Questioning Biden’s Inequality Narrative
2021-01-31 · Guest: Edward Conard (Author and AEI Adjunct Fellow) · 52:47
The upside of inequality and income distribution
Bob Zadek interviews author and economist Edward Conard about the “upside of inequality” and the misconceptions surrounding income distribution. Conard argues that the US economy’s success is driven by its ability to incentivize high-skilled talent to innovate, creating a “technological frontier” that benefits the middle class more than the egalitarian models of Europe and Japan.
Topics: Income Inequality, Economic Growth, Innovation, Redistribution, Labor Markets, Immigration, Welfare State, Taxation, Public Choice
Speakers:
- Bob Zadek — Host
- Edward Conard — Author and AEI Adjunct Fellow
Defining Income Inequality [00:00]
Bob Zadek: Hello everyone, and welcome to The Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. This show, this Sunday and always, the show of ideas, never once the show of attitude. Thank you so much for listening this Sunday morning. We are live on Facebook as well, so if you want to have a visual in addition to the audio, please check out Facebook. The Bob Zadek radio host is the link, and you will be able to watch us and to communicate and to join the conversation. You’re welcome to join.
Thank you so much for listening this Sunday morning. This Sunday morning, we are going to discuss a principle that nobody can object to. Or can they? The principle is equality. Who out there doesn’t favor equality? And equality is often followed by, or preceded by, a modifier. There are lots of different kinds of equality: equality of opportunity, equality under the law. This morning, we are going to examine in detail an incredibly, oh my goodness, misunderstood concept of income equality. There is even enormous confusion about what that term even means.
And as I wanted to learn for myself and have you folks learn as well what this concept, which will dominate the discussion, the political discussion for the next four years, what this concept even means—income equality. And to help us sort through this, because it is fascinating and it will change probably how you receive and how you process information that you will be reading and hearing in the news, or what passes for the news over the next four years, to help us understand this, I’m happy to welcome back to the show Ed Conard.
Ed is a bestselling author. He has published two books in the top 10 of the New York Times bestselling books. His most recent book, The Upside of Inequality: How Good Intentions Undermine the Middle Class. Is there an upside of inequality? We will learn. Before that, he published Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong. Ed is an adjunct fellow at the American Enterprise Institute and a founding partner at Bain Capital, where he worked very closely with his friend, colleague, and fellow founder, Mitt Romney. You may have heard of him, former presidential candidate and now United States Senator from Utah.
So Ed, we’re going to talk this morning about income inequality. That is a phrase that everybody uses but often doesn’t really understand. As you use the phrase in your writings and in your hundreds—that’s not an exaggeration—of appearances and debates on mainstream and not-so-mainstream media, tell us, let’s start somewhere. Tell us what, when you use the phrase, what are you referring to? What is income inequality?
Edward Conard: I think the straightforward answer to that is how much income one person earns relative to another. But I think you can have—I’ll give you four different definitions which are commonly used. One would be market income: what you actually earn out in the marketplace, forget about taxes, forget about what the government may or may not give to you, just what does the economy pay somebody?
I think the second is after taxes, after government transfers, how much are you—what is your actual income? How much money do you have to spend? And very closely related to that is something called consumption inequality, which we’ll maybe get to here, which is how much do you consume? And we know that somebody like a Bill Gates has a lot of money and a lot of income, but—and he has a lavish lifestyle—but his lifestyle is very small. He can’t consume very much of his money. Most of it is invested; most of it is given to charity. So I think often when we’re talking about the poor, what we care about is how much consumption they have. And so a measure of inequality is consumption inequality, which, by the way, hasn’t changed since the 1960s. The 90th percentile consumes about four times more than the 10th percentile.
And the last is wealth inequality, which is what the proponents of redistribution are most likely to point to these days because it’s much more extreme than the other forms of inequality. And the reason for that is you have about 40% of the population which is consuming all of their income, every dollar that comes their way. So of course, they’re not going to have any wealth; their wealth is zero. You’ve got a very, very large segment of the population which has saved some money for retirement. And we can talk about that because a lot of people stop saving for retirement as the Social Security benefits have increased. And so often we say, “Oh, look at the wealth inequality, how it’s growing,” despite the fact that we’ve put in enormous Social Security and Medicare programs to help people in retirement, which is the very reason why most people are saving.
