Elon Musk, the First Trillionaire: A Capitalist Success Story with Some Caveats

Just when you thought Elon Musk could not have gotten any richer, he announced the initial public offering (IPO) of SpaceX, an aerospace manufacturing company. The SpaceX shares combined with Tesla made Musk the world's first trillionaire. 

There were those, particularly on the Left, flipping out. The Institute for Policy Studies called it a dark day for democracy. Senator Elizabeth Warren decried it while making a call for a wealth tax, which is a bad idea. Senator Bernie Sanders thought it was absurd and pitched the idea of removing the cap on taxable income for Social Security. It is certainly a reminder that the income inequality debate is not dead, and neither is envy for success or rich people. 

Forget what I think about his missed opportunity to reduce government largesse with DOGE, the man's accomplishments are remarkable. He helped the foundations for PayPal, built Tesla into a transformative company, and founded SpaceX. If he is successful in making routine space travel possible, it would rank among one of the biggest entrepreneurial achievements in human history. 

More importantly, Musk is creating value. And that brings us to a point often lost in this discussion. Elon Musk is not sitting on a trillion dollars in cash. A net worth is not a bank account. It is largely an estimate of the value of investments, businesses, and other assets. 

Nor is he hoarding wealth. The economy is not a fixed pie in which one person's gain necessarily comes at another person's expense. Wealth is created through innovation, investment, and productivity. Musk's fortune reflects the belief of millions of investors that the companies he built have generated enormous value and may generate even more in the future. 

His rise to trillionaire status is a reminder of what can be accomplished through ideas, perseverance, risk-taking, and a market economy that allows individuals to create wealth on a massive scale. That being said, I would say that there are two important caveats. 

The first has to do with monetary policy. The Federal Reserve spend decades expanding the money supply and eroding the purchasing power of the dollar. One consequences has been rising asset prices, which in turn have produced ever-larger fortunes on paper. Musk unquestionably created wealth, but the emergence of the world's first trillionaire is less shocking given how much the dollar has devalued. 

The second has to do with the government subsidies, contracts, or regulatory breaks received by Musk's companies as evidence of unfair advantage. This argument often misses the broader institutional point. When the government has the authority to subsidize industries, grant tax advantages, and regulate entry into markets, it inevitably creates incentives for rent-seeking.

Musk's success is best understood not as the product of government intervention, but it cannot be understood as something that happened in a purely free market either. His success and value creation took place in a system in which markets remain the dominant engine of value creation, but also where political discretion occasionally distorted outcomes at the margins. 

Musk's story is one that took place in an economy with considerable rent-seeking and monetary expansion.  The story is less about whether anyone should be a trillionaire and more about the fact that propserity depends on sound money, competitive markets, and limits on political favoritism. 

How Lockdowns and Other COVID Measures Have Caused Suffering, Even in 2025 (Part II)

While the COVID pandemic might seem like a distant memory that started about five years ago, the truth of the matter is that we are still not over the impact of the lockdowns or other COVID measures. The fact that there are multiple impacts does not shock me in the slightest. I was against lockdowns before they started in the United States, and I was adamantly opposed once implemented because of the harm it was going to cause. This is hardly the "I told you so" I want to write, but here we are. I was thinking about this enough where I decided to write a multi-part blog series on how we still feel that impact to this day. 

Part I covered the health-related suffering, whether that was greater backlog in health services, higher obesity rates, higher rates of substance abuse, or less trust in public health experts. In Part III, I intend on covering the political costs that we still pay today. As for Part II right now, I will cover the costs related to the economy. 

School closures harmed the economic future of today's children. School closures meant that students were unable to effectively learn. In terms of academic achievement, students have still not recovered from the pandemic. As I pointed out in 2022, that loss in academic achievement and attainment will translate into diminished wages in the future. Not only will it reduce wages, but life expectancy, thereby diminishing their quality of life in the long-run. So much for the mantra "Think of the children!"

Lockdowns stunted our social skills and socializing, and by extension, can impact the economy. As I wrote in 2023, the lockdowns lowered children's social-emotional skills in comparison to the pandemic. That makes sense because childhood is a formative moment in one's emotional development and depriving children of socialization erodes social skills. While children were the most affected, they were not the only ones affected. 

According to a recent study from the Journal of the American Planning Association conducted by researchers at UCLA and Clemson University, people spend an average of 51 minutes a day less on out-of-home activities than they did pre-pandemic (Morris et al., 2024). This 51 minutes does not count the reduction of 12 minutes for daily travel. There also seems to have been at least some impact on college students, as well (Cerutti et al., 2024). Less socializing not only has impact on our mental health, but less socializing and going out can mean less economic growth. 

Increased poverty and income inequality, especially in developing countries. Before the pandemic in 2019, 37 percent of U.S. citizens could not cover a $400 emergency without needing to borrow or sell something (Federal Reserve). Economic insecurity was even more pronounced in developing countries, where 50 percent of households could not able to sustain basic consumption in the event of income loss for more than three months (Badarinza et al., 2019). As the World Bank illustrates (but does not explicitly state), having to endure lockdowns for multiple months exacerbated income inequality. 

As the International Monetary Fund points out, the ability to work remotely is highly correlated with education, and thus pre-pandemic earnings. This was more pronounced during the pandemic because those who worked remotely during the pandemic were able to maintain their financial status better than those who could not. As the IMF shows in another research paper (Fuceri et al., 2021), this trend impacted employment of lower-income households. Since it diminished the employment prospects of these individuals, the effects of lockdowns continue to exacerbate income inequality, and by extension, their future earnings. 

Federal debt made worse by policy choices. As I covered last year, the greater the COVID restrictions, the greater the budget deficit due to the economic downturn. The Coronavirus Aid, Relief, and Economic Security (CARES) Act cost over $2 trillion, with the American Rescue Plan (ARP) Act costing $1.9 trillion. And that was just the COVID-related Federal spending in the United States during the pandemic. 

The trajectory of U.S. debt was already not in a good place before the pandemic. As I brought up during the pandemic, greater debt means more interest payments and less savings and investment for citizens. Because Trump is not showing any interest in reducing debt in any significant way, the federal debt gained during the pandemic combined with greater anticipated deficits will ultimately diminish quality of life for us all. Sadly, this was not a strictly U.S.-based phenomenon. Average global debt levels have increased by 12 percentage points as a result of profligate spending during the pandemic. 

New Robust Research Shows That Hysteria About Rising Income Inequality Is Unfounded

When people find out that a firmly held belief they have is false, there is this grieving process, ranging from denial to sadness to anger. At least for me, I prefer to adhere to sound research methodology, logic, reason, and facts. That way, if new information or evidence comes along that challenges previously conceived notions, it is less of a shock to my worldview and I do not deal with such a grieving process because I do not believe that personal is political. I do my utmost separate the political arguments from the person. For those who believe that the personal is political, this grieving process can rattle one's cage. 

