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Jonathan Rothwell on Market Egalitarianism

Gallup’s Principal Economist Dissects Just vs. Unjust Inequalities in *Republic of Equals*

Have Americans become jaded by unjust inequality?

Two data points are informative.

  1. Few expect the celebrities caught in the college admissions scandal to do jail time for their criminal bribes.
  2. Those associated with Jeffrey Epstein appear to be unlikely to be held accountable any time soon.

Perhaps even more seriously, however, Jonathan Rothwell believes that inequality and the political forces underlying it are actually undermining the public’s faith in our government.

He says that the wave of populist nationalism that swept Trump into office is driven by a deeper discontentment and insecurity resulting from widening income inequality. [Paradoxically, Rothwell argues that many of the same nativist attitudes are also cementing the very policies that are exacerbating unjust inequality.]

Buy the book

Of course, it’s vitally important in this debate to distinguish between inequality that is the result of people’s subjective preferences for work vs. leisure, that which is based on supply and demand, and that which is based on pure political privilege.

In his new book A Republic of Equals: A Manifesto for a Just Society, Rothwell ushers an impressive body of data to show just how much of the current inequality is caused not by free markets, but by the political powers that be. In doing so, he upsets both the right and the left’s narratives around inequality.

We do not live in a perfectly free market based on mutually-beneficial exchange. From education to housing, the current political system further rewards those who have already made it with additional spoils.

As a “market egalitarian,” Rothwell claims that we do not need government to act to redistribute unjustly acquired wealth so much as we need government to set the rules of the game such that incomes more closely align with relatively evenly-distributed abilities in the population. There’s a lot to unpack there.

I spend the full hour dissecting the poll numbers in Jonathan’s book to determine whether his thesis is correct.

A Republic of Equals envisions what would happen naturally to equality of outcome if we stopped giving those with political power special access to markets and public services.

We also discuss licensing — one of the most hateful words in the language. Licensing suggests permission from the government to do an otherwise lawful act such as offering your services to somebody else at a price they are willing to pay.

READ THE TRANSCRIPT:

Jonathan Rothwell on Market Egalitarianism

Bob Zadek: Thank you so much for listening this Sunday morning. We are today and always the show of ideas. I was an undergraduate at Syracuse University, an astonishingly mediocre college, and I was the poster child for mediocrity in that undergraduate school. The only course I got an F in, although I loved it, was Greek Mythology. I took a one credit course in Greek mythology because it was what was known at the time as a “football players course.”

Even though I was an accounting major, everybody took that course because it was so easy, and I liked it. The only reason I got an F was that on the day of the final I was studying for it, because I put the wrong date in my calendar.

In that course, there was a Greek God called Procrustes. A rather sinister fellow. He was a mean spirited blacksmith and his role in mythology was that he had this sinister bed. He was determined to make sure everybody was exactly the same height. And if he captured you as you walked by or whatever you did when you were dealing with a Greek God, he would put you in his bed. And if you were too short, he would, forgive me, stretch you. And if you were too long, he would amputate part of your legs so that everybody that was the same height at the end. He met his fate when another guy who wasn’t crazy about what he was doing, put him in his own bed and killed him. What in the world does that have to do with libertarian talk radio?

Well, Procrustes goal was “height equality,” a rather absurd concept, but no more absurd than income equality or it’s converse, income inequality. In public life today, many political figures have as their goal undoing inequality, which is as sensible as undoing height differences among humans. I suspect that the subject of income inequality is born of a desire to take from people who for one reason or another, whether it’s luck, good fortune or skill, have more than you. So there is envy, there’s greed — pretty ugly motivations. Income inequality is worthy of at least one show.

And that show is this morning. I’m happy to welcome to the show Jonathan Rothwell. Jonathan is Gallup’s principal economist. He has lived his entire life in the world of politics and public policy. Most relevant to this morning show, he’s the author of a Republic of Equals: A Manifesto for a Just Society, where Jonathan has studied no surprise with enormous data to sport his conclusions and statistics, income inequality.

Is inequality a bad aspect of society or just a fact of it, which is neither good nor bad? If it is bad, should it be fixed? Do politicians have to all take an oath to become Procrustean in their policy? Hard questions. No one better to answer them that morning’s guest.

Jonathan, good morning and welcome to the show.

J.R.: Good morning Bob. Thank you for having me.

Bob Zadek: Now you have spent much of your adult life in the world acquiring, refining, and learning what conclusions can come from enormous amounts of data. You take data and you can see what others cannot see. You can see conclusions and policy issues that others cannot because you are talented and skillful in handling of data. When you set out to write Republic of Equals, did you discover aspects of economic life in America that surprised you? Or did it confirm conclusions you had before and they were merely confirmed in the book?