And then you have a very small group of people who have produced some sort of innovation or are extremely skilled, in the case of some lawyers and doctors, who have accumulated or own a business that is—they really haven’t accumulated; it’s more that they’ve created a business which is extremely valuable. And you know, we can discuss: would we want to take that business away? Do we want to take ownership of that business away and give it to other people, which is what wealth redistribution really is about and taxing wealth is really about? And I think for the most part, we would be giving that to poorer people, presumably. So we’re talking about increases in taxes on richer people, giving the money to poorer people. When we do that, what we’re really doing is increasing their consumption, because if you were to give people Bill Gates’s stock in Microsoft, they’re going to sell that stock and consume the money for the most part. So really, I think most economists would agree that the right measure is consumption, and what we really are concerned about is increasing the consumption of people at the bottom end of the spectrum.
Inequality as a Market Feature [07:09]
Bob Zadek: Okay. Now, income inequality. Those words to me mean somebody earns more than somebody else. Well, that just evokes a “duh.” The fact that a doctor earns more than perhaps a middle-class worker in a factory or in an office, that’s not a headline. That is neither bad nor good. Ever since we have a market economy to a substantial degree, different things are worth more and therefore they cost more. So income inequality is not a defect; it’s a feature. Of course, some things are more expensive than others. Some athletes make more than office workers. That’s not a headline. That’s not something to be changed. Nobody would say that’s a defect in our system.
So when income inequality is just a fact, so when the politicians, when now the Biden administration, will be looking at every policy through the lens of income inequality—and income inequality, as you obviously accurately joined in, the discussion of income inequality is linked to the redistribution, which we will talk about, because once you identify that income inequality is being a problem, which it isn’t, but once you identify it as a problem, inevitably you jump to, “Okay, we have a problem. Well, what’s the fix?” The fix is redistribution. It’s to simply legislate, therefore declare by fiat, that we are going to level the playing field. Just like you’re trying to legislate that somebody six-foot-six has to be no taller than somebody five-foot-ten.
So before we get into income redistribution, there seems to be that in the public conversation, there is a type of income inequality which is bad as opposed to just being a fact. Nobody complains that Tom Hanks makes more than the average physician. Nobody complains about that. That is income inequality. So as you understand it, what I will call “bad” income inequality, income inequality which is a defect—what’s bad income inequality? What’s wrong with somebody’s—an hour of somebody’s time being worth more than an hour of somebody else’s time? Why is that wrong?
The Talent Harvest [10:04]
Edward Conard: So it’s a very complicated question, and I always want to give the other side of the argument its due. I think it’s always best to debate them at their highest level. So, you know, certainly it’s the case that if somebody works harder than somebody else, if somebody takes more risk than somebody else successfully and builds a business, I don’t think anybody has any problem with that person earning more money. Bear with me for a second.
I think there is an argument that people would say the talents of mankind belong to mankind, not to the lucky recipients. And so what we want to do is harvest the most value we possibly can from mankind’s talent, or peoplekind’s talent, womenkind’s talent—I’ll call it mankind because I have for 65 years. But you know, we’re just trying to harvest the value that we can. So even though somebody’s more talented and even though we’ll allow them to earn more money, how much more money do we have to let them earn in order for everybody to get the maximum value from that talent? In the same way that we would say we all kind of own the oil, we all kind of own the land, we all kind of own the air—I know we don’t, there’s private enterprise, but people would see those resources as mankind should benefit from those resources.
So I think that’s one aspect independent of, “Hey, somebody’s taller and they play basketball better than somebody else, they’re going to earn more money because of the market,” and the question is how much of that should they give back to everybody else? I think there’s a second component to it which is: if you were stealing the money or getting the money unfairly—and some people would say even if you’re getting the money luckily—now I would say you’re taking risk, some people get lucky when they take risk, some people get unlucky, so I view luck and risk as being something that should be rewarded. There’s definitely an argument on the left that says you’re just lucky, therefore you shouldn’t get to keep the money.
But you know, there are other aspects to that where you’d say, “Hey, if you stole the money, if you were lucky, if you got it from crony capitalism, then you don’t really deserve the money and we should be able to redistribute the money.” I would argue that the conversation be redirected in the following way: Let’s take as a matter—for the sake of argument—that the talents of mankind are owned by mankind and not by the lucky recipients. Then all we care about is how to get the most value out of that talent. And there’s always a trade-off between: do we want to tax the person more, or do we want to motivate the person to take more risk, work harder, and really use their talents for the benefit of mankind?
And even a liberal economist—I’ve had many debates with them, I could tell you some great stories—but the most liberal economists will agree that an investor, an innovator, has to put about $5 of value in their pocket—at least, I mean, $5 of value in other people’s pockets in order to put a dollar in their own pocket. So the question is, are you going to try to get that person to create another $5 of value, or are you going to tax the dollar that’s in their pocket more heavily?
