These days, just about everyone — from Barack Obama to Pope Francis — seems to be worried about inequality. Now, inequality is actually shrinking on a global level, but inside many countries, it has increased. And the result is a renewed focus on inequality.
On one extreme, progressive economists like Thomas Piketty fret that increasing inequality in a context of reduced economic growth could create a neo-feudal order. On the other extreme, a number of my fellow conservatives argue that inequality is a red herring, and that what matters is to have a rising tide that will lift all boats. They point out that the most obvious recipe touted against inequality — increased fiscal redistribution — is likely to harm the economy. And sometimes, they darkly warn, liberal concerns about inequality are just the result of the mortal sin of covetousness, and an expression of the ever-present social urge to punish the successful for their success.
Famously, during Margaret Thatcher's last session of Prime Minister's Questions, she was pushed to show contrition about increased inequality in Britain during her tenure. She proudly refused, pointing out that all levels of income had risen during her tenure. "He would rather the poor were poorer, provided the rich were less rich!" the Iron Lady roared at her questioner.
Thatcher was correctly describing a certain kind of progressive. Go, Maggie!
But it's also possible to have a more nuanced view. An advanced market economy and sustainable political economy are dependent on the fact that most everyone doesn't feel like they're getting a raw deal, and doesn't feel like people who do get rich are getting rich at their expense. Moreover, as Jim Manzi points out, a vibrant market economy inevitably produces economic dislocation with its creative-destructive process — and making sure that the "losers" of creative disruption can still have a productive share in the economy should surely be a prime goal of policymakers. What's more, from a pure political perspective, it doesn't seem wise for conservatives to simply brush off concerns about inequality. We must develop an agenda that would address these problems with less unintended consequences than the progressive recipe.
Here's what my fellow conservatives need:
1. A greater awareness of crony capitalism
Often, increases in inequality are a result of crony capitalism. The best way to get rich is to have some sort of economic rent, and the best way to have an economic rent is to get the government to put your competitors out of business. Crony capitalism is a double-whammy: it helps the rich get richer, and it prevents those who would get rich from getting rich.
This has been the main problem of the Republican Party as a steward of economic policy over the past few decades: it hasn't been sufficiently able to differentiate between being pro-business and pro-market. The pro-market policy is rarely the pro-incumbent policy. Thankfully, the Tea Party has a keen awareness of the problems of crony capitalism. Conservatives would be wise to follow the Tea Party's lead — in this lens, the fight to defund the Ex-Im Bank is one of the most encouraging political developments of the past few years.
2. Tax breaks for stronger families
In many ways, we should see social liberalism as a form of class warfare. Along with sexual laissez-faire comes a host of problems — biological, social, psychological. And very often, whether you can manage those problems can mean the difference between success and failure, and whether you can manage those problems depends on how much social and economic capital you have. As the book Paying for the Party recounts, the party scene at large public colleges often ends up reinforcing inequality, as those from bourgeois backgrounds have an implicit safety net to recover from the pathologies inherent in a party culture, and those who don't...don't, and end up slipping back.
There are reams of social studies arguing that families are incubators of social capital. Being brought up in an intact two-parent household gives you a much better shot at developing the soft skills necessary to do well in school and to succeed in the new economy. And, in particular in the United States, the "marriage gap" is clearly a social gap. The upper-middle class has, in the wake of the divorce epidemic of the 1970s, rebuilt a strong marriage culture; the lower-middle class has not. Lower class people are much more likely to grow up in dislocated families, and thereby much more likely to do less well. Social inequality ends up being reinforced. Simple policies such as encouraging marriage and child rearing through the tax code could have a serious effect at the margin.
3. Better monetary policy
Monetary policy is like the air you breathe: you can't see it, you can't taste it, but it affects everything you do. In many ways, it can be argued that increasing inequality is the product of a too-restrictive monetary policy that has privileged price stability at the expense of full employment. The effects cannot be overstated, since another word for "full employment" is "growth," and since nothing wears the estate of rentiers down like inflation. While we are well aware of the destructive effects of too-high inflation, we should be more aware of the more subtle, but equally destructive effects of too-low inflation. Moderate inflation punishes rentierism and risk aversion.
A monetary policy that would support moderate inflation and full employment via, for example, financing payroll tax cuts and/or wage subsidies by money creation, would also be the best thing for workers' rights. As Matt Yglesias put it perfectly, "full employment punishes asshole bosses as a class."
4. Make it easier to get rich, and harder to stay rich
We want a vibrant, innovative market economy where it's easy to start a business, grow a business, and become very rich. But we also — and this is the other side of the same coin, since today's innovator is tomorrow's vulnerable incumbent — want to make it hard for the rich to stay rich. We tend to keep in mind the first half, and forget the second half.
All of the policies laid out above would contribute to this. But we must also tax stocks of wealth rather than flows of wealth. In other words, we should have a high estate tax. We might contemplate a wealth tax, or realize that moderate inflation accomplishes the same goal. Clayton Christensen, widely regarded as one of the greatest innovation scholars of the past 30 years, has also noted that the more disruptive innovations — the ones that make poor people rich and rich people poor — tend to yield benefit only over the long term, while more process-oriented innovations — the ones that make rich people richer — have more short-term benefits. He has argued for shifting capital gains taxation to encourage more long-term investments. I would add a suggestion to make asset managers hold assets for longer, by, for example, only making the infamous carried interest loophole, which is a tax break for fund managers, available for managers who hold assets in a fund for 15 years at least.
The great strength of the American conservative movement is that, unlike European conservatism, it did not arise out of the legacy of feudalism, but instead took root in the Enlightenment principles of the American founding. So a true conservative agenda would — necessarily — be an anti-inequality agenda. Let's make it happen.
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