Take income inequality for example. CNN tells us that income inequality is snowballing. Washington Post posits that income inequality harms everyone, including the rich. The famous economist (or infamous, depending on your point of view) Thomas Piketty popularized the narrative that the rich made of like bandits because, according to their research, the top 1 percent's share of income increased from 8 percent in the 1980s to 27 percent in 2021. Even the centrist Council on Foreign Relations depicts income inequality as "one of the defining challenges of this century." 

All we hear about is how income inequality has continued to rise in recent decades and how awful it has been. What would you think if it turns out that income inequality has barely budged in the past sixty years? It would run counter to so much of what we have heard, especially since the Occupy Wall Street movement in the 2010s. 

A study published in the Journal of Political Economy last month scrutinizes the narrative and turns it on its head (Auten and Splinter, 2023). The authors of this study are far from being lightweights in tax policy. Gerald Auten has been an economist at the U.S. Treasury for nearly four decades. David Splinter is a senior economist at the Joint Committee on Taxation. 

Why do I prefer this analysis over the likes of Thomas Piketty? In short, it better contextualizes what is going on and measures it more accurately. In terms of context, Auten and Splinter take into account the reforms from the Tax Reform Act of 1986. This Act lowered the statutory rates and broadened the tax base. The higher statutory tax rates created incentives to shelter income inside corporations. Without these adjustments, top income shares from the 1960s are understated (p. 3).

Auten and Splinter also accounted for decline in marriage rates. Why is this important? To quote the authors, "This increased the total number of tax units, thereby increasing the number of high-income tax units in the top one percent. This differential decline in marriage rates overstates top income shares in recent years (ibid)." 

In addition to making these adjustments, the authors sensibly accounted for two other factors. One is that they adjust for post-tax income. Pre-tax income tells a certain story, but post-tax tells a more practical story since post-tax income is what one de facto earns and takes home. The second adjustment is with regards to including government transfers. Whether it is welfare benefits for low-income households or tax breaks for high-income households, these funds need to be factored in to determine actual purchasing power. 

When the authors factored in all of these adjustments, the picture surrounding income inequality looks quite different. What we see with the share of income for the top 1 percent is much more modest than Piketty depicts. 

It is not only the Top 1 percent that are faring better, but also individuals in lower income brackets. The authors looked at the data by quintile. One key trend is that income shares for the middle and lowest quintiles did not change. The second more notable change is that income [in 2019 dollars] went up for those in the lower quintile (p. 26).

It should be no surprise that Piketty and his colleagues take issue with the findings from Auten and Splinter. I am also not surprised that Splinter was able to refute the flaws in Piketty's response, especially since Piketty did not address most of Auten and Splinter's criticisms of Piketty et al. in the first place. Furthermore, I remember analyzing a Harvard study from 2014 showing that single-mother households had significantly more impact on income mobility than income inequality. 

This is more than academic sparring or quibbling over methodological differences. The findings from Auten and Splinter have real-world implications. Forget for a moment that income has increased for lower-income households after adjusting for inflation. After all, measures of income inequality or wealth inequality do not tell us about the well-being of poor people, as this 2018 Cato Institute report on wealth inequality reminds us or as I brought up in 2014 when scrutinizing the Gini coefficient. 

What does it mean that income inequality has stayed by and large stable over the past 60 years? I am sure it has similar implications to finding out that climate change is not a crisis or that COVID-19 would not have been so much worse had we not implemented lockdowns. It means that the narrative of "the super-rich continue to get richer at the expense of the poor" is a falsehood. It means that the political Left cannot propagate the politics of envy by focusing on relative gains (as opposed to everyone getting a bigger piece of the pie) or dividing people into the haves versus the have-nots. It means that such policy recommendations as the wealth tax or a global minimum tax lose justification. Ultimately, it means that the political Left loses power. I will conclude today's piece with concluding thoughts from the Financial Times:

One conclusion is that methodology matters in such research. A more profound one is that if income inequality has not risen, we have been asking the wrong questions about U.S. society. Instead of asking how to curb the power of the super-rich, perhaps there are better questions. For example, why has a rise in redistribution been so ineffective in solving the U.S. societal ills? And do we want so much of redistribution to be undertaken through healthcare rather than providing poorer households with more money?

Is the One Percent Finally Paying A Smaller Percentage In Taxes Than the Poor in the U.S.? Probably Not.

Income inequality continues to be a rallying cry for the Democratic presidential candidates. Whether it is the idea of raising the estate tax or creating a wealth tax, the Democratic candidates want to soak the rich with taxes. A study by two economists give additional fodder for the "soak the rich" platform. According to economists Emmanuel Saez and Gabriel Zucman in their latest book "The Triumph of Injustice," we have reached the point where the billionaires are paying a smaller percentage in taxes than the poorest 20 percent when factoring in federal, state, and local taxes. The New York Times had a field day with this finding (see figure below).

If Saez and Zucman's (herby referred to as SZ) findings are true, it would strengthen, at least in a political sense, the Democrats' arguments for higher taxes on the rich. Rather than give into knee-jerk reactions about the Tax Cuts and Jobs Act (TCJA) that the Republicans passed, let's actually take a closer look at what went behind SZ's findings:

• Where are the 2018 federal income tax figures coming from? Normally, such figures would come from the IRS. However, the IRS has not released the 2018 figures. If that's the case, how could SZ possibly assert that the rich paid a lower percent than the poor? They took 2017 figures and extrapolated. As the Left-leaning Tax Policy Center points out, that is no easy feat because the TCJA made such changes to the tax code. Any findings on the TCJA have been preliminary, and as such, SZ's findings are premature at best. While I cannot be certain until we receive those figures, I would bet (if I were a betting man, that is) that the richest are not paying a lower tax rate than the poor, so let's get into why I would make that assertion, shall we?  
• The U.S. tax code has been progressive, and most probably remains so. Historically, the U.S. tax code has been more progressive than its European counterparts (see 2016 CBO figures as an example). What is even better is that the TCJA made the tax code more progressive, not less. That is not just based on the estimates from Joint Committee on Taxation, but also the Tax Policy Center. In response to SZ's book, JCT economist David Splinter wrote a response with an alternative estimate to SZ showing how the tax code remains progressive (Splinter, 2019; see Figure below). Obama's former Chair of the Council of Economic Advisers, Jason Furman, also takes issue with SZ's claim about tax progressively. With these estimates from Left-leaning sources and the JTC, it becomes more difficult to accept SZ's thesis. The federal tax code seems to remain progressive, even with the TCJA. Perhaps state taxes are the thing causing the increase in the tax rate for the poorest.

