Obama Has Misdiagnosed America's Income Inequality Problem

The restoration of a free market is the best way to level the playing field.

By SHARE

Stephanie Slade is a project director at The Winston Group, a political strategy company.

In his acclaimed recent speech in Osawatomie, Kan., President Barack Obama articulated what has become the dominant liberal explanation of the issues America faces. "Inequality gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions, and runs the risk of selling out our democracy to the highest bidder," he said.

The president correctly identifies the injustice inherent in rewarding the rich with undue political influence. Unfortunately, he misdiagnoses the source of the problem.

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Obama's mistake is a common one. He sees inequality as the root cause of our present evils, giving those "at the top" an unfair advantage when it comes to advocating for policies that benefit them. They alone have the resources to buy access and sway, thereby ensuring the "rules of the game" will always be rigged in their favor. This story makes intuitive sense, but it suffers from an obvious flaw: The real problem is not that certain individuals have the ability to "game" the system while others do not. The problem is that we've come to accept a system that invites itself to so easily be gamed.

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Within a free market, inequality comes almost exclusively from one place: unique individuals' differing levels of productive ability. People who work hard to solve problems and produce things of value to society tend to accrue wealth. The more productive you are, the more wealth you can accrue, and the less productive you are, the less wealthy you're likely to be.

The world we live in, however, boasts many avenues for a person to become rich that have nothing to do with productivity. For example, you can be elected or appointed to a position of power, at which point those who can afford to will expend resources trying to persuade you to enact policies that favor them. They'll donate to your campaign in the hopes that you'll channel government funding to their industry. They'll hire fancy lobbyists in the hopes that you'll pass regulations that damage their competitors. As a result, you will gain more power—and you both will gain more wealth.

There are other ways to amass wealth in our world without being productive. You can advocate for rule changes that favor you directly. You can arrange your property so as to pay as little in taxes as possible. You can collect bailouts. You can take advantage of government programs that try to make things like housing or education less expensive for regular Americans by raising prices on those things and pocketing the difference. Such activities reward ingenuity in altering or circumventing the rules of a market economy rather than ingenuity in producing things that make people better off. In the process, they exacerbate the problem of inequality—after all, as the president noted, those who don't possess resources will never have the same success getting rules bent in their favor as those who have money to spend.

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The liberal reaction is to want to reduce inequality directly through forced redistribution. More regulations to keep behemoth corporations in their place, bigger tax breaks and subsidies to help struggling companies compete and higher taxes on the affluent to prevent them from getting too far ahead of the average American worker. In practice, this only creates more opportunities for the powerful to exert their influence, and the new benefits are just as likely as the old ones to end up getting channeled in the direction of the rich.

A better, though less obvious, solution would be to answer not with more government involvement but with less. The well-intentioned liberal is understandably outraged at the thought: Sit back and do nothing to stop big-wig special interests from taking advantage of the little guy? The idea strikes many as negligence of a criminal kind.