Some thoughts on the economy

I generally like Jon Kay’s articles, but this one is pretty bad.

In the National Post, Kay writes:

The big question isn’t whether this is a massive problem. It is. The big question is why so many American conservatives are in denial about it. The Republicans, in particular, are promoting many policies that would actually make the income and wealth gaps worse — such as “flat taxes,” and other schemes that effectively amount to permanent tax cuts for the ultra-wealthy. Mitt Romney’s opponents have made a big deal about his background in “vulture capitalism,” and the 13.9% tax rate he paid on his 2010 income. Yet Newt Gingrich has proposed lowering America’s capital gains tax rate to … zero. Whom, exactly, is that supposed to benefit?

Kay confuses a few issues here, I think.
1. Why some people are getting very rich: it has partially to do with government policy, and not capitalism. Too big to fail and other creditor bail outs allowed people in high finance to take risky bets, acquire massive bonuses for years, and then face no downside loss as a result of their mistakes. This is part of the inequality story.
2. Wage stagnation for some ‘groups’: This is a problem, but what is the cause? Is it really poor K through 12 education? Is it that low skill workers aren’t keeping up with technological change? Is it that burdensome government regulations are stomping out new entrepreneurship and innovation that might put these resources to more productive use?
3. Unemployment: once again, a problem, yes, but what is the cause? Low aggregate demand in the economy, the decline of very specific sectors of the economy including housing? Manufacturing is booming, but not hiring.
4. Kay talks a lot about taxation as a means to redress income inequality. Taxation (redistribution) can have an effect on inequality by definition, but it’s not obvious that it addresses any of the underlying problems that feed inequality in the U.S. I personally find the flat tax argument pretty convincing, and it’s pretty obvious from Kay’s portrayal of it that he’s never really looked into the issue.
Overall, the big mistake in thinking that he (and many people) makes is treating inequality as some aggregate thing, and not the product of disparate factors. A second mistaken conclusion that flows from this is a confusion of cause and effect: there are convincing arguments that some of these underlying issues have more to do with bad government policy than with the operation of free markets.

Quote of the Day: The Concentration of Power

Lawson and Alm:

In 2010, a tiny cabal of 535 individuals — just 0.00017% of the population — spent $3.5 trillion, or about 23% of the $14.5 trillion U.S. economy. That leaves 77% for the other 99.99983% of us. The group is the U.S. Congress — whose members have enormous powers to tax and spend. And they've used them to grab economic power well beyond anything found in the private sector.

Something that both libertarians and OWS protesters can agree on: a concentration of power is bad. THe difference, is that libertarians recognize that big government and big business are two sides of the same coin. Lefties want more government: read, a higher concentration of power.