• Skepticism on state and local tax calculations. I'm not only skeptical of SZ's estimates on the federal figures, but the state figures as well. For one, I have to question why SZ include state- and local-level consumption and property taxes. Everyone pays the same tax percentage. There is no "tax injustice" going on here, only a recognition that lower-income households pay a higher percentage of their income on these taxes because they spend a higher percentage of their income on the goods and services upon which the taxes are assessed. If you remove these taxes from the equation, it's unsurprising how the richest manage to have a higher tax rate than poorest, thereby diminishing SZ's argument. 
• Skepticism on state and local tax calculations, Part II. But for argument's sake, let's give SZ this assumption and include state- and local-level consumption and property taxes. It's still problematic. Why? The Left-leaning Institute on Taxation and Economic Policy releases its study, Who Pays?, on state tax levels. ITEP found that the difference in state taxes between the Top 1 Percent and the Bottom 20 Percent is 4 percent (ITEP, p. 4), which is nowhere what it would need to be for the poor to pay a higher tax rate than the rich. What is even better is that ITEP estimated what taxes paid and total income would be. It turns out that in terms of tax rates and shares of total federal, states, and local taxes, the rich still pay more. Figures from Left-leaning sources show that the higher the income, the higher the tax burden, which serves to imply that SZ's estimates are simply over the top. How is that the case?

• Omission of Earned Income Tax Credit (EITC) and other means-tested welfare. What SZ are measuring (or in this case, not measuring) is affecting their numbers. SZ consider the EITC as a transfer of income rather than a negative income tax. As the Tax Policy Center argues, while the EITC and the Child Tax Credit (CTC) feel like spending, they are features of the federal tax code to offset the burden of the regressivity of the payroll taxes. Since the EITC and CTC are administered through annual tax filings and contribute to net tax rate, the Congressional Budget Office has included them in their calculations. By treating the EITC and CTC the way they did, SZ raised the effective tax to a rate much higher than otherwise would exist. When those tax credits are accounted for, the Tax Policy Center has the effective federal tax rate for the poorest 20 percent at 2.9 percent, and not the 20-plus percent that SZ have calculated.
• Addition of health care premiums. Not only do SZ omit aspects of the tax code explicitly created to ease the burden of the poor, but SZ highlight something else peculiar on their website: they consider private health care premiums as a "health insurance poll tax." If that ends up playing out in the data they used for their book, it is a peculiar choice indeed. While there are aspects of health care premiums intertwined with the tax code, it is equally true that private health care premiums are not taxes. Treating private health care premiums as part of taxation while excluding the EITC and CTC as part of taxation (when they are de facto negative income taxes) only serves to exaggerate the tax rate of the poor. 
• Treatment of Corporate Taxes. When analyzing the incidence of corporate taxes, some of the incidence falls on shareholders and part of it is passed through other forms of capital (e.g., disbursement through the non-corporate sector). SZ toss aside that assumption and transfer the entire incidence to shareholders, which is contrary to reality and standard economic practice (e.g., Smith et al., 2019; Splinter, 2019). This heterodox approach is significant because using this assumption attributes an excessively high amount of wealth to the rich, thereby giving the appearance of a lower tax rate than they actually have. 

Postscript: When looking at the tax data with reasonable assumptions, the U.S. tax code has not become overly regressive, certainly to the point where the rich pay a lower rate or amount than the poor. The best-case scenario is that SZ are using unconventional means and assumptions to arrive at their numbers. Combining the spurious assumptions with how they frame the issue in a "politically slanted narrative" (e.g., their website promoting the book has an interactive data simulator with tax proposals from the Democratic presidential candidates, boasting on their university website how it will affect the Democratic primaries), it becomes more difficult to accept the best-case scenario, thereby casting doubts on their intentions since they blur the line between scholarship and politics. These severe methodological flaws do not take away the need for debates about what tax policy should like (e.g., simplify the tax code to remove tax avoidance mechanisms, adapt to the increasingly global nature of firms) or what to do about income inequality. At the same time, Elizabeth Warren, Bernie Sanders, and others who are of similar ideological mind should base their policy ideas on reality, not on what they would like for reality to be.

Eight Reasons Why Elizabeth Warren's Wealth Tax Is a Poor Idea

Since the Democrats regained power in Congress, they have been pushing for their wholly unoriginal idea of increasing taxes on the wealthy. Democrats are eyeing a corporate tax increase, which would be a reverse trend of the Republican's tax reform bill: the Tax Cuts and Jobs Act. Earlier this month, freshman Congresswoman Alexia Ocasio-Cortez (D-NY) proposed a misguided marginal tax rate of 70 percent that got a lot of people talking. Now it's Senator Elizabeth Warren's (D-MA) turn. Last week, Warren proposed to levy a 2 percent wealth tax on assets over $50 million, and a 3 percent wealth tax for assets over $1 billion.

Since it is a progressive tax, the first $50 million would be taxed at 0 percent, and anything between the $50 million and $1 billion mark would be taxed at 2 percent. Anything above $1 billion would be taxed at three percent. Since both income and wealth inequality have reached new highs, Warren hopes that a wealth tax could redistribute the wealth and mitigate the inequality. Economists Emmanuel Saez and Gabriel Zucman estimate that Warren's wealth tax could generate $2.75 trillion over the next ten years. Most Americans don't make over $50 million, which means it has populist appeal, and it is calculated to generate a fair amount of income. The Left-leaning Institute for Tax and Economic Policy (ITEP) released a report just last week making the case for a wealth tax, which means the idea is catching some traction. What could possibly go wrong? I covered the topic of a wealth tax in 2014. I will use that 2014 analysis as a starting point for this 2019 analysis, as well as the OECD's April 2018 report on wealth taxes, but the short answer is "plenty could go wrong." Here are a few issues with Warren's plan to implement a wealth tax:

1. The wealth tax is difficult to valuate. One of the advantages of an income tax is that it is easy to determine one's income: just use the W-2 or 1099 Form. Not so with wealth. Wealth includes land, stocks, bonds, cash, cars, retirement savings...you get the idea. What is more is that determining the value of these various assets is more subjective than determining one's income (OECD, p. 69). 
2. The wealth tax can be evaded. Especially with increased capital mobility over time, which won't go away anytime soon, tax avoidance and evasion have increased (OECD, p. 67). To provide a U.S.-based example, the closest thing the United States has to a federal wealth tax is the federal estate tax. As the Left-leaning Center on Budget and Policy Priorities points out, wealthy people have been able to evade an amount equivalent to a third of the estate tax revenue raised since 2000. Granted, this was primarily caused by the GRAT loophole. Saez and  Zucman expressed confidence in Warren's plan lacking such loopholes. 
• In spite of Saez and Zucman's confidence, there are multiple ways to get around the wealth tax, including hiring tax attorneys to exploit IRS loopholes, dividing assets among family members, divorcing for tax purposes (if there are different asset thresholds), moving it overseas, and hiding it in trust funds (e.g., OECD, p. 67-68). Warren might be able to address some of these shortcomings, but it's also true that people will find new ways to get around the wealth tax.
• According to a Swiss case study co-authored by the co-architect of Obamacare, a 0.1 percent increase in the wealth tax resulted in the wealth reported to the government to drop by 3 percent (Gruber et al., 2016). 
• As former Republican tax policy advisor Alan Cole points out, since it is difficult to enforce the wealth tax, it is easier to go the route of the capital gains tax than it is the wealth tax. 
3. Other countries have abandoned the wealth tax. In 1990, 20 countries from the OECD (Organization for Economic Cooperation and Development) had a wealth tax. Now, only four countries have a wealth tax: France, Norway, Spain, and Switzerland. The Executive Summary in the OECD's April 2018 report on wealth taxes points out that the wealth tax repeals were "justified by efficiency and administrative concerns and by the observation that that net wealth taxes have frequently failed to meet their redistributive goals." If they frequently failed to meet their redistributive goals, that will end up being a problem for Warren since that is the primary reason she is advocating for the wealth tax in the first place. 
• Since 2000, France had 60,000 millionaires leave France because of a high wealth tax. French President Emmanuel Macron limited and lowered the wealth tax to mitigate the capital flight. 
4. The wealth tax in other countries have not collected a lot of revenue. Saez and Zucman believe that the wealth tax would contribute $2.75T over ten years, or an annual average of $275B. As the OECD report shows (p. 19-20), most countries kept their wealth tax revenue collection below 0.5 percent of GDP. Switzerland's 3.7 percent is explicitly stated by the OECD as an exception to the norm (p. 18). If we use the BEA's 3Q 2018 GDP estimate of $20.66T as a basis for the GDP, that would be 1.33 percent of the GDP. Adjusting the GDP for inflation would still not get the desirable figure: Saez and Zucman's estimate is rosier than historical data. The past, especially that of other countries, is not indicative of the future. At the same time, what the historical data show is that other countries have found it challenging to have rich people pay the wealth tax. The burden of proof would have to be on Warren to prove how her plan would be different from the other countries that tried and ultimately abandoned the wealth tax.  
5. The wealth tax poorly targets capital income. As the Tax Foundation explains, the wealth tax poorly targets capital income (or simply capital) because the wealth tax goes after normal returns. What it should be going after instead are the super-normal returns, which are the returns that go above the amount needed to compensate someone for saving and subsequently delaying their consumption. Since super-normal returns are unexpected, they do not have as much potential to distort investment decisions. 
6. The wealth tax lowers economic growth. In its 2014 analysis of Thomas Pikkety's global wealth tax, the Tax Foundation calculated that it would reduce GDP by 0.49 percent per annum. On the other hand, a 2010 World Tax Journal analysis calculated it at just 0.02-0.04 (Hansson, 2010). In either case, no one is arguing that the wealth tax is going to boost the GDP.
7. The wealth tax affects more than the super-wealthy. Savings finance business investment. This drives more than wealth for the rich or the economy. The capital acquired by these super-wealthy individuals is used to employ others, create products that are consumed by other individuals, or generates wealth for pensions and retirement accounts. 
8. The wealth tax is arguably unconstitutional. The Constitution prohibits federal direct taxes that are not apportioned by the states (Article I, Section 9, Clause 4). The exception to this rule is the income tax since the Sixteenth Amendment creates a separate constitutional provision. Given the nature of the wealth tax, it could be classified as a direct tax. It might not be clear whether a wealth tax would constitute a direct tax, but one thing that is clear is that it would be challenged in court shortly after Warren attempted to implement it.

As the OECD points out (p, 59), the wealth tax does not work in isolation. Its effects depend on the overall composition of the tax code. At the same time, there are considerable and observable drawbacks to the wealth tax that Warren would rather not mention. Given that we are approaching an election cycle, this will not be the last the American people hear of income inequality or higher taxes for the rich. 

Clinton's Criticism of "Trickle-Down Economics" Is Misplaced for a Number of Reasons

The presidential debate last week was the first debate I actually watched during this election cycle. It was the three-ring circus I was expecting it to be. As usual, there were many topics on which Donald Trump inaccurately spoke, whether it was NAFTA, the Trans-Pacific Partnership, stop-and-frisk, or how he would reduce debt (Spoiler: His current plan would increase debt more than Hillary's plan). Even with all of the inaccuracies coming from Trump, Hillary kept going after Trump for advocating for "trumped up, trickle-down economics."

The Left has historically used the term "trickle-down economics" pejoratively to refer to capitalism, supply-side economics, or laissez-faire economics. However, for purposes of this discussion, we will go with the definition of "using tax breaks (e.g., capital gains tax cut) or other forms of public policy (e.g., subsidies, such as TARP or the Chrysler bailout) for large businesses, investors, and entrepreneurs to stimulate economic growth." The idea behind trickle-down theory is that because those who have the greatest resources have the greatest potential to generate productive output, everyone benefits from the increased economic output, i.e., it trickles down.

Before going into whether this theory works, there are a few points I would like to state. The first preliminary point, which is brought up by economist Thomas Sowell, is that after looking at page after page of economic theory, the idea of "trickle-down theory," i.e., taking from Group A to give to Group B in the hopes that Group A will benefit, has not been advocated by any economist. As Sowell continues, why not just give directly to Group A and cut out the middleman?

That set aside, let's go to my second point, which is how "trickle-down economics" is associated with supply-side economics or capitalism. While that is the common mischaracterization, particularly for a number of those on the Left, the truth is that there is not a single economic policy or even economic school of thought that necessarily embodies "trickle-down." For a given policy to be "trickle-down," two main criteria have to be fulfilled: 1) It has to disproportionately benefit the very rich in the short-run, and 2) It is designed with the intention of improving upon the standard of living for all in the long-run. One of the main reasons why "trickle-down economics" is frequently associated with capitalism is because people conflate being pro-business with being pro-free market. AEI scholar Mark Perry helps explains the difference between the two:

"Businessmen like free markets until they get into a market; once they are in it, they want to block entry to others. Pro-marketeers want free markets at all times. The more conservative pro-marketeers are fearful of criticizing business, because they assume they will be seen as criticizing the free market. But we need to stand up and criticize business when business is not helping the cause of free markets." 

