The elites’ big lie on inequality

by
Dean Baker
My articles My siteAbout meMy booksMy videos
Follow on:Twitter

from Dean Baker

(I saw that Jeff Bezos wants the Washington Post’s editorial page to run pieces touting the merits of free markets. Here’s my submission.)

There are not many issues on which there is largely bipartisan agreement, so the story we tell about the origin of economic inequality stands out. Both sides agree that the increase in inequality of income and wealth is driven by an unfettered market. The difference is that conservatives say it is wise to accept the outcomes of the ‘free market,’ while people on the left believe the government should ameliorate the effects of the market.

But both sides accept that inequality is caused by the market. This is nothing but a Big Lie that bolsters elite interests.

The reality is that there is no “the market” out there generating inequality. The government structures the market, which is infinitely malleable and can produce almost any outcome we want. Over the last half-century, we have increasingly structured markets in ways that generate more inequality — a reality that our economic policy debates largely refuse to acknowledge.

Let’s start with the clearest example: government-granted patent and copyright monopolies. These are government policies to promote innovation and creative work. Since we have seen lots of innovation over the last half-century, one could argue these are good policies. However, the economy actually had faster productivity growth (the economic measure of innovation) in the quarter century following World War II — a time when there was less inequality, and these monopolies were less important. Recent policies have made these monopolies longer and stronger.

In the case of prescription drugs, while patents monopolies provide incentives for innovation, they also provide incentives for drug companies to lie about the safety and effectiveness of their products. The opioid crisis is the most prominent example, where drug manufacturers deliberately misled the public about the addictiveness of a new generation of drugs so that doctors would more freely prescribe them. Instances where drug companies are less than honest about their products occur all the time.

But the merits or disadvantages of monopolies in specific circumstances obscures our understanding of the broader pattern: These are government policies with enormous implications for the distribution of income. We will spend over $650 billion this year (or $5,000 per household) for drugs and other pharmaceutical products that would likely sell for less than $100 billion in a free market without patent monopolies.

As far as the impact on inequality, we can take the example of Bill Gates. He would likely still be working for a living if the government did not threaten to arrest people who copied Microsoft software without paying him a licensing fee.

The shaping role of government goes far beyond enforcing these costly monopolies. While we have supposedly embarked on a quest for what is often labeled ‘free trade,’ little effort has been put into removing the obstacles that protect physicians and other highly paid professionals from international and domestic competition. As a result, our 1 million doctors earn an average of more than $360,000 a year, twice as much as their counterparts in other wealthy countries.

Or consider the lesson of the 2008-9 financial crisis. If we really believed in the “neoliberal” free market ideals, why didn’t we let most of our major financial institutions go bankrupt? That would have given us a much smaller financial sector (which is already subject to other backstops from the government, like deposit insurance).

If having a smaller financial sector was a goal prioritized by a government promoting efficiency, we could institute a modest financial transaction tax. After all, we apply sales taxes to most items people buy. Given that sales taxes are the norm, we could argue the special exemption for financial transactions is a government intervention, and that taxing sales of stock in the same way as we tax sales of shoes and furniture would be a more “free market” policy. There would certainly be fewer great fortunes in the financial sector if its sales subject to a transactions tax.

It is impossible to overstate the extent to which policy choices by government structure the market. Corporations as legal entities (as opposed to partnerships, where the partners are personally liable for a company’s actions) are the creation of the government. Our corporate governance rules make it far easier for CEOs and other top executives to pull down incredibly high paychecks than is the case in Europe or East Asia. Again, this is simply how the government structures the market – we are not choosing between government intervention and a supposedly free market.

It is understandable that people who approve of the rise in inequality claim that it is just the natural workings of the market. After all, blaming the market sounds much better than saying we rigged the market to redistribute income upward. But those who are bothered by inequality – and want to do something about it – should resist this obviously false narrative.