J.R.: Well, I certainly did learn quite a bit in the course of doing this research. I should say that I’ve been studying this topic for probably 20 years. I became most interested in it around the 2000 election back when I was an undergraduate studying mostly political science at that point. That motivated me to study economics. Ralph Nader for example, who was talking a lot about income inequality back then. I wanted to understand what was behind it and what could be done about it, if anything. And that that lead me on a journey to get a couple of graduate degrees. I’ve worked at the Brookings Institution for seven years and now I’ve been a Gallup since then and had the opportunity to study this in some detail.

Particularly in the course of preparing the book. One of the things that motivated me to write the book more than anything else was that I was unsatisfied with the explanation that we’ve been given by politicians in particular, but also thought leaders, op-ed writers and pundits, when it comes to why there is inequality and what to make of it.

Getting at the issues you raised in your introduction, I think it’s perfectly natural that there would be some income inequality, but one concern is that the United States stands out among other democracies as having what you could characterize as extreme amount of income inequality. So if you look around the world, countries that are poor and often have authoritarian or corrupt governments have fairly extreme income inequality in that say the richest 1% may control 20 to 30% of the income in a given year. In European democracies and countries like Japan and Korea, it’s more like between 6% and 12–13% at most, and usually under 10%. But in the United States it’s 20%. So we’re closer to the authoritarian governments and non-democracies around the world than we are to the other developed rich democracies. And so the question is why?

Bob Zadek: Jonathan, before we get to the “why,” which is the crux of this morning show, I’d like to unbundle a bit of what you said when you referred to inequality in authoritarian regimes as compared to Western democracies. Of course, the criticism of an authoritarian society is not income inequality. That is the result of it. The criticism is the political structure to begin with. No rights, no personal property, no freedom. So authoritarianism doesn’t need income inequality as the reason why it’s bad. It’s bad because it’s bad, inherently bad.

Income Equality: A Procrustean Desire?

So the question as to this income inequality, as to that economic fact, what is wrong with it? What’s wrong with some people having more than others, so long as that inequality is the result of the simple inequality in skills and drive, motivation, psychology, intelligence, and energy from one person to another. If it is the natural result of people being different, what’s wrong with it?

J.R.: I would think very little is wrong with it and maybe nothing if it is the result of people’s underlying talents and preferences. Now with one exception. I think societies are oriented around taking care of the poor, so there will always be some members who have a hard time contributing for health reasons, for other sorts of disabilities, extreme bad luck, etc. And people have come together in various ways to figure out how to help the people. That in a sense reduces income inequality.

Society is organized along those lines where people are compensated based on their productive skills and talents and energies on things you mentioned, but then just simply compensated people who are struggling for whatever reason, I think that would be a pretty great society that most people would enjoy living in and would consider just. My concern is that that’s not what describes the United States. We have income distributions that are based more on politics and political inequality than they are based on the natural distribution of talents.

Bob Zadek: I knew you were going to say that. I was hoping you were going to say that. That is one of the major contributions of your book. That’s what I would like you to share with us this morning. One comment.

You use the word “society.” In documents, in statutes, and in language, there is often something called “rule of construction.” What does the word mean? I would just observe that society is how people live together voluntarily. It’s the neighborhood, the block, the town. That’s the society, as distinguished from the government, which has nothing voluntary about it. It is compulsory. So when we ask whether society takes care of the people who are less fortunate or less skillful or whatever, I would throw out there that most societies have done that. Governments have not, and perhaps shouldn’t. But societies always have.

Whether it’s a fraternal groups, religious groups, people always have voluntarily taken care of those less fortunate. Just an observation. Just a thought. So the premise of your book is that the income inequality is not necessarily or exclusively the result of differences among humans, but rather due to an artificial influence, which is government. And that’s a great amount of the scholarship in your book. Tell us what you mean by that and give us some examples.

Unequal Access to Markets: Modern-day Guild Systems

J.R.: Sure. So I talk a lot in the book about the importance of providing equal access to markets. I believe that a right that has been largely ignored and political science theory and scholarship, but it’s really important once you start thinking about it. And there are a few historical examples that I think really illustrate how a lack of access to markets, which was created by government laws and rules has created inequality throughout history. So in medieval Europe, one of my favorite examples is the Guild system. You have distinguished occupations that were highly skilled and required years of training and preparation in an apprenticeship-like system to develop the craftsmen like skills that were valuable in cities throughout Europe. The guild regulated who was allowed to provide these services and in very strict ways. You had to in many cases be the son of somebody who was a guild member.