This leads to my third point. In an American context, "trickle-down economics" often comes in the shape of rent-seeking and crony capitalism, or the term I prefer to use here is "crapitalism." Giving handouts and goodies to the rich is not what is commonly advocated by libertarians, or even conservatives, for that matter. The idea behind having liberalized markets is that freer trade generates net economic welfare for the rich, middle-class, and poor alike through voluntary exchanges and the wonderful idea of spontaneous order.  As economist Steve Horowitz expresses:

"There are many economists who argue that allowing everyone to pursue all the opportunities they can in the marketplace, with the minimal level of taxation and regulation, will create generalized prosperity. The value of current taxes is not just cutting them for higher income groups, but for everyone. Letting everyone keep more of the value they create through exchange means that everyone has more incentive to create such value in the first place, whether it's through he ownership of capital of finding new uses for one's labor." 

This is true, whether or not we are talking about reducing the tax rate for the corporate tax for the rich or whether we are removing onerous occupational licensing regulations so that poor individuals are more free to start a business. This is not about favoring the rich, but creating as free of a market economy as possible, in which if the rich want to get richer, their enterprise needs to produce even more value for their consumers. This distinction between "trickle-down economics" and capitalism is actually confirmed by the International Monetary Fund's 2015 paper on income inequality, in which they find that "the benefits [of increasing income share of the rich] do not trickle down." While I will point out that this paper focuses on developing countries, which are places with less stable institutions and more corruption, it does bring up the point of helping increase the income shares of the poor. I brought this point up a couple of years ago when discussing income inequality and economic growth: the problem is not the the rich are rich, per se. It is that the poor do not have as much opportunity. While this is topic which can be spoken about at greater length at another time, as already alluded to earlier, we need to provide the poor with incentives to pursue greater wealth, and a lot of that can occur via less regulations and taxes. As the World Bank brought up in a 2013 report, "institutions and policies that promote economic growth in general will on average raise incomes of the poor equiproportionally, thereby promoting 'shared prosperity' (Kraay and Dollar, 2013)."

"Trickle-down" is a politically effective mischaracterization of tax cuts and other economic policies that defy neo-Keynsian tax-and-spend policy, which glosses over the irony that these same politicians believe that taking money from the rich and distributing it to the poor in the form of stimulus programs will also "trickle down." The term "trickle-down" deflects that the reality that there is a certain point where the tax rate or is too high or that there have been enough times where tax rates have been reduced while tax revenue has increased. As Thomas Sowell states, it ignores that "there are limits to how high they can push taxes rates on people with high incomes, without causing repercussions that hurt the economy as a whole."

The question here is the extent to which tax policy has harmed incentives for individuals to pursue more opportunity to become richer. There could be quite the debate on how to address the tax code's bias against savings and investment, or on how fiscal policy affects economic growth. There also could be a discussion on how public policy can provide the poor with greater opportunity to work hard and become richer. But alas, that sounds too reasonable for this election cycle. While Trump makes for a good caricature of "old money," Clinton deprived the American people of another opportunity to discuss ways where public policy can help expand economic welfare for all Americans. It would be nice to see substantive discussions about how to create economic growth, but my guess is that we will see more debates about the ever-misleading "trickle-down economics", the demonization of freer trade, and about Trump's tax returns or Clinton's email controversy while ignoring issues that affect the American people.

Soaking the Rich With Higher Income Taxes Won't Help with Income Inequality

There are those in the United States who have so much wealth that they don't know what to do with it while there are others who have to work hard to earn an honest living or even survive from day-to-day. The sort of outlandishness that is exhibited by the exceptionally wealthy comes off as unfair to many. The latest Gallup poll on the subject shows that 52 percent support redistributing wealth by heavily taxing the rich. Bernie Sanders is making it one of the cornerstones of his presidential campaign. It is such a part of Sander's campaign that he stated that he would love to soak the rich with a marginal tax rate of 90 percent because honestly, how else do you expect him to pay for his costly, insolvent programs that would most probably do the exact opposite that he intends?

As proponents of this line of thought would like to think, "If we could simply tax the rich and spread some of that money around, we could make a huge difference in the lives of so many Americans." To quote Penn Jillette, "Voting for our government to use guns to give money to help poor and suffering people is immoral, self-righteous, bullying laziness." But let's set aside moral or philosophical qualms for now. Let's also set aside how this would increase revenue (see here, here, and here), how it would affect economic growth, decrease work incentives for the rich, create new reasons to evade taxes, or how the welfare system creates disincentives to work. I would like to answer the question of whether increasing income taxes on the wealthy would solve income inequality woes.

Taking from Peter to give to Paul seems intuitively sound at first glance. The government takes money from the rich to give to the poor. The poor take that money, purchase goods and services that they desperately need, and circulate that money into the economy. This would give the poor a great economic boost, and subsequently pull the poor out of poverty. As nice as that might sound, there has been some recently published research to counter that notion.

Earlier this week, the Brookings Institution released a paper entitled "Would a significant increase in the top income tax rate substantially alter income inequality?" Let's keep in mind that the Brookings Institution is not a conservative think-tank or a proponent of the free market system. The Brookings Institution tends to be more centrist (although sometimes more Left-of-center than it likes to admit), and comments often enough on the importance of dealing with income inequality. It came as a surprise to some, including one of the researchers of the paper, that soaking the rich with a higher marginal income tax rate would do so little to help with income inequality. How so?

[As a side note, it also came as a shock to these same researchers that increasing access to college education would also have minimal effects on income inequality.]

Currently, the top individual income tax rate is at 39.6 percent. The researchers at the Brookings Institution ran a microsimulation to see what would happen if that tax rate were raised to 50 percent. To find out how this would affect income inequality, they took a look at the effects it would have on the Gini coefficient. Essentially, the Gini coefficient is a 0 to 1 scale measuring the dispersion of income distribution in a given nation (further explanation is here). The main thing that surprised me was that the Brookings Institution had the pre-tax Gini coefficient at 0.61 because looking at data for the World Bank, the CIA, United Nations, and the OECD, it is considered lower than 0.61.

However, let's assume that the Gini coefficient is that high. Under the current law, government redistribution lowers that to 0.574. Assuming that the tax revenue would be an explicit redistribution of wealth to the lowest quintile, the difference between current law and raising the marginal income tax to 50 percent would change the Gini coefficient to 0.571 (Table 2). That is a measly 0.003 points on the Gini scale, which is only a 0.52 percent change!

Raising the marginal tax rate to soak the rich is yet another example of how misguided good intentions can be. Increasing the marginal income tax might help to increase government revenues (only to a certain point before the reality of the Laffer curve kicks in), but decreasing income inequality by an amount of any significance is certainly not a reason to do so. The poor are not poor because the rich are rich, and trying to redistribute wealth in a "soak the rich" fashion is not going to ameliorate that. It would be nice to have a discussion about how public policy should be more than feel-good activism, but I suspect with the 2016 election cycle in swing, I doubt the majority of American people can transcend the knee-jerk, populist sentiments of sticking it to the rich.