Now, we’re already taxing that dollar at the corporate level, 23%. Then we’re taxing it at the individual level, if it’s a capital gains at 20% plus state taxes in California would be another 10-ish percent, so that’s 30% on top of the 20, which gets you to 50. And then we’re also taxing it 50% when the person dies because we’re—with estate tax. The question then would be how much more can we continue to tax that dollar versus whether or not we’re going to get an additional $5?
US vs. Europe Productivity [13:53]
Edward Conard: As this conversation goes on, I’m going to show you that we have created a lot more of the $5 with a lot less talent in America than other high-wage economies like Europe and Japan have been able to produce. Our talent—I’ll just go on here—we have about—if you look at academic test scores as a measure of talent, and there’s many other ways to measure talent, I’m not trying to be narrow but trying to be quantitative—we have about half as much talent, high scores per capita. We have about twice as many low scores per capita as Northern Europe, which is the second richest place in the world.
So with half as much talent per capita and twice as much low-skilled labor per capita—low-skilled labor that needs to be managed by high-skilled labor to make it more productive, to help it earn more money—so we have twice the management challenge and we have half the talent. We’ve been able to generate incomes which are 30% higher on average and about 30% higher in the middle class than the richest countries in Europe. Now, you know, we can get to Luxembourg and some crazy little tax haven countries like that, but when you talk about Germany and Scandinavia and France and the UK, we are 30% higher. We’re about 70% higher than Southern Europe, which is where our demographics look very much like Southern Europe. Our incomes are about 70% higher than Southern Europe.
And I’ll contend to you that is because we have done a much better job at motivating our talent to take the risks, to get the training, to work longer hours, to produce the innovation that other countries have not been able to get their talent to do. I’ll give you an example: we are producing five times as many billion-dollar startups than Europe is, the second highest place. Five times as many with half the talent per capita, and our economies are about the same size. And it’s precisely those things that are driving up the incomes of our middle class. So I think you always have this choice: do you want higher incomes for the middle class or do you want more equality? We can get more equality for the sake of getting more equality. It’s highly debatable—and I can talk all about my point of view versus the left’s point of view—whether we can also have higher middle-class incomes when we do that, because everywhere it’s been tried, they’ve ended up with substantially lower incomes because they haven’t been able to motivate their talent to do the work that’s required to produce the $5.
Innovation and the Technological Frontier [16:13]
Bob Zadek: So your argument, which sure makes sense to me, obviously, but your argument is that we want to—while it’s okay, my word summarizing yours, it’s okay to impose a tax on those people who are at the top of the—a disproportionate as compared to lower class—it’s okay to impose a tax as long as you don’t cross some mythical threshold so that they say, “I’m out of here, I’m going to Galt’s Gulch, I’m going to check out because I no longer have sufficient incentive to be a producer and to create jobs and wealth.” So you want to find that sweet spot that’s high enough to build a fund to redistribute, but not so high so they all catch a flight to Galt’s Gulch. Is that a fair summary of your position?
Edward Conard: Yes, I’ll make two little caveats. So, do I think it’s morally right to tax people 50, 60, 70% of their income? No, I don’t. I think there’s a moral right to freedom, a moral right to free property that we start to impinge on. But does the government have the right to tax people for the common good? Sure. But at some point, do I think it becomes immoral? Yes.
Second point is this: incentives when it comes to taxes and return on investment and payoffs for risk-taking happen very gradually over long periods of time. Okay? It’s not as though Europe can cut their tax rate and all of a sudden people are going to start inventing Google and Facebook and Intel and Microsoft and Apple and eBay. It takes a long, long time to do that—decades and decades. So what’s happened in the United States slowly over a long period of time, people have shifted from being mechanical engineers to being computer programmers. We’ve gotten more MBAs to mix together with our scientists in order to create the commercialization of innovation. We’ve gradually taken risks that have produced companies like Google and Facebook and Intel and Microsoft, Apple, eBay—you name it—that can mine the technological frontier.
So when our workers, our most skilled workers, are going to work in the mines, mining the technological frontier, they are getting exposure to very, very valuable ideas. And they’re saying, “Hey, I could start a company.” And oh, by the way, Google’s saying, “I can invest billions of dollars in that idea.” And there’s other entrepreneurs saying, “I could steal that idea and run across the street and get venture capital money and create that,” especially if Google decides that it’s not their priority.