If you moved towns and tried to relocate in a new town, it was very difficult to gain the status of being part of a guild. There were ethnic discriminations, women couldn’t be guild members. So there were a lot of groups that were excluded from being guild members. And that created benefits for the members at the expense of the public, who had to pay higher costs for everything that they were making. So in more recent examples in the United States, African Americans were denied membership to important guilds as late as the middle of the 20th century. The American Bar Association didn’t allow African-American lawyers to be members into the 1950s. The American Medical Association had state level members and state level organizations that didn’t allow African Americans in the South to become members until the 1960s. That’s a political regulation that has nothing to do with the inherent talents of the people who are trying to be members.

Bob Zadek: You mentioned the American Medical Association and the American Bar association. They are the mother of all guilds today. I complain bitterly about the licensing regime for occupations in our country. There are about 1,400 economic activities for which you need a license. Now we all know that “license” is one of the most hateful words in the language. It suggests permission from the government to do an otherwise lawful act such as offering your services to somebody else at a price they are willing to pay.

So, we should also mention that we don’t have to go to the American Bar Association and the American Medical Association and their counterparts, but rather just the licensing regime where you need a thousand school hours of training to be a cosmetologist, to be a hairdresser, to be a barber, which has the effect of keeping out mostly low income people from getting into one of those occupations, which is the first rung of the economic ladder.

J.R.: I don’t take the view that there should be no licensing or no regulation whatsoever because I do think that to have mutually beneficial exchanges, you need to have informed buyers and some kinds of licensing system to reassure people that at least basic criteria have been met. The underlying motivation is not terrible and can make markets work better if done appropriately. I think the bigger problem that I have is that the licensing system has been corrupted by member organizations and particularly the most powerful member organizations operating usually at a state level where it’s fairly easy to influence legislators, and even the specific divisions or committees that regulate occupations and professional services. So it doesn’t require a great amount of spending to be the leading campaign contributor in state elections.

Often, if you look at who the leading contributors are, it’s the state bar association and the state medical association. In many ways you could say they are writing the laws that control the licensing process and we have good reason to be suspicious of what’s happening there. Not that doctors and lawyers have any desire to exploit the public, but when they have so much power and there is no countervailing force checking what they’re doing it’s very easy for the law to drift toward a process that is overly restrictive and ends up shutting out many extremely competent and well trained people from providing even basic services.

Bob Zadek: So far you have said that income inequality in part is the result of conscious governmental action. It’s not the result of the operation of the free market, which produces anything unfair. In part it’s an unintentional consequence or maybe an intentional consequence of governmental action playing favorites with one group at the expense of another. Now, can you reach any conclusion, even if it’s a gut reaction, as to how much of the complained about income inequality in our country would go away if these unfair statutes which contribute to it or cause it were collectively repealed? Is that the primary driver of income inequality? Where does it fit in and scale?

J.R.: I embarked on a thought exercise to take a stab at calculating that. To be honest, it’s an extremely difficult conceptual and empirical exercise. But let me describe what I did and your listeners can decide for themselves how plausible it is.

If you take the attributes of individuals that are measurable and strongly predictive of income — health data, other indicators of successful happy life and put them all together — so these would include IQ, the personality traits that have been identified with success, which would include conscientiousness, emotional stability and enthusiasm, experience in the workplace and the amount of education or years of education that someone has obtained. All those things are predictive of hiring come later in life. You measure them when someone is a young adult and you can calculate what their expected income would be if they were paid only based on those attributes and compare that to the actual income that they have.

When you do that for the entire country, you can have two alternative measures of the income distributions, one based only on measurable talent, another based on the actual income distribution we have. And what I find is that income inequality would fall by roughly half if we paid people based on those measurable skills and talents. So that suggests that the remaining income inequality is a result of those political factors involving access to markets and the way that they’re regulated and the way that certain professional occupations which tend to be overly represented in the 1%. Doctors and lawyers, for example, are two professions most heavily represented in the 1% of all income earners. If those were removed, I estimate that the income inequality would fall by roughly half.

That would make the United States much more like Sweden in terms of the level of income inequality we have. And I think that’s much more aligned to what one could consider a natural distribution of income if it were based on talents. In Hunter-Gatherer societies anthropologists have calculated that the distribution of wealth was, was roughly equal to the distribution of income in Sweden today. So there you have it.

