Opinion

Economist Dierdre McCloskey Promotes False Math About Inequality and Redistribution

It takes “alternative math” to claim that redistribution Is futile.

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By Adam M. Finkel

The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies.

To the extent that a regulation correcting an externality or other market failure provides total benefit in excess of total cost while particularly helping the disadvantaged subsets of society, the regulation may—and in my view, should—be seen as doubly wise. If, instead, the regulation creates positive net benefit but requires the poor to pay the costs so that the rich can reap health or environmental benefits, it may be neither just nor wise.

Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. The economist A.O. Hirschman asserts in his book, The Rhetoric of Reaction, that both conservatives and progressives promote different flawed narratives in order to rationalize their policy preferences. But it is conservatives, according to Hirschman, who uniquely tend to argue that even when good intentions do not backfire, they simply are futile.

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In a recent New York Times op-ed, University of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.

Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.”

McCloskey states that “[a]s a matter of arithmetic, expropriating the rich to give to the poor does not uplift the poor very much. If we took every dime from the top 20 percent of the income distribution and gave it to the bottom 80 percent, the bottom folk would be only 25 percent better off.”

It was obvious to me, and I hope to others, that McCloskey’s math is only correct in the extreme and unrealistic situation where there is zero inequality—that is, no “distribution” at all—to begin with. If in a population of 1,000 people, each person had exactly the same $500,000 in wealth, then it is true that if the entire $100 million that the “top” 200 people held were transferred to the “other” 800 people and split equally among them, those 800 people would be given $125,000 each, which would indeed increase their individual wealth by 25 percent.

In the real United States, however—where $500,000 is indeed a reasonable estimate of the average individual net worth, but where the top 20 percent own 85 percent of all wealth—the math is very different. Among a representative sample of 1,000 Americans, there would be $425 million to redistribute among the bottom 800 people, who would each start with only $93,750. These 800 individuals would receive $531,250 more from the rich, increasing their wealth by 570 percent—not 25 percent. Thus, the only plausible takeaway of McCloskey’s example is that soaking the rich might conceivably help the poor “not very much”—but only if the “poor” are as rich as the rich to begin with! Unfortunately, readers may have come away with the comforting and self-serving “knowledge” that the pie is not big enough to meaningfully help the poor, so why bother trying?

In reality, imposing a policy of redistribution down the economic ladder—whether through the tax code, regulation, or any other means—could help the poor immensely. So should we adopt such policies? Of the many arguments McCloskey offers as to why redistribution is wrong-headed and futile, I disagree with two in particular.

First, McCloskey asserts that once the poor have “a roof over their heads and enough to eat,” they have no further need for any of society’s accumulated wealth. Elsewhere, she claims that all progressives seek a “forced equality” that would require brain surgeons and taxi drivers to earn the same amount. The former assertion is callous , and the latter is a strawman: even the most repressive Communist regimes in history sought equality of opportunity—not equality of outcome. Surely, somewhere within the 99 percent of the ideological distribution between dystopian Darwinism and utopian equality-for-its-own-sake, there is room for fruitful discussion about whether we should favor some modest redistribution via a progressive tax code and social programs. But McCloskey’s caricature of both positions makes any compromise impossible.

Second, McCloskey refers to taxation as “state violence,” “compelled equality,” and “envy-and-anger-satisfying extraction from the rich.” What can one say to this view of community-as-prison, other than to say that McCloskey does not speak for me, and many like-minded friends and colleagues: I have zero envy for the hardworking, lucky, or rapacious folks who are rich compared to me. I simply contribute—both voluntarily and compulsorily, and without rancor—and I expect the wealthier in society to do as much, or more, with their surpluses.

I recognize, of course, that McCloskey’s substantive views are shared by others and that reasonable people can differ on how much redistribution society should pursue. But we can have no meaningful dialogue about the costs and benefits of modestly progressive policies if that discussion is grounded in “alternative math.” It is possible to argue that the rich should not help uplift the poor, without making the claim that they cannot do so as a matter of “arithmetic.”

As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. In recent weeks, likely in response to being tarred as “fake news” by the new Administration, the Times launched an impressive ad campaign (print ads and a Super Bowl commercial). I agree: the truth about data, algebra, and policies is indeed “more important than ever.”

Originally published at RegBlog here.

2017 March 18


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  • Patrick cardiff

    You’re both wrong.
    Crude “economic” redistribution under false assumption is bound to reject the null of no effect when the assumption is of such silly high-order and simplistic, one-variable-control (income) regimes … well, you’re creating unicorns.
    The difference in class is of such a heterogeneous nature as to belie most attempts to change matters with policy. We need to starting thinking about lives – relationships, coping strategies, group dynamics, human capital, labor decisions, initial conditions, educational opportunities, lack of healthcare, nurturing environments – then, just then, maybe, recognizing that we do not have the answers.
    Stop acting like all solutions are all bound up in generalizable money-metrics.

