Sorry, Libertarians - Inequality Does Matter

Tim Carney has an interesting and flawed column that exposes why "libertarian populism," the attempt to reformulate a libertarian economic agenda around middle-class economic concerns, must fail.

The column is headlined "When is inequality harmful? When it's caused by cronyism." Carney starts the column by asking the question "Does inequality matter?" But he never answers that question. He instead reaches this conclusion: "When a country's wealthiest got wealthy through market means, the resulting inequality has no negative effect on economic growth."

By conflating "harm" with "harm to GDP growth," Carney and his editors reveal two key libertarian blind spots:

1. Economic growth is not the same thing as well-being. The point of economic growth is that it leads to improvements in standards of living. If the gains from economic growth are not broadly shared, but instead accrue disproportionately to people already at the top of the income distribution, then a lot of economic growth will only generate a little improvement in living standards for most people. For this reason, rising inequality is a problem even if it does not hold back GDP.
2. What constitutes "market means" is a matter of opinion. Carney is right to call out some policies as obviously non-market and undesirable, such as top officials selling off state assets to their friends at fire-sale prices. But what, for example, is the "market" approach to intellectual property? Bill Gates is one of the businessmen whom Carney cites as someone who got rich by working through the free market. Gates' wealth is accrued from returns to intellectual property whose legal protections are set somewhat arbitrarily by the government. Weaker protection for patents and copyrights might have made Gates less wealthy and increased the purchasing power of Microsoft's customers, reducing inequality.

The problem with trying to shoehorn popular economic concerns into fights against "cronyism," as the libertarian populists do, is that broad economic problems in wealthy countries are not mostly about cronyism. Income desparities are arising from market forces: Creators of intellectual property sell into bigger markets than ever; wages are soft due to weak labor demand; capital is more mobile than labor and flows to markets where wages are low.

By and large, public policy did not create these phenomena and the rising inequality that results from them. But because inequality is important, policy still needs to find ways to address it. A political ideology that has nothing to say about inequality not arising from cronyism does not address one of today's key economic concerns and is not populist.