If you’re sitting in an internet cafe in Greece, you’re not going to get any of those ideas. You’re not going to get the training. And the training is not just going to school—but school’s important, because if you don’t learn how to be a computer programmer at some point, you can’t be a computer programmer or an accountant or whatever, a business executive. And so it really, though, is on-the-job training. It’s a lifetime of mining the technological frontier which allows us to be a lot more innovative.
So if we now, under the Biden administration, we jack up taxes, is everybody going to quit their job and stop working? Probably not, especially people who are on the verge of solving something big. Okay? I think they really have an opportunity. But gradually over time, will our young people continue to say, “I’m going to go like Bill Gates and Steve Jobs”? We know in the United States, when the Bill Gates and Steve Jobs walked away with, you know, hundreds of billions, almost a trillion dollars of value, armies and armies of risk-takers came in their wake to try to duplicate the success that they had achieved. That didn’t happen in Europe. That didn’t happen in Japan. Okay? In Europe, people go on vacation. They don’t go, “I’m going to take the incremental hour and get back to work, I’m going to sit at my computer, I’m going to work till 10 o’clock at night, by God I’m going to crack that problem and I’m going to be a millionaire.” They don’t. They say, “I’m going to take the month of August off.”
And part of the reason for that is because it’s not just taxes. These things multiply together. So I say this: if you have no ideas, the tax rate doesn’t matter. You’re not going to take a risk if you don’t have a good idea. On the other hand, if you have so many good ideas that you can tax everything at 50% and cut your pile of ideas in half, well, that’s a wonderful place to be. Unfortunately, nobody’s in that place because we know, if we look at what’s called total factor productivity—the productivity that’s coming from know-how, not the productivity that’s coming from capital investment, not the productivity that’s coming from educating our workforce, although we’ve largely saturated our workforce with education at this point—but the amount that’s coming from innovation, from know-how, is shrinking over time. We’re at about a half a percent a year right now, down from about double that in the 1990s. Okay?
So it’s not like we have this huge surplus of ideas and we can say, “You know what? Let’s just whack it all by 50% and we’re going to continue to grow at a half a percent from innovation every year.” We’re going to have a significant impact on that, and that’s going to affect—directly affect—the wages of everybody else in our economy.
The Mechanics of Driving Up Wages [21:29]
Edward Conard: Now, I can go on, which is: if you restrict the supply of low-skilled labor and then you increase the amount of innovation, what’s going to happen? You’re going to have money, you’re going to go spend it, and you’re going to drive up the wages of everybody else. On the other hand, if that labor’s unrestricted, that supply, because you can get $3-an-hour labor overseas, you can get $3-an-hour labor in Mexico, somebody’s willing to come across the border, it’s much harder to drive up the wages of low-skilled workers if you’ve got an unconstrained supply of low-skilled labor. There’s an issue that will come back to haunt us on inequality, which is how do we drive up the lowest-skilled wages if that’s what we want to do? But I give you the outlines of how the economy works in a way that we can drive up everybody’s income.
Bob Zadek: I have a—I’m troubled, and the problem is mine, I’m troubled intellectually with a concept you just now said: “drive up wages.” That would suggest that wage rates simply can be manipulated. They can be—government can in effect cause people to earn more. I don’t understand—being a free marketeer, Ed, I don’t understand how that works. You cannot legislate that a car is going to be worth more tomorrow than today. You cannot legislate it. It’s a question of what somebody is willing to pay for it. So you cannot cause wages to go up. Indeed, I don’t even think that’s a valid goal of government. It’s like the valid goal of government is to legislate my house goes up every year in value so I can be richer. Utterly absurd. So wages, if you have any faith at all in a marketplace, as you and I of course do—profound faith—wages are worth what they’re worth, what somebody is willing to pay for them. And if we’re talking about work in the private sector, that wage is worth—an hour of that worker’s time is worth only its contribution to the success of the enterprise, nothing more. That cannot be legislated. That is what it is. So tell us about this concept, which I have never understood, this concept—your phrase—“driving up wages.”
Edward Conard: Yes, okay. So I think you can legislate wages—you might not want to—but you do that by restricting the supply. Because prices are set by supply and demand, okay, with a caveat that I’m going to get to about how much of it’s used when the price is high. But so let—I think what you’d find in today’s economy is that the low-skilled worker—let me step back a little bit. If you go back to the 1950s, I think what you’re going to find is engineers were designing and marketeers were designing products that were produced by blue-collar workers and consumed by blue-collar workers. And we went through an enormous period where we transitioned from agriculture to manufacturing where the middle class got a lot richer as a result. And all of our talent was focused on creating products and marketing products that were being produced by blue-collar workers, and we were filling factories up with equipment, and all of that was driving up wages relative to where they were on the farm, you know, which is a lower level of productivity. By the way, we had a boom in agriculture as well, and that freed up all the employees to make the transition.
