Monday, January 27, 2014

What's Missing in the Inequality Debate

The following is my Op-Ed in the January 26, 2014 Orlando Sentinel
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.



  1. I couldn't agree more. As the owner of a small retail store, I can say that although I have been achieving unbelievable gross profits for a startup in it's first year, one would have to hold me at gunpoint and threaten those I love before I would consider hiring employees. And it is exactly for the reasons you state. Somehow, the idea that the Government has the right to tell me how much is the minimum I can pay my employees along with the employee benefits I must supply them with, regardless of my ability to afford those things, demotivates me when it comes to creating jobs and expanding my store, no matter how potentially profitable it might be. And that's a shame.

  2. Excellent argument and brilliantly written. I shared on FB.

  3. Here is another thought. Salary is not a zero-sum game, but an employer’s costs are. Increasing one cost means another cost must reduce.
    The wages paid to a worker have to come from somewhere. To pay employees more, the employer can increase the price of the product, reduce material or labor costs, become more efficient at converting labor or resources, or reduce the return on his investment in the company.
    For example, let’s consider a fast food restaurant since it is typical of the type workers very likely affected. To pay more in wages, the employer has the choices above.
    If the employer increases the price, that affects the same worker who got the raise because workers are the ones who buy product with the wages they earn through the conversion of their labor. A minimum wage is just inflationary.
    If he reduces material cost, he typically passes a lowered quality product to buyers. A minimum wage is creating less value for the price which is inflationary.
    If he reduces labor cost, it has to be from eliminating some other workers or cutting wages of workers above the new minimum. A minimum wage hurts other workers at the expense of those who get more.
    If he wants to become more efficient at converting labor, then he will likely get more work out of the employees by eliminating breaks, increasing the pace, reducing staff, or being more selective in who he hires. If you are not worth $10.10 you won’t be able to find a job. A minimum wage reduces overall employment.
    If he becomes more efficient at converting resources then he likely has to invest more into a company without an increased return. A minimum wage reduces the return on capital and therefore the desire for businesses to start. A minimum wage is anti-growth.
    I am sure there are many other examples and issues.
    In spite of a minimum wage increase we will still negotiate for our labor. To increase the minimum wage just means other things change to compensate.

  4. Thanks for reminding me why my husband set up the Carter CS in Durham with its 100% "Minority" students, few of whom could read until we got our hands on them!

    North Carolina charter schools were allowed to hire non-certified teachers up to a limit of 25%.

  5. Our current President will never allow such things to take place as they are not seen to be altruistic, popular with low information and low income voters and as Bastiat explains in the Law man will always seek to do the least amount of work and if that means plundering his fellow man so be it