Chris Edwards argued earlier in the week that wealth inequality statistics alone tell us little to nothing interesting about the American economy. It seems Larry Summers agrees (see from 8h 27 mins).
In a speech at PIIE yesterday, the former Treasury Secretary under Bill Clinton outlined why wealth inequality wasn’t a particularly useful measure to consider the justness of a society.
He highlighted, for example, that the arguments about wealth inequality and political power appear to have almost no validity. Interest groups and corporate lobbying are much more important sources of political power than wealthy individuals. In the panel discussion afterward, he pressed economist Emmanuel Saez to give just one example or mechanism of how an extraordinarily rich individual losing a large fraction of their wealth would alter political outcomes. Little meaningful response was forthcoming.
I’ve looked in detail at the supposed relationship between wealth inequality and democracy for a forthcoming Cato paper with Chris Edwards, and the evidence for wild assertions we hear about inequality killing democracy is extraordinarily weak. But more on that next week. What was heartening was to hear Summers deliver some home truths to the left on wealth inequality and the redistributive welfare state:
Wealth inequality reflects many things that happen in a society. Suppose we successfully in the United States adopted a more generous and complete progressive social security system….I would assume that the lower half of the population would have much less need to accumulate or hold liquid assets because they were being properly insured. And so measuring the ratio of the wealth of the wealthy to the wealth of the less wealthy may reflect something about accumulation at the top or it may reflect something about the adequacy or inadequacy of social insurance arrangements.
This is exactly right, and supports what Chris and I have outlined about the disingenuousness of those who say wealth inequality shows the need for a more progressive welfare state.
Evidence from both here and abroad shows major social programs, not least Social Security, increase measured wealth inequality because they leave the non-rich with “proportionately less to save, less reason to save, and a larger share of their old-age resources in a nonbequeathable form than the lifetime rich.” Economists Baris Kaymak and Markus Poschke estimate that the expansion of Social Security and Medicare caused about one-quarter of the rise in the top one percent wealth share over recent decades.
As Chris writes today, the European experience shows the same results. It therefore makes no sense to say you believe reducing wealth inequality is an overwhelming imperative, and that expanding the welfare state is the way to do it.
Those who worry about measures of private wealth inequality and want a bigger welfare state therefore face two ways of squaring the circle. Either they can admit that reducing measured private wealth inequality is not an important and overwhelming public policy objective. Or they can seek to incorporate social programs into broader, “lived” measures of wealth inequality.
Both would be problematic for them, politically. If goals other than reducing wealth inequality drive their desire for more social spending, it’s much more difficult to argue that concerns about other priorities are illegitimate when discussing top taxes (for example, economic growth). And if you include assessments of the present value of promised government benefits as if they are real wealth, wealth inequality looks much lower and less problematic.
What’s dishonest though is to argue that private wealth inequality measures show we need an all-out war on narrowing the wealth distribution and that more social spending is the cure. Kudos to Larry Summers for pointing that out.