Why Income and Wealth Equality Cannot End Wage Stagnation

• Publication year: 2022

48 Creighton L. Rev. 1. WHY INCOME AND WEALTH EQUALITY CANNOT END WAGE STAGNATION

WHY INCOME AND WEALTH EQUALITY CANNOT END WAGE STAGNATION

Richard A. Epstein(fn*)

I. INTRODUCTION

It is a great honor and privilege for me to return to Creighton Law School. I was last here in 1979 when I talked about automobile no fault insurance, a lecture that formed the basis of my 1980 article for the Creighton Law Review.(fn1) There is in fact a common theme between that article and this topic: beware of the Nirvana fallacy in evaluating proposals for major institutional reforms. This proposition was first stated by Harold Demsetz, who put the point bluntly, "The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing 'imperfect' institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements."(fn2)

The simple point is that one cannot easily compare any untested reform proposals with long-established institutional arrangements that bear the scars of repetitive use. All too often the course of implementation introduces unanticipated pitfalls that were neither understood nor intended at the time of passage. It is very difficult, as it were, to be confident that these new programs will remedy all past defects just because that is their stated ambition. Efforts to eliminate all the glitches and inequities of some prior legal regime usually introduce novel errors, which often create dislocations greater than those that had just been eliminated. The new solution always appears to come in second place in any head-to-head competition with the ideal one.

Just that happened with the automobile no-fault programs that I talked about in 1979. They were advertised as the solutions to the manifest defects of the tort system. But once in place, their own difficulties limited their success so that today they are less widespread and less important than they were when first trumpeted some fifty years ago. A similar cautionary message applies to other major schemes of social transformation, including measures intended to redress serious inequalities of wealth, one of the topics of this talk, brought to a head by Thomas Piketty's new book sensation, "Capital in the Twenty-First Century."(fn3)

Yet, just that kind of loose thinking often drives the Obama Administration in its public rhetoric. Indeed, many of the sins that trouble me are encapsulated in a woolly editorial that I read the morning on which I gave the oral version of this talk at Creighton Law School. The editorial began by pointing out the regrettable situation about how income and wealth have slipped in the past decade, as the gap between the rich and the poor has increased. For these purposes, I shall assume that all the claims are true, although the measurement questions in making these arguments are themselves questionable. Indeed, there is much evidence that the Gini coefficient, the standard measure of income inequality, has remained constant in the United States over the past two decades.(fn4) For these purposes, I shall only ask the question of what should be done in order to counteract these recent trends. On the day that I gave this lecture, a New York Times editorial offered me with an editorial wistfully entitled "Where have all the raises gone?"(fn5) The editorial first noted the wage stagnation between 2001 and 2013. For men, the average weekly wages in constant 2013 dollars went from $33.60 to $33.71, which averages not quite a penny a year. For women, those average weekly wages went from $25.33 to $25.35, which is (as it were) a fifth of the wage increases for men. Having identified the condition, the editorial then proposes its cure in one sentence that encapsulates all that is wrong with current labor market policies: "What's needed to raise pay are policies like a higher minimum wage; trade pacts that foster high labor and regulatory standards; and more support for union organiz-ing."(fn6) All of these items are promoted not only on grounds of equity, but also as part of a growth agenda.

In my view, this last claim is the source of much intellectual confusion and social decay, for it is hard to imagine three proposals less likely to promote growth in wages or anything else than the three on the New York Times list. Yet these, unfortunately, are championed in other circles as well. In fact, the better way to understand these proposals is to treat them as though they were part of the problem, not as part of the solution. In this short lecture, I hope to explain why these attitudes toward equity and growth misled basic policy in the United States during the Obama years.

What is needed, yet again, is a return to free-market classical liberal positions that stress a greater facilitation of voluntary exchange in both labor and capital markets. The campaign for greater equity is not, and cannot be, a campaign for greater growth. Instead, in practice it always turns into a socially destructive campaign for a larger share of a smaller pie. As the recent slow-growth figures attest, it is easy to achieve the pseudo-objective of the smaller pie.(fn7) But it is not possible to increase the total size of the slice of any individual group. The economic doldrums of the United States show that even if some groups may get a somewhat larger percentage of the smaller or constant pie, in the end these proposed policies will produce smaller slices as well as smaller pies.

What is needed, therefore, is complete reversal in direction to undo the current economic swoon. We must concentrate first on growing the pie, not on evening out the size of the slices. Any movement to a larger pie will increase on average the size of the various slices. No one can predict with confidence how the gain will be distributed. But even in the absence of that information, the only confident conclusion is that when the dust settles, the likely result will be larger slices for most people. The larger the overall gains, especially those induced by general policies, the fewer the individuals who will be left behind. In contrast, the three policies advocated by the New York Times will leave virtually everyone worse off than before. Negative economic growth and wage stagnation are not viable social policies. It makes no sense to double down on previous mistakes. The demand to reduce income inequality and force wage increases through government regulation will have many poor results and few salutary consequences.

In order to make out this case, I shall proceed as follows. First, I shall give a quick statement of the first principles that drive this particular analysis. Second, I shall explain how that analysis applies to the minimum wage controversy. Third, I shall show how this same framework applies to unionization and the various restrictions on foreign trade intended to lift up the position of poor people in those countries.

II. FIRST PRINCIPLES: LIBERTY AND EQUALITY

In approaching this problem, I am brought back to the famous quip of Shimon Peres that "the friends of liberty have done better by equality than the friends of equality have done by liberty." Put otherwise, any commitment to liberty will contain a commitment to equality of opportunity at the very least. In contrast a commitment to equal distribution of income or wealth has little inclination to support the liberty of all persons. Before turning to particular cases, it is useful to return to first principles to explain why this proposition is true. Any liberty-centered position will drive society to develop a mix of government and private institutions that begin with the proposition that each person should have the greatest extent of personal choice coextensive with the like liberties of other persons. The stress upon the word "like" rests on the key insight that any effort to defend a system with unequal liberties in the initial position raises these further challenges: whose liberties should be greater than those of other individuals, and to what extent? There is in effect no strong theory that could be applied to countless different social arrangements that rank une-qual liberties in a fashion that will garner widespread social approval. Keeping with like liberties therefore avoids huge battles over ad hoc descriptions of individual entitlements. And once like liberties is the touchstone, the most viable substantive solution seeks to implement that insight in the most direct way possible, such that each person has sole and exclusive possession of his or her own body and labor-labor that can be sold to other persons on terms and conditions that the parties find mutually advantageous. This system further posits an equal right to the acquisition of property, which can then be allotted under the time-honored system that prior-in-time is higher-in-right. These rules on autonomy, contract, and property do not exhaust the entire set of needed legal rules because they do not explain how and when government coercion should be used to organize a society strong enough to protect these individual rights, but not so strong as to snuff them all out. That last task requires a detailed analysis of the rules governing taxation (where a single flat tax on income or consump-tion-preferably the latter-will perform best)...