What do smart people do today? They work for Google, Facebook, Intel, McKinsey, Goldman Sachs, okay? They don’t employ any blue-collar workers, and they’re largely working for each other, increasing their own productivity. That’s where our economy is today in an information-based economy. It’s fine; it’s probably the best use. And in the United States, where we have a shortage of talent, guess what? We’re even more focused on creating the innovation that increases the productivity of our constrained resource, which is talent. And all of the information technology—most of it people are using it for entertainment—the talented people are using it for data and information and decision-making. And that is making them a lot more productive. And luckily, the window of opportunities to apply those skill sets to is even bigger than the increase in productivity, and that’s in part why you see wages rising for the most talented people. Now, they’re soaring for the 1% that’s the fortunate risk-takers who we can come to.
What’s happening on the other side of the equation? Three things have happened to increase the supply. One of those is automation. Okay? A big part of what you’re seeing—manufacturing used to be 30% of employment, now it’s down to 10% of employment. A lot of that shift is to services, and we know that the productivity of services hasn’t grown anywhere near as fast as the productivity of manufacturing. It’s much harder to manage services because you really have to supervise the workers as opposed to in a factory where you say, “Load that equipment with parts,” and the machine makes the person do it and sets the speed and it can all be kind of engineered and you can walk away—command and control management, is the way I would describe it.
So automation has been one thing; it increases the supply of low-skilled labor. Low-skilled labor is pushed over into the local service economy. The second thing is $3-an-hour offshore labor. We have put millions and millions, probably a hundred million offshore workers to work on our behalf at $3 an hour. It makes everybody richer, okay? But 60% of the value is captured by people who aren’t the workers, okay? The top 40%, retirees, poor people who aren’t working but are largely getting their money from the government. So 100% of the cost is falling onto the worker, and they’re capturing only about 40% of the value.
So we’re all getting richer, but not in the same amount. And it’s not clear that the lowest-skilled worker’s benefited from that. And then the third is you’ve had an enormous wave of immigration into the country over the last 20 years. We’ve added about 50 million jobs; half of those have largely been immigrants on the low end of the wages. And so you’ve unconstrained the supply of low-skilled labor. So what happens? Work will expand because the price is lower. So now you’re going to say, “I’ve got hedges, go ahead cut my hedges, I don’t have time to supervise you, it’s not a very productive job, if you try to charge me $15 an hour, I’m going to—I don’t care about gardening my garden if you do that, I’ll do it myself, I’ll leave it untended,” a whole bunch of tasks that I won’t do.
Now, on the other side, if you were to say, “I’m going to restrict low-skilled immigration,” or in the case of trade—and I’m not for this—but “I’m going to restrict trade,” you would increase the amount of demand for domestic low-skilled labor. Okay? That would start to drive up the wages. Second thing that would happen would be you’d say, “Okay, those hedges, I’m not going to plant hedges now, I’m not going to tend my garden, I’m not going to cut the grass, I’m not going to have a huge lawn.” And so a lot of the very low-skilled jobs that are very unproductive and don’t get paid much would start getting pruned off. The economy would be smaller, it would be growing more slowly, but wages would be higher and there would be redistribution from the richest people, the most skilled people, to the lesser-skilled workers. And that money wouldn’t be getting redistributed by some rent-seeking politician who’s trying to buy votes and is largely giving out handouts to people who don’t want to work—as after all, anybody can make money who works, okay? What you want is money for not working. And so you’d be creating workfare as opposed to welfare, but you’re doing it through policies by controlling the supply of low-skilled labor. And we could have a debate about whether that’s good or bad for the American economy—might not be, might be—but I do think you can control with policy, you can control the supply, and it will have an effect on the wages.
Coercion and Labor Restrictions [29:48]
Bob Zadek: Now, a couple of comments. It really started me thinking, Ed, when you were speaking. My first comment is that I often observe when I have a conversation on any topic with progressives, people as you will on the left, I start with an observation that I ask them to challenge, and they really can’t. The difference between any policy that you on the left would favor and a policy that I would favor is that the only way you get your policy is through force and coercion. You have to have somebody who is authorized to carry a weapon to force your policy upon your citizens. Every single policy that I propose is voluntary. It simply requires force only to protect my freedom. That’s the only use of force.