    • Adam Finkel

      I agree with you, Patrick– but will just say that I wrote a reactive essay in response to an incoherent, glib, and mathematically nonsensical column in the NY Times. When the needed “thinking about lives, relationships, etc.” begins, it’s important not to start from ridiculous assertions about the basic arithmetic of redistribution.

  • Nicholas Gruen

    If someone’s got their hands in the cookie jar, it’s good someone else caught them at it 😉

  • If we count the distribution of goods, like iPhones, Americans look much more equal (almost 80% of Americans own smartphones). If we count the distribution of dollars that Steve Jobs and others received in exchange for the iPhones, we look extremely unequal (Jobs died with $8 billion in the bank).

    So, if people like Jobs should give back some of the dollars they received in exchange for the iPhones, should we give back some of the iPhones we received in exchange for the dollars?

    • Mark Richardson

      Weak idealistic argument based on short sighted thinking. You’re saying the only way to determine what someone deserves is by the immediate value of the transaction.

  • M A J Jeyaseelan

    The problem of growing inequalities is perhaps the most misunderstood of all current economic issues. There is no denying the fact that concentration of wealth has reached an all time high and is threatening to disrupt economies in their tracks. At the same time, it is foolhardy to believe re-distributive taxes will solve the problem.

    Inequalities are caused and abetted by the unfair exchange mechanisms that are sanctified and glorified by extant economic theories and practices. Re-distributive taxes can only alleviate some part of the inequalities accumulated in the past. These cannot however, stop inequalities from getting aggravated in future.

    If we want resolve the problem of inequalities then we must address its root causes and eliminate the legitimised economic mechanisms that make way for unfair exchange. The rich use several types of suction pumps to draw in wealth. While the list is too long, I am giving below a few of the bigger income and wealth suction pumps.

    1) The banking system including the central banks are the biggest of all the suction pumps used by the rich. Banks create credit over and above the savings deposited with them . Central banks add bonds and print currencies without creating a penny of economic value. Both pass on these extra claims in the form of loans to the rich at insanely low rates of interest but the rich use these loans in multiple ways to generate far higher rates of return. These returns are earned by the rich with the help of money, bonds, and credits illegitimately created by the banking system.

    2) The speculative markets are the next most significant channels used by the rich to siphon away wealth without creating it. With the money borrowed from the banks at atrociously low rates of interest, the rich keep manipulating stock prices with the help of orchestrated bulk purchases or sales. All speculative market transactions involve only transfer of values. All profits made in the stock market are a kind of legitimised looting. There are also other stock market instruments such as the buy back arrangements that result in double whammies. Usually buybacks are thrust upon companies at unreasonably high prices . In order to make up for the lost profits, such companies often raise the prices of their products and services unfairly

    3) Public debt and taxation: This is one of the most innocuous looking suction pumps that is hidden from the view of the public. Who owns this debt? It is the rich and the richest. The most hurtful feature of debt is that interest must be paid irrespective of the way one makes use of such debt. Usually, governments earn negative returns on expenditure incurred with help of public debt. Yet, governments pay interest to the lenders, even when the economy is down in the dumps. Governments are least bothered about both the quantum of public debt and growing interest burden. They simply increase tax rates or impose new taxes. What most citizens do not take into reckoning is the fact that a larger part of the taxes paid by them goes towards interest payments. In some countries, interest payments constitute over two thirds of government budgets. In my view, it would be very fair to say that most governments simply tax the poor to pay the rich.

    4) Market mechanism: This is the most rampant source of inequalities. Markets as these are designed in extant economics give enormous powers to the rich to manipulate markets in their favour. Companies and traders with deep pockets always manipulate supplies and create artificial shortages that result in unfair prices – transferring in this process, more economic values to the sellers than what their products or services are worth by themselves. The same happens with the help of marketing and advertising that play on the mindset of the consumers and con them into paying higher prices than warranted. Some companies also adopt premium pricing policies by enticing customers with their one-up-ness strategies.

    In nutshell, there can be no inequality without the help of unfair exchanges. All unfair exchanges are actually blessed by extant economics. There is no way to end inequalities without correcting the unfair exchange processes. There is no way to end unfair economic exchanges without rewriting economics.

    If you would like to read more about the directions in which economics needs to be rewritten, i would invite you to read my article hyper linked below

    https://www.linkedin.com/pulse/10-must-do-things-reviving-economies-economics-jeyaseelan-m-a-j