminate other subsidies:
"[E]very full-time worker would be earning almost exactly $25,000 and every full-time worker couple $50,000. Under normal family circumstances, those income levels are sufficiently above the poverty threshold that households would lose their eligibility for a substantial fraction of the various social welfare payments they currently receive, including earned-income tax credit checks, food stamps and housing subsidies."
Other millionaires favor raising the minimum wage even higher. “Wider prosperity” is a worthy goal, without which the justification for capitalism is one large bit weaker.
There is strong feeling in some quarters that the market itself will naturally produce wider prosperity and equality without any intervention by government. For example, in the rush to industrialize, the demand for skilled labor exceeded supply, leading to a rise in inequality between skilled and unskilled workers. Over time, we would predict the higher returns to education would lead more poor people to invest in education, and eventually the supply of skilled labors would increase, the supply of unskilled would decrease, and inequality in wages would be reduced by the working of markets.
This is a lovely story, but does not capture the path-dependent nature of opportunity and choice. I know four very smart people who never made it to college. College always seemed out of reach given the exigencies of their own circumstances. Call this price “illusion.” No parent, uncle, brother had been to college; they found it hard to “see” themselves in that environment, especially if they had to borrow vast sums and the ultimate jobs were outside their history of experience. The financial markets did not seize on their needs for information and cash-in to help them, so four very bright people never made it up the economic ladder.
Rather, the narrowing of inequality in the United States from 1930 to 1970 was to a large degree the result of government actions: the breakup of monopolies using the Sherman Anti-Trust Act after 1880, the progressive income tax (16th amend. - 1913), Social Security (1930s), the minimum wage (1938), the GI Bill (1940s), Johnson’s Great Society and the Voting Rights Act (1960s). And today I would add the Affordable Health Care Act (2010) that allows the middle class to pool into exchange markets without being part of a large formal work place.
These myriad of economic programs can all be criticized for inefficiencies and one longs today for Milton Friedman’s relatively simple negative income tax as an alternative to all of them.
Nevertheless, the basic point remains the same: capitalism cannot work only for the 1 percent. “Let them eat cake” went out of style in 1789.
[Yes, I know Marie Antoinette never said this, and Rousseau likely made it up. Still, it captures a useful sentiment.]