So therefore, I challenge—and they never can meet the challenge—anybody on the left, you favor a more coercive, less free policy. And Ed, in what you just described, in how you in government can raise, in effect, artificially raise the value of an hour of unskilled labor, what you said was you restrict immigration. In other words, you deprive the freedom of somebody to move with their family to a place where they can thrive. You deprive them at force; you put a wall at the gate.
Another way is—when you were speaking about reducing the supply of unskilled labor, you know what I thought of, Ed? That’s what Jim Crow laws did. Jim Crow—indeed, that’s what the minimum wage did. These were all governmental policies which are now, of course, an embarrassment and an abhorrence to anybody with any kind of moral compass. Those policies were done to do just what you say, which is restrict the supply of unskilled labor. In other words, to prevent somebody from selling an hour of their labor for what they are willing to accept and what somebody else is willing to pay. So you have really explained the mechanics of increasing—bracket artificially—increasing the value of unskilled labor. The only way to do it is by depriving huge swaths of the population of core liberties and using coercion and force. And that’s exactly—and I want to be sure, because you are obviously exactly right, and I want to be sure that our listeners and viewers understand the import of how you have explained how one artificially increases the value of an hour of a human being’s time, because that’s really what you have said.
Edward Conard: I think there’s no doubt what you’re saying. Look, I’d have to think a lot more carefully about it—I’m thinking about it off the top of my head—but in general, I’m saying I agree with you. You want to control the supply of something, you’ve got to do it with guns. I don’t disagree with that. I would make two important points that are related to it. The first of all is it’s not clear that we owe the people of the world the same freedom that we owe ourselves. Maybe we do; I think a strong argument could be made that we do. Okay? But I also think when you talk about who we’re pointing the guns at, we are pointing the guns at the rest of the world and saying, “You can’t come in,” or “You can come in.” We’re setting a policy about who can come in as opposed to pointing the guns at ourselves. And I agree with you that minimum wage laws and Jim Crow laws point the guns at ourselves, and that is a very dangerous and often immoral thing to do—probably always an immoral thing to do, but I’ll say often an immoral thing to do since I haven’t thought about it very carefully yet.
The Welfare State and Immigration [34:15]
Edward Conard: The second thing I would tell you is whether we like it or not, we do not live in a free market economy—bear with me for one second—because we have agreed to give out very rich safety net benefits to everybody. We are unwilling to let somebody actually get the market wage. So if we had an economy where we said everybody who comes in can get the market wage—although we might be driving everybody down to, you know, Indian 50-cent-an-hour wages when we’re overrun by the rest of the world, okay, and everybody here might be making 50 cents—if we were willing to let them make 50 cents, and I don’t think the citizens here who were going to end up making 50 cents who are now making $15 an hour are actually going to elect you to anything, they’re going to fight you every step of the way, so I don’t think you can pull together a winning coalition with that point of view.
But you know, if we were to let them all go to the market wage, I think it would be different than what we’re doing today, which is, you know, we spend about $1.2, $1.3 trillion a year not on the elderly, where we spend another $1.5 trillion, but we’re spending $1.2 trillion on the non-elderly, which if you divide by all the people who are under the age of 65 times 20% to get to the number of people in the bottom 20%, that’s $22,500 per person that we’re spending. Now, all of that’s not going to the poor; half of that’s going to the middle class—half, I’ll give you the exact number, it’s not really half, but close. $22,500 for a family of four, you’re talking about $90,000 a year. Now, we’re giving about $25,000 to $30,000 to a poor person, okay?
So when we let a person in from Mexico, who maybe their market rate if we let everybody in the world come in here would be $3 an hour times 2,000 hours a year is $6,000, we better stop giving everybody $25,000 of safety net benefits because we cannot feed the whole world with our economy. So when you set that policy in place, it’s going to have cascading repercussions for other things that you can or cannot allow. And so I would have said myself, my view is the following: Do I think we need immigration? Heck yes. But the world today administers tests to everybody in the world. We know that what we have is a constrained supply of talent and an unconstrained supply of low-skilled labor. So what would I do? I would go get all the talented people in the world and bring them here. And I would restrict the amount of low-skilled I would be allowing into the country, and I’d be driving up all the wages of the low-skilled workers. And I’d keep getting another high-skilled, super high-skilled worker from the rest of the world and bring him here and driving up the wage.
