More Government May Only Increase Inequality
Chateau Sur Mer a “Gilded Age” Mansion in Newport, RI
As in the 1920s, America is in a crisis of inequality, and for many it’s Capitalism’s fault. Even conservatives like David Brooks are coming around to this view, a troubling sign from a staunch supporter of free enterprise. The one-time “right-wing editorial writer” now says he was too slow to see how free markets were leaving people behind. He’s especially concerned that educated Americans have been building entrenched advantages for their offspring. He says governments will “have to get much more active” if every child is going to have a fair chance.
He and other commentators assume that governments actually can do much to level the playing field. In the case of education, he may be right. But a close look at American history suggests the opposite in many other instances: public interventions to fix a problem often exacerbates, not reduces inequality, and it undercuts productivity and dynamism in the process. That’s because government programs usually end up privileging certain people and groups over others, with special interests often finding a way to prevail.
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Here it helps to step back and understand inequality. We tend to focus on two kinds, wealth and income. By those measures, America has long been a far less equal society than the developed countries of Europe and Asia. But there’s a third kind that matters at least as much, and it’s about the opportunity to succeed.
Italy, for example, might seem more equal than the United States, but try opening a business or advancing in politics. Even liberal democracies throughout Europe allow a great deal of entrenched hierarchy and privilege, which limits opportunities throughout society.
Though America needs to do more to broaden access to opportunity, relying on government is a dangerous way to do it. The country’s inherent entrepreneurial energy is likely to be more effective in generating opportunity than the government, even as wealth and income disparities are the result.
Overcoming that social inequality is what the Declaration of Independence meant by the right to “the pursuit of happiness.” And it turns out the former colonists took it more seriously than did Thomas Jefferson and other founders.
The elites who crafted the Declaration and then the federal Constitution believed they were replacing monarchy with a republic to be ruled by well-educated, “virtuous” leaders like themselves. But voters soon swept away those expectations, opening up positions to everyone.
One of those virtuous leaders was Robert Livingston, a wealthy New York planter who helped Robert Fulton build the first commercially successful steamboat in 1807. The grateful state legislature awarded Livingston a monopoly on ferry service in New York City. But then came Cornelius Vanderbilt, a nobody with minimal education but abundant energy, ambition, and intelligence. Vanderbilt worked to challenge Livingston’s privilege, which the federal Supreme Court eventually struck down in 1824.
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Such challenges dismayed the Founding Fathers. In order to sustain their public-mindedness, they believed, the virtuous leaders of the republic needed special privileges and deference. Without those supports, society would become a chaotic free-for-all of people pursuing their self-interest.
The rabble were getting so much power that Alexander Hamilton and others ultimately despaired of their efforts, believing they had failed to build a sustainable government. But actually they had built the foundation for the most egalitarian – and lasting -- society the world has ever seen.
Perhaps the final blow was in 1832, when populist President Andrew Jackson vetoed the renewal of the federally chartered Bank of the United States. The bank had been the country’s first attempt at a central financial manager, and it had helped to stabilize money flows during the economy’s rapid growth. But Jackson faulted it for granting privileges to wealthy financiers in the northeast.
His veto left the country vulnerable to financial panics for a century, until Congress created the Federal Reserve System in 1913. But it prevented the central power and cronyism that has dominated banking systems in other countries. The resulting equality of opportunity is a big reason why the United States has led the world in financial innovation.
As for government, Americans have long distrusted it – not from libertarian ideas, but simply because they had seen political insiders use it for personal enrichment. Most (non-African) people had immigrated here in order to break free of stifling hierarchies elsewhere, usually backed by government power. The country’s longstanding anti-monopoly tradition was as much about fighting government privileges as corporate collusion.
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That distrust goes a long way to explain why governments here have struggled to truly overcome inequality. It’s not just racism: too many people simply don’t trust agencies to distribute resources fairly and appropriately. Just look at the billions of dollars in Covid relief lost to fraud.
Even clearer is the “War on Poverty” in the 1960s, which failed largely because it was captured by local officials who didn’t want poor people taking away their power. And that legislation passed with Congressional supermajorities. Since then the country has only gotten bigger, more diverse and more polarized – just look at how little Congress has accomplished lately. Why should we expect any more success now?
The United States is hardly perfect – opportunity is still not captured as broadly as it should be, especially among women, minorities, and people living outside of the innovation-driven economy. But we still do better than most countries in enabling upstarts to challenge vested interests, and in limiting the ability of elites and large corporations to protect their interests. We need to make sure that efforts to address inequality don’t indirectly undermine this dynamism. Reducing tax deductions, for example, is one such way.
The best solution to inequality is to root out government privilege where we find it, at all levels, and encourage continued openness. America’s entrepreneurial capitalism has shaken up social hierarchies for centuries – it’s a central plot line in the TV show “The Gilded Age.”
Government can still do a lot, including nudging the economy towards broader equity ownership and more effective philanthropy. But relying on government to address inequality directly, even if the legislation somehow passes, is likely to backfire.