Monday, January 27, 2014
What's Missing in the Inequality Debate
In 1795 the United States Supreme Court declared, “The right of acquiring and possessing property, and having it protected, is one of the natural, inherent and inalienable rights of man. No man would become a member of a community, in which he could not enjoy the fruits of his honest labor and industry. The preservation of property then is the primary object of the social compact.”
Soon President Obama will deliver his State of the Union Address, which is going to lean heavily on his philosophical disdain for growing income inequality in the United States. We know he wants to raise the minimum wage to $10.10 per hour. Last year income and payroll taxes were increased, in part to satisfy his desire for greater revenue for the relief of struggling Americans. And, of course, he recently stated that to not extend unemployment benefits would be, in his words, “cruel.”
I share the President’s desire to see an increase in the income of poorer and middle income Americans. No one in the economics community I know of has argued that we need to see falling incomes in order to produce a healthier economy.
Unfortunately, his speech is going to create the impression that income and wealth can be viewed as a ‘zero-sum game’ featuring the idea that if Bill Gates earns one more dollar someone else is $1 poorer. Yet, rather than acknowledge his economic failures over the past five years we will be told more about how unfair life is for poorer Americans.
This is where the 1795 Supreme Court comes in.
America’s long history has proven that prosperity for all hinges on a healthy respect for, and protection of property rights.
Left alone, every business owner has an inherent desire to earn a profit. They learn over time that in order to make profit in the long run, they must serve their customers in a way that makes people want to voluntarily engage in commerce with them. They also know that taking greater risks and seeking expansion opportunities will only take place if it is believed that more profit will follow. In order to expand – or to exist to begin with – productive employees are necessary. Hiring and maintaining these employees means offering an income that is commensurate with the marketplace for that particular type of labor. Paying greater wages and salaries to workers who prove to be the most productive is also rational, inasmuch as losing them to your next best competitor is an ever-present risk.
When a wage is offered, the prospective employee has the right to evaluate the offer, compare it to others and say “yes” or “no”. The social compact ensures that liberty, rather than force, violence or coercion will keep this system working well for the employer and the employee.
When government steps in and forces employers to pay more than employees productivity and value would warrant, or when government imposes mandatory health care or sick leave benefits, it is tantamount to a taking of the employers property, by force, and the right to voluntary exchange is violated.
This is what is missing from the current income inequality debate. The right for human beings to free negotiate labor contracts has been taken away. Private property is being transferred, by force, from employer to employee. Meanwhile the following unintended consequences unfold.
First, fewer and fewer jobs are available and those who have jobs become convinced that it is government, rather than their own advancements is skill, education and training, that is the source of a better life. This keeps people locked into dead-end jobs while waiting for the next law to come along forcing employers to do “the right thing.”
Second, rather than take the risks of starting a new business, or expanding an existing one, the men and women who might otherwise have become valuable entrepreneurs and income creators, decide that the risks outweigh the rewards and either relocate, refuse to expand or never open their doors to begin with.
Until President Obama realizes the connection between private property rights and long-run income creation, we will continue to see more laws, more force, more regulations and more income inequality.