Does Income Inequality Cause Decreased Economic Growth?

The income inequality debate never seems to die. Its most recent revival was due to the Organisation for Economic Co-operation and Development (OECD) and its latest report (summary here) on "Trends in Income Inequality and its Impact on Economic Growth." Although the OECD's analysis has more variables, the essential relationship that the OECD establishes is between the Gini coefficient and the GDP growth rate.

What is the Gini coefficient? It is a form of statistical dispersion used to represent the income distribution of a given nation. It has become the gold standard for measuring income inequality. Although it works nicely because it's relatively easy to compare across countries, there are still some flaws with it. One is that it compares income, and not wealth. Two countries with different amounts of wealth can have the same Gini coefficient, which also means that the Gini coefficient says nothing about quality in a given country. The Gini coefficient can produce the same coefficient for two countries with different income distributions because the Lorenz curve can have different curvatures for different countries. Furthermore, the Gini coefficient does not account for utility or economic opportunity.

Much like with the GDP, until we can come up with a better metric, we need to do the best we have. Even if the OECD uses the GDP as the metric for economic success, I still take issue with the temporal comparison because over time, a more developing country is going to experience an overall decline in GDP growth rate with reasons having nothing to do with income inequality. Correlation has suddenly turned into causation, and that fact that the OECD recommends wealth redistribution, a policy that does more than its fair share of harm, based on a correlation that can be easily explained by other factors is most unfortunate. The OECD says that redistribution would work if the government could do so efficiently (OECD, p. 19), which I find to be a highly tenuous assumption.

Although there is enough reason to not to jump to conclusions with the OECD's report, what did the OECD end up finding? The ratio of the income of the richest ten percent to the poorest ten percent increased from 7:1 in the 1980s to 9.5:1. As a result, the OECD's economic analysis suggests that this increased income inequality has had a statistically significant, negative impact on economic growth. Conversely, what the OECD finds that is equally intriguing is that "no evidence is found that those with high incomes pulling away from the rest of the population harms [economic] growth (p. 6)." This is important because the typical income inequality narrative is that the top echelon is gobbling up the resources while the "99 percent" have nothing left.

Looking at the OECD study, the issue is not with the rich getting richer per se, but rather with the poor not having the same level of access to resources in order to develop their human capital. This is especially true when looking at educational attainment for lower-income families (p. 28), which was one of the biggest kvetches of the OECD in this study. If the OECD study is correct, then income inequality only affects those with a lower educational attainment. Those with parents who have medium to high educational attainment are not affected by income inequality (p. 25-26). 

The OECD focuses on the bottom of income distribution, as it well should. Anti-poverty initiatives are not enough, according to the OECD (p. 29), but they might not be enough because the current programs are not sufficient at accomplishing the task at hand. It very well could be because many anti-poverty initiatives are handled by government bureaucracies, which makes me wonder whether the government intervening to reduce income inequality will actually increase economic growth. There are many ways to revive economic growth, and I honestly don't think simply redistributing wealth is going to help. The IMF actually published a report, and showed that at best, redistribution is negligible, but it can also very well make things worse (Ostry et al., 2014, p. 23). There is no need to knock rich people down a peg with poor policy like the wealth tax because by the OECD's own admission, the "one percent" isn't de facto causing the issues at hand. I've discussed education and anti-poverty initiatives in the past, but it should go without saying that we should focus on policies that help make the poor less poor and provide them with the opportunity to access the tools they need to succeed in life. Whatever those policies may end up being, we should improve the quality of education and encourage entrepreneurship instead of going after the ever-intangible and elusive "income inequality."

If You Decide to Have Children, Get Married First

Love and marriage. Love and marriage. Go together like a horse and carriage. Those Cole Porter lyrics made me think of the importance of marriage as an institution. Marriage is not just about commitment. It creates stability within the household, and you don't have to be conservative to accept that premise. There is something to be said about marriage, where it's a heterosexual marriage or a same-sex marriage, as a framework of cohesion, and it's not something we should dismiss. Whether it's not wearing a bicycle helmet while cycling, smoking cigarettes, or having children before marriage, while we have the economic right to make stupid or unwise decisions, that doesn't mean that we should, and even if we do, we should at least be well-informed before making a decision. The American Enterprise Institute's (AEI) provides such good information in its latest study on the topic, For richer, for poorer: How Family Structures Economic Success in America (Lerman and Wilcox, 2014), and shows just how much marriage is the cornerstone of a stable family life to raise children.

Looking at pre-tax income ratios from 1979 and 2012 (see below), we see a major uptick in inequality between households with married partners and unmarried partners. A couple major changes seen in family composition is increase in divorce and more single-parent households. This results in households with lower income and wealth, which means greater income inequality and wealth inequality. How much of the increase of family-income inequality over the past 35 years can we attribute to a lower marriage rate? According to the AEI study, as much as 41 percent (Lerman and Wilcox, p. 12). If America maintained the marriage rates that existed in 1980, the growth in median income of families with children would have been a whopping 44 percent higher (p. 3).

What makes the AEI study different from Left-leaning economists that focus primarily on wage stagnation is that the AEI study focuses on less-educated males and their declining share in the labor market. Technology, globalization, and a shift to a service-dominant economy have caused the wages of men without college degrees to decline both in real terms and relative to women's wages (p. 14). As a result, less-educated men are less financially desirable, which attributes to the decline in the marriage rate among those who are less educated. The AEI study also proposes the alternative theory that the lack of commitment [via marriage] slackens men's commitment to work and providing for one's family (p. 15). Both higher wages and the commitment of marriage seem to improve upon a man's work ethic and wages.

Marriage is not only good for the partners involved, but also for the children. Aside from the fact that marriage means that there are more economic resources to provide for the children, the stable, two-parent home leads to increased economic mobility and a myriad of positive social outcomes, including increased odds of completing high school (p. 22), working more hours per annum (p. 24), greater economic and social mobility (p. 23), a higher income premium (p. 24), and increased labor force engagement (p. 17).

Although I find that AEI's research did a fine job outlining the income disparities between those who are married and those who are not, it is not as if this was exactly groundbreaking. Even earlier this year, a very thorough, longitudinal study done at Harvard suggested that single-parent households were the single greatest cause of less income mobility. Marriage is an overall, positive social good that should be encouraged (see AEI study, p. 51-55 for policy proposals to encourage marriage). Some might think the institution of marriage is passé, but the reality is that it is a time-tested, stabilizing force that provides the best welfare for children.

Would Piketty's Wealth Tax Help America Strike It Rich?