And what’s happening today? Okay, it’s not like Google sits around and says, “Oh geez, we’ve run out of talented people, I guess we’ll stop growing our business.” They go, “No, I want to build a skyscraper in Romania and I’m going to start hiring people in Romania.” And then the bus driver and the teacher, the waitress, the doctor, all end up in Romania as opposed to we’ll let all that demand come here and drive up the wages of everybody. Will it redistribute money? Yes, it would redistribute money. Would it slow down growth? Yes, it would slow down growth. Would it make the people—our middle class—a lot richer? It would make our middle class a lot richer and they’d stop voting for socialism and they’d start voting for capitalism.
But when you—when we all go to work for ourselves and none of us hire any low-skilled guys and we leave them all to fend for themselves at a time when automation is chewing up their jobs and the world is full of $3-an-hour labor that’s willing to move to us and we’re willing to let the southern border open to let even more low-skilled workers come in, what do you think people are going to do? They’re not going to be happy with us. Okay? And it is a policy; it is a policy that we can control. Now, what the Democrats do is they go, “I’m going to soothe my guilt, I’m just going to throw money at it. You don’t have to work to get the money.” And even the blue-collar Trump supporter is like, “I don’t want a handout, I’m against a handout, a handout destroys my community, destroys my children, destroys my family. I don’t want welfare, I want a high wage.” That’s all I want. I want a shortage of low-skilled labor, drive my wages up. If you do that, I’m going to be happy with you, I’m going to vote you into political power. Otherwise, they stay home and the Democrats take control of the Senate. And what do they do? They open up the southern border and flood the labor in, and then they give everybody a handout to soothe their guilt. I don’t think that’s a better alternative, and those are the real-world alternatives.
The Politics of Redistribution [38:56]
Bob Zadek: Two comments. We are—we both can cite Milton Friedman in support of our positions. Milton Friedman acknowledged that a welfare state, which is what we have, is incompatible with open borders. And he said his first choice was scale back the welfare state—impossible, politically impossible—but he would agree with both of us. So of course, you cannot have a welfare state and open borders. But the argument is not automatically “open the borders”; the argument is “limit welfare benefits, tie it in with residency”—that’s another show. Immigration policy is a whole other show.
But on the issue also, you made a very interesting point, I thought, fascinating point. Earlier in the show, we talked about how high should taxes be on the innovators, on the risk-takers, the entrepreneurs. And you cautioned us: don’t have the tax too high because they have a—they will have a disincentive to create jobs, create wealth, and innovate. Of course, that’s correct. So you said the task is to find the sweet spot: high enough to fund the welfare state but not so high to discourage innovation. It’s finding the sweet spot.
But there’s also the same issue on welfare, and that is the issue of income redistribution. Now, you said we have a moral obligation to redistribute wealth, to take from the haves to give to the have-nots. You specifically identified that as a moral obligation. And I say a moral obligation is personal, and you cannot have one person enforcing, once again, with force and guns, their view, their morality—not integrity, not respect of other people’s rights, but their moral compasses are personal. And income redistribution is enforcing one worldview on morality on another. That’s offensive to me.
However, you also referred to, correctly—I embrace it—the practicality. If you don’t do some form of income redistribution, you will create unrest. There will be a lot of unhappiness. And to me, income redistribution is simply done to keep everybody calm. It’s finding the sweet spot: how much do you have to redistribute wealth to keep people calm while still not discouraging the market that you speak about so fondly, as I do? And so once again, it’s that balancing act, and different government—different parties and different politicians—will find a different spot. But there are two very important balancing acts that government can get wrong and can err on one way or the other way. If they err one way, civil unrest; they err the other way, economy tanks. And that’s what you seem to be talking about in the big picture.
Edward Conard: So I’d say two thoughts. First of all, are we just trying to keep everybody calm? Yes, I think we’re trying to keep everybody calm. But I would also say this: in large part, the Democratic Party, their reason for being is to buy votes with other people’s money. And it has been very successful at accomplishing its objective. Okay? We are spending about $22,500 per person on everybody in the bottom 20%, even though the money isn’t going there. Why? Because since 2000, we have increased the amount of money going to the middle class to about $10,000 or $11,000 per family of four. So they are very successful not in keeping everybody calm, but in buying their way to power.
And so we free marketeers and we libertarians—I’m more of a free marketeer than I am a libertarian, but I think we’re both sympathetic with each other—it’s not just keeping people calm, even though that might be optimal. It’s winning the election against somebody who’s determined to basically give more and more and more no matter how much more. It’s mercy at any cost, it’s more no matter how much more, and it’s gotten to very, very high levels. You know, we’re not just at the soothing level anymore; we’re at the “give me more” level.
