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March 19, 2013

The Freedom to Exert Economic and Political Power

I agree with some of this, and I definitely agree with the last sentence of the following "explanation" of inequality from John Taylor -- a "poor diagnosis of the [inequality] problem will lead us in the wrong direction":
Economic Freedom For All, by John Taylor: In talks..., I argue that shifts toward and away from the principles of economic freedom have had profound effects on economic performance. From the mid-1960s through the 1970s, deviations away from economic freedom were large, economic policy was bad, and economic performance was poor with rising unemployment and inflation and falling economic growth. During the 1980s, 1990s, and until recently, deviations were smaller, policy was better, and economic performance improved; unemployment and inflation declined and growth picked up. In recent years policy has been poor and so has economic performance with high unemployment and low economic growth.
Many ask about how changes in the distribution of income fit into this story...
A large body of research documents that returns to education started increasing in the 1980s as evidenced by the growing college and high school wage premium. ... The source of the income distribution problem is thus related to a poor education system. We are restricting educational opportunities, especially for those who are disadvantaged.
In other words the explanation for the widening inequality is the restriction of economic freedom rather than the promotion of economic freedom. Economic freedom did not mean economic freedom for all. ...
Not extending economic freedom to all in the area of education is only one example of how deviations from economic freedom can adversely affect the distribution of income. ...

Ironically some argue that moving further away from the principles of economic freedom—with higher marginal tax rates or more regulations on firms or more discretion for regulators or more interventionist macro policy—is the way to improve the economy and the distribution of income. That would be a great tragedy since history shows that over the long haul it has been more economic freedom that has pulled people out of poverty. The point is not that income distribution isn’t a problem; it is that a poor diagnosis of the problem will lead us in the wrong direction.
The increase in inequality occurred during an era of deregulation, so I can't agree with his basic premise. In any case, I am all for increasing opportunity, and for improving access to education. But the story that inequality is a result of education (and the freedom thing) doesn't hold up to closer scrutiny. It's a "poor diagnosis of the problem":
OK, I see that some people are doubling down on the claim that rising inequality is all about education — when what the CBO report drives home is that this is all wrong, the big increase has come from gains at the very top. ...
Yes, college grads have done better than non; but inequality in America is mainly a story about a small elite pulling away from everyone else, including ordinary college grads. And we’ve know this for a long time! There is no excuse for getting it wrong.
The "Regulatory capture by large firms, crony capitalism, deviations from the rule of law, [and] bailouts of the creditors of large financial firms" certainly contributed to inequality (though his comments about the Fed seem more like sour grapes than analysis). But the problems he describes such as regulatory capture, crony capitalism, etc. are largely about the economic and political power enjoyed by the wealthy. It's hard to see how having government step even further out of the way than it has since the 1970s -- less oversight, less regulation, lower taxes at the top, etc., etc. -- will solve these problems.

[Taylor also has an op-ed in the WSJ. Noah Smith responds.]

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