Economist Thomas Piketty has caused all sorts of hullabaloo with his book Le Capital au XXIe Siècle (Capital in the 21st Century) because his thesis states that because the rate of return on capital is greater than the rate of economic growth in the long run (r > g), this results in such an unhealthy concentration of wealth that it creates societal instability. Its depth and usage of data have gained the attention of those who want to bring income inequality to the forefront of political issues. I do not want to get into the economic nitty-gritty of r > g right now (also see here, here, and here) or even discuss the extent to which wealth inequality is an issue. I would like to go after his idea of a wealth tax.

Piketty's proposal is relatively simple. In addition to taxing the income of the richest citizens, tax their wealth, as well, in order to better reflect the vertical equity of the rich. A wealth tax is essentially a tax on the returns on capital. Piketty suggested multiple rate schedules (see technical index of his book here), but one in particular that he would implement is a 1 percent tax for wealth totaling €1-3M  and a 2 percent tax for anything exceeding €5M. The collected tax revenue could be distributed to those in need, thereby remedying some of the maldistribution. Considering how high the Social Security or income tax rates are, 1-2 percent sound reasonably low in comparison to what the rich are already paying. What harm could a wealth tax cause?

According to the Tax Foundation, quite a bit. The Tax Foundation published a study just a few days ago (Schuyler, 2014) using an economic model in attempts to measure the economic impacts of such a tax. Their main results included reducing employment by nearly 900 thousand, reduce wages, and have the GDP take a nosedive of $1T, all to simply collect a few extra billion dollars in tax revenue. We can go after the flaws that the model almost certainly has, and we could even go after the fact that the leanings of the Tax Foundation are contrarian to those of Piketty. I don't find the latter to be productive, but regardless, why would such a tax be so problematic?

Forget the fact that even Piketty himself calls the idea of a global wealth tax "utopian," mainly because trying to collect that tax on a global level without a global taxing authority is essentially impossible at this time. Even if we attempted that a wealth tax on the national level, it would still be problematic. The closest thing America has right now is the estate tax, which is only collected on inheritances. This is not simply a matter of asking whether the rich in this country "pay their fair share" or if the rich are being whopped with a form of double taxation because a wealth tax is a surtax on income. If we went went Piketty's suggestion of starting the tax at the equivalent of $260,000, it would hit a lot of middle-class Americans because it's not unreasonable to assume that they have that much in wealth. This would also disproportionately affect seniors who are trying to save up for retirement and have finally reached the wealth tax minimum. Even with a higher tax minimum, you still run into these issues, just at a smaller magnitude. As we see with the Tax Foundation study, a wealth tax would reduce wealth inequality, but it would also increase poverty. There is also the matter of liquidating illiquid assets for the purposes of paying the tax, which would further jam up taxpayers. If you need a small list of countries that have abandoned the wealth tax, here's one: Austria, Denmark, Germany, Finland, Luxembourg, and most notably, Sweden. Taxation has two primary goals: 1) tax revenue collection, and 2) disincentivizing behavior. What are we disincentivizing here? Wealth. Since it's easier than ever for jobs and capital to cross borders in our increasingly globalized world, the last thing America needs to do is further punish wealth creation.

Let's say that the Pikettys of the world didn't care that the wealth tax would increase poverty because wealth equality is the prime goal. Can you imagine trying to administer this tax? In order to measure one's wealth, the government has to be able to make an itemized list of every asset and every bit of capital an individual has. That would include housing, land, stocks, bonds, cash, cars, jewelry and antiques, retirement savings, the list goes on. If you think administering a value-added tax is problematic because its multiple stages increases the likelihood of tax evasion, imagine how much of an intrusive nightmare it would be to account for every last piece of wealth in one's possession. And this is not mere theory: this has been an issue in the past (Seim, 2014; Pichet, 2007). It is easier to value bonds and stocks, but have fun trying to put a price on other assets! This inventory check would not be a one-time endeavor, either. It would have to be done on an annual basis, and I don't see the government capable of doing it, especially given how it currently administers current redistributive programs. Amazing how Piketty thinks that too much concentrated power in the private sector is so problematic, but when it comes to government, they are somehow immune. Go figure. Let's not forget that the Constitution (Article I, Section 9, Clause 4) prohibits direct taxation, which means that either the Supreme Court would have to rule in favor of its constitutionality or the relatively more likely occurrence of Congress passing an amendment for a wealth tax, which I don't see happening anytime soon. Valuation, administration, and collection: a trifecta that kills the wealth tax's possibilities of having any practical benefit or application.

Much like I brought up last Friday, we don't need to go after the ever-abstract concept of income inequality in hopes to redistribute wealth "more fairly." Why are we so focused on outcome when we should be focused on institutions, incentives, and processes? We need a way to encourage entrepreneurship and stimulate economic growth, and a wealth tax is simply not the way to go.

Note to Janet Yellen: Income Inequality Isn't Killing the American Dream

Federal Reserve Chairwoman Janet Yellen made a bit of a splash last week during her address last week on income inequality last week when she said that "the extent of and continuing increase of inequality in the United States greatly concern me." After highlighting the income inequality, Yellen highlights what she considers the four blocks of opportunity: education in earlier years, college education, ownership of business, and ownership of wealth. According to Yellen, if America had greater access to education and increased business ownership, the problem of income inequality would be solved. After taking a look at Yellen's address, I thought to myself not only that Yellen's concern for income inequality is overstated (see this fine report by the Manhattan Institute that elucidates upon that point), but even if income inequality is a concern, she should look in different places for solutions. It wouldn't be any fun if I simply left you with that, so I am going to delve into further detail as to my criticism of Yellen's address.

A lot of the issues that I will bring up with her analysis of income inequality are ones that I have brought up in the past both when discussing income inequality and wealth inequality. With that being said, I have to start by taking issue with the data she is using. I understand she wants to use the Survey of Consumer Finances (SCF) because they are data that the Federal Reserve generates, but there are other data sources that go back further than 1989. Capturing only 25 years of data does not tell the whole story, especially if you pointed out to Yellen that wealth inequality is lower now than it was in 1989. Second, she groups households into the top 5 percent, next 45 percent, and bottom 50 percent. The income groupings she uses (see below) are so vague that they really don't provide much substance. Grouping in quintiles, for example, would provide me with more information.