Second thing I would say is: imagine we were in a rowboat and we are set adrift and we all have to work very hard to live. And you’re not pulling your weight. Do you get to do whatever you want, or do we throw your ass out of the boat? Okay? I think it’s a little more complicated than everybody gets to do whatever they want. Now, I think where libertarians—and this is where I kind of part ways with libertarians—when you’re rich, talented, successful person, your priority is freedom, freedom, freedom, freedom. Believe me, I think we’ve taken a lot of freedom away and I think it’s very dangerous and we’ve stepped way over the line on that. But I don’t think freedom is the only moral issue. There are other moral issues as well. And so if we are in a rowboat and we do all have to work hard in order to survive and you refuse to pull your weight, it’s not clear that we’ve got to drag you along with us. Okay? We can take a vote potentially and throw you out. And it’s not clear whether we’re doing the moral thing or not.
So it’s a little more complicated, and I give you other circumstances where I think other factors come into play besides simply freedom, despite the fact that I would agree strongly with you that we’ve stepped way over the line on what freedom we will or won’t allow. Because we don’t have to take it anywhere near as far as we’ve taken it in terms of taxation. The only reason we’ve taken it that far is because the Democrats are determined to buy votes and they keep winning elections because it’s a powerful, powerful force. I mean, Winston Churchill said, you know, democracy is the worst form of government except for all the others. And this is precisely the reason why, because a majority—you know, they’re a tyranny of the majority on the minority, and the investors are in a huge minority and there’s always going to be a majority of consumers that say, “Let’s go take their money and consume it.” And we’re going to have less investment, less growth, less prosperity.
And so I would always say—and I go back to where I started, which is—I’m willing to concede the left’s arguments about morality and what the responsibilities of talented people are. I think it’s more powerful ground to stand on to say, “Okay, I’ll accept that. I don’t agree with it 100%, but I’ll take it as for the sake of argument. And now, what do I need to do to make the middle class as successful, as rich, as I can possibly make them?” I just want policies that optimize there. Because what I think happens is people think that we’re taxing the rich and giving it to the poor and it’s not costing them any money. Oh yeah, it’s costing them a lot of money because they are demotivating the creation of the $5 in order to get a nickel of the dollar to redistribute. And the nickel just isn’t where the leverage is, isn’t where the money is, particularly when you’re taking 50% of the money away already. Another nickel isn’t going to make the middle class richer. And so America’s middle class enjoys incomes that are 30% higher as a result of our policies versus Europe’s over a long period of time.
Conclusion and Contact Info [50:30]
Bob Zadek: Now, we have—we have two minutes to go, Ed. I want to just summarize—I know the time goes by fast, sorry about that. My sort of very brief response, and then we’ll help our audience understand how they can follow your writings and your works, which are brilliant works and we’re better off for your having written your books. But just my parting comment is that in our founding documents—the Declaration, the Constitution, and the Bill of Rights if you want to separate the Bill of Rights from the Constitution—there is not one syllable that I am aware of where government is either empowered or tasked with the job of having people’s quality of life improved. That has been since the founding the job of the individual, not the job of government. Government’s job is to make sure that nobody else interferes improperly with your fulfilling your potential. And this duty of government to help out people in need is an individual duty that I hope to heaven everybody recognizes and in their generosity and in their support. But I never want to compel it. Compulsory morality is not morality; it’s simply the absence of freedom. And I don’t even think we disagree on that.
So Ed, in our closing, so our audience can follow your work, tell us how they can follow your writing. Do you blog? Are you active on Twitter?
Edward Conard: Yes, easiest way is to go to my website, www.edwardconard.com. That’s C-O-N-A-R-D. It’s Conard, not Conrad. So www.edwardconard.com. I just had a chapter came out in an Oxford University Press textbook called The Economics of Inequality in High-Wage Economies. You can get a free copy of the chapter on my website if you’d like to read it; that’s my latest thinking. The Upside of Inequality, sitting up here are my books, by the way, talks a lot about morality and libertarianism and where I agree and disagree if you want to really dig into the details of that, and has lots of data about what it takes to make the middle class as successful as it can possibly be.
Bob Zadek: Ed, thank you so much for giving us an hour of your time this weekend. Good luck with your book. I invite my friends out there to read it; there’s a lot to learn from Ed’s writing. So thank you so much to my friends out there, thank you to Ed. Bob Zadek saying so long for now. I’ll be back again next Sunday for another hour uninterrupted of ideas, not attitude. Thank you so much.
Edward Conard: Thank you, Bob. Thank you, I appreciate it.