The Conversation

Income inequality and crony capitalism

National Review has an article from James Pethokoukis of the American Enterprise Institute in which he offers suggestions for the Republicans to swipe the "income inequality" issue, by highlighting how political connections and favoritism account for much of that growing gap between rich and poor:

Inequality has increased across advanced economies. Macro factors such as globalization and technology deserve most — but maybe not all — of the “blame.” Big Government loves to pick winners and losers in the private sector. Some lucky ducks owe their place in the 1 percent or 0.1 percent or 0.01 percent to federal favoritism. Conservatives shouldn’t mind at all when value-creating innovators and entrepreneurs strike it rich while crony capitalists do not. The precious tax breaks and subsidies that go to rent seekers, such as those in the agriculture and alternative-energy sectors, should get the ax. Sorry, Big Sugar and Big Solar.

At its core, such an anti-cronyism, anti-inequality agenda would use competition and markets to fight Washington’s natural bias for elite and entrenched interests. 

Pethokoukis goes on to offer some specific rhetorical and policy proposals, such as opposing big bailouts (such as the almighty frakkin' huge one coming to the insurance industry as ObamaCare collapses) and pointing out that "nothing boosts inequality like the nation's complex tax code and regulations."  

The latter is a favorite hobby horse of mine.  Everyone knows the stories of politically-connected individuals and corporations wiping out most of their tax liability by skillfully negotiating the vast maze of tax law.  I'd go so far as to say liberal soak-the-rich "populism" is largely a sucker play, tricking their victims into supporting high tax rates to feel good about sticking it to the Evil Rich, when in fact the Evil Rich have Evil Accountants and Evil Lawyers who help them neutralize much of that theoretical burden.  As Pethokoukis puts it, "smaller, simpler government would reduce the kind of income inequality that comes from leeching off the productive parts of the economy."

It seems amazing that Democrats and their media allies could actually profit from making an issue of "income inequality" or unemployment insurance, when their man Obama has been running the show for five years and counting - and running it with a far stronger whip hand than any of his predecessors contemplated.  If Obamanomics is raising income inequality to record levels - and, far more disturbingly and demonstrably, reducing workforce participation to historic lows - then clearly more Obamanomics isn't going to make things better.  

It's a monstrous deception to convince the public that political control of the economy is the "cure" for income inequality.  It's far more accurate to portray it as the cause.  The anti-competitive powers of government - from regulatory barriers against business formation, to bailouts that override the business decisions of the public, at their expense - reduce the wealth of the private sector, transforming political connections into the most valuable "resource" in the land.  That resource is sharply limited.  It's almost like a radioactive material, because the more heavily an economy relies upon it, the more toxic that economy grows.  The government can only seize so much wealth and power before the productive sector collapses in a heap beneath its heel.  The law of diminishing returns comes into play, requiring an increasing burden of coercive force to squeeze diminishing value from the productive sector.  And unlike other resources, when political influence is bought and sold, no one except the buyer and seller enjoys any peripheral benefit. 

Naturally, when wealth is a product of such a toxic and limited resource, the gap between the rich and everyone else grows wider.  It's harder to get from poverty into the middle class (a point Senator Marco Rubio has been hammering lately, when he talks about the "opportunity gap.")  It's also hard to get rich, but easier to stay rich, particularly when you're running some Solyndra-type operation and the government is pouring taxpayer money into your failed business model.  

It's abject folly to be worried more about "income inequality" than your own fortunes.  But when such inequality comes through crony capitalism, it becomes difficult to do anything about your own fortune.  Those who succeed by selling the rest of us what we want, at a price we can afford, are contributing value on their journey to the top.  Those who get rich by taking money away from the rest of us are not worthy of celebration.  Unsurprisingly, they are keenly interested in diverting the ire of the public.


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