Third, her figures are based on cross-sectional data. This is problematic because when looking at Yellen's charts, it makes the assumption that people remain in certain income groupings, i.e., there is no income mobility whatsoever. While there is less income mobility than there was in the 1950's or 1960's, income mobility still very much exists in America (see Federal Reserve research here as an example). A highly regarded study published earlier this year (Chetty et al., 2014) found that in spite of the increased income inequality, income mobility has not really changed since the 1970's. Fourth, the composition of the household has very much changed since the mid-twentieth century. What do I mean by that? To quote former chief economist of the U.S. Labor Department Diana Furchtgott-Roth, "the size of households has changed since 1980, contributing to perceived inequality. With the increased prevalence of divorce, delayed marriage, and longer life expectancy, there are more households composed of one person, or non-family households. These households tend to be in the bottom quintile." Households with two earners fare better than households with one earner. More households with one wage-earner is going to cause a bigger disparity. Fifth, Yellen's analysis is presumably based on pre-tax income. Looking at after-tax income with government transfers paints a slightly different picture. Sixth, even when adjusting for inflation, measuring income is insufficient in terms of accounting for the increased quality of consumption that we have experienced in recent years, which is why Yellen's accusation that income inequality caused "significant wealth and income gains for those at the very top and stagnant living standards for the majority" is a specious one. We should be looking at how peoples' lives are improving in absolute terms, not in relative terms.

It is peculiar that the head of the Federal Reserve is expressing such concern since Yellen does not have control over education or wealth allocation. The Federal Reserve has issues with fulfilling its dual mandate of controlling inflation and decreasing unemployment, so I don't know what all it can do to help with income inequality. I also think it's peculiar that Yellen is giving such a speech, especially the Federal Reserve has arguably caused income inequality with its quantitative easing, although I would argue that the Federal Reserve completely dismantling from the gold standard has done a bang-up job of devaluing the dollar, as well as keeping interest rates near zero percent.

Even if Yellen is simply using her bully pulpit to advance the issue, I still found the address unsettling. She didn't explicitly give policy recommendations, but given her adherence to Keynesian school of economic thought, it's not unreasonable to assume that she would want the government to do something about these issues. She said in her address that "public funding of education is another way that governments can help offset the advantages some households have in resources available for children." The problem here is that public funding of education hasn't been working too well to help. The government implementing universal preschool has been a debacle, not to mention that keeping interest rates artificially low on college student loans has caused that mean education debt to mean income ratio you mentioned to increase. Speaking of keeping interest rates low, the government pressuring banks to keep interest rates low on housing loans was a major contributor to the bursting of the housing bubble, which would help explain why those in the bottom 50 percent lost their wealth during the Great Recession (i.e., their wealth was tied up in the illiquid asset known as their house). None of this even gets into her assertion that "social safety-net spending is an important form of public funding that helps offset disparities in family resources for children" because that would be too time-consuming right now. I've written on poverty and welfare issues before, so you can look here if you want my two cents on the matter.

If you want to help the American people out of this economic sluggishness, you need to create an environment that inculcates economic opportunity. This means that the government needs to implement policy that encourages, rather than stifles, economic prosperity. I'll give a few examples. If Yellen thinks business ownership is a key to reducing income inequality, she should advocate for reducing barriers to entry such as occupational licensing. The Mercatus Center just published a study showing how employer-based health insurance is causing a huge spike in income inequality, so why not remove this antiquated tax break? Competitive markets incentivize businesses to come up with more innovative ideas than monopolies do, so why not provide public-sector unions or public schools with some competition by encouraging alternatives to the status quo? Unemployment benefits don't help, and neither do high income tax rates or other onerous regulations. These are but a few ideas of what can be done to help the American people. Going after the "income inequality" boogeyman isn't going to solve anything. If you don't bludgeon American businesses with taxes and regulations that hold back entrepreneurship, it will be much easier to live the American dream.


9-10-2016 Addendum: The Cato Institute recently published a paper on five myths about income inequality, particularly with the extent to which it affects poverty.

Harvard Study Suggests That Single-Parent Households, and Not Income Inequality, Cause Income Immobility

Income inequality has become a cause célèbre for many on the Left these days. Oxfam has even jumped on the income inequality bandwagon and declared war on income inequality. In the United States, we're coming up on the midterm election season, which seems like an opportune time to pursue the issue of income inequality. The income inequality narrative goes like this: There is a huge relationship between income inequality and income mobility. Because of that, we should do something about income inequality to prevent further income immobility.

Forgetting that "correlation doesn't equal causation" for a moment, a friend of mine was kind enough to send me a couple of recently published Harvard studies on the matter. These studies are an improvement in discerning the issue of income inequality because instead of using small surveys, these studies use larger sets of data consisting of millions of tax records. The first one was a longitudinal study entitled Is the United States still a land of opportunity? Recent trends in intergenerational mobility (Chetty et al, 2014a). I find its conclusion to be remarkable, which was that "rank-based measures of social mobility have remained remarkably stable over the second half of the twentieth century in the United States (p. 10)." Over the past forty years, income inequality increased while income mobility stayed the same. As a matter of fact, it may even be improving (p. 7). In spite of what the Great Gatsby Curve has to say, income inequality does not cause income immobility, which makes sense because much like income immobility, income inequality is an outcome of given policies and [market and societal] forces, not the cause of societal woes. Not only that, the results of this study show that it is not any more difficult to climb the income ladder than it has been in the past four decades. The days in which we use "income inequality" and "income immobility" interchangeably with a serious face are over.

But wait, it gets better. If income inequality doesn't cause income immobility, then we have to ask ourselves what does. This where the Harvard University longitudinal study of Where is the Land of Opportunity? The geography of intergenerational mobility in the United States (Chetty et al, 2014b) comes into play. This study looked at five main factors associated with income mobility: residential segregation, income inequality, primary schools, social capital, and family stability (p. 4). Given the heavy rhetoric about income inequality, I was expecting income inequality to be the culprit of income immobility. However, in spite of some geographical variants (Figure VI), income inequality is a comparatively weak factor. Although the authors were careful to state (p. 5) that these factors should not be interpreted as causal detriments (no surprise there….that can be said about any study. Can we say "endogeneity problem?") and there is possibly a correlation between the various factors (p. 45), they nevertheless concluded (Table IX) that "the strongest and most robust predictor is the fraction of children with single parents (p. 46)" and that "children of married parents also have higher rates of upward mobility if they live in communities with fewer single parents (p. 4)."

At the very least, these studies quash the Left's assertion of "income inequality leads to income immobility." At the most, it affirms that conservatives were correct in saying that we should legitimately be worried about family structure and making sure that couples get married before having children. There is validity to advocating for married couples, particularly if children are involved. If one is to raise children, two parents are more able to bring in income than one parent. Plus, a two-parent household is better equipped to devote time and effort to childrearing. This is not to say that there aren't single parents who can raise children better than a married couple. There are obviously children who were successfully raised by single-parent households. It is to say, however, that a child will statistically fare better with a home that has two parents than a home with a single parent. Even non-conservative policy analysts believe in the importance of a two-parent home.

Whether family structure is the primary or sole factor in income immobility, it is safe to say that a fixation on income inequality is not going to solve our problems. We should find policies that make life better for as many people as possible, so how about a "war on economic immobility" instead? At least that way, we can better focus on causes of income immobility and root problems related to poverty.