Bob Zadek: You know Jonathan, that fact and that analysis gave me goosebumps. That is so interesting and so relevant to all of the conversation we are having today because it’s one thing to complain about the result of income inequality. It’s quite another to say what caused it. You can’t fix it by simply taking money from A to give to B at the point of a gun. That is Procrustean. It has an air of dishonesty and immorality to it. But what you just taught us is fascinating to me because I would sit here before we had the pleasure of speaking this morning and I didn’t know how to get to the next step. I was opposed to steps that politicians have taken, such as Elizabeth Warren. But I couldn’t draft why it was so wrong even while conceding that it would be nice to have less income inequality.

There is a way to understand it and to present the issue to the public and to the politicians in a way that since it’s data driven, it’s not appealing to greed or envy. It’s data-driven. It has just doubled my respect for your profession. Thank you so much. That was a fascinating explanation. It helps us to start to get our arms around the cause and how to income inequality. Now, what is bad about income inequality?

A Data-Driven Understanding

J.R.: What concerns me about income inequality is when it’s not based on merit and when it’s unfair. So just to put this in perspective, Gallup just partnered with some economists at the Norwegian School of Economics and they conducted a fascinating new study in 60 countries with roughly 70,000 people around the world. They gave people different scenarios to assess how fair they believed income inequality was in their country and under different scenarios. In two scenarios, they presented people around the world with a case where a worker performs a task and gets paid six U.S. dollars, another worker performed in the same task and gets paid nothing. And they asked how much would you give from the worker who performed the task for $6 to the other one. And then they had the same scenario but in this case, the one who gets $6 was told that he or she worked harder and performed the work at a higher quality.

So in the first scenario, people were willing to redistribute a lot of the money as you might guess, because the differences were based on something other than merit. It struck people as unfair that one worker would get $6, where another would get zero when they both did the same work. But when they were told that the one who got $6 did higher quality work they still redistributed a little bit of the money, but much less though. So the two big conclusions that come from the study for me that relevant to this conversation are that a lot of people around the world think that the current distribution of income in their country is unfair, but two, they believe that compensating people based on merit is fair and they are willing to do so. So that’s to be the key issue with income inequality. We have to understand that some of it is fair and appropriate and even desirable while other aspects of it, when it’s based on political power is unfair and that is where the focus of public policy should be, in my opinion.

Bob Zadek: When you say that it’s like all of these light bulbs are lighting up. I want to take political figures, shake them, and make them listen to you. Don’t just play into emotions like envy. Why did Gallup do this poll?

J.R.: George Gallup founded the organization, and has done polling just for the sake of acquiring information and presenting it to the public in a way to be helpful. We do that to some extent. We do this through something called the World Poll, which is a survey of a thousand randomly selected people and almost every country in the world that we publish every year, where we partner with the Norwegian School of Economics. They received funding from several sources and contracted with us to do this on their behalf.

Bob Zadek: This is a topic which is in the news every day and which brings out the worst in people emotionally and no part of the public conversation seems to be data-driven. And here Gallup has the Holy Grail, so anybody who wants to discuss the topic can do so not by appealing to emotions. Gallup, and perhaps other organizations, is the place to start. Is this generally available to the public. Does Gallup have an open website where these findings are available to the public, like CATO and its World Economic Index?

J.R.: It is kind of a mix. There is some information that we post on our websites through Gallup News where we summarize the findings of our polling research and we have some data that is publicly accessible on that website where you can track trends over time. For the world poll, most of that data is not publicly available. For a fee people can access it, and some universities allow their students and faculty to access it for free because they partnered with us. This new research that I’m describing just came out earlier this week. The scholars behind it who are based in Norway, are going to be using it for academic publication. Some of the findings are going to be summarized on our website and on their websites. But for people who want the raw data they will have to pay for it.

Income Inequality in a Political Context

Bob Zadek: Your book seeks to motivate people who form public policy to understand the issue and to fix income inequality the right way. The purpose of the book is to provide the data so people can understand it. In your opinion, as a political observer, if politicians were to say, I have the cure for income inequality and I can do so without taking from A, at the point of a gun, to do a wealth transfer to B. I can do so in a way that everybody benefits except for those people who have for too long been living in the protection of what amounts to a Guild, is that a winning political argument as opposed to just taking money from A to give it to B? A crass wealth transfer?

J.R.: I think it is a winning political argument, although it’s hard to say that because no politician has made it. It’s kind of striking that if it were a popular argument, why hasn’t anyone yet really tried to do it? I mean, arguably there are politicians who aren’t famous who might have this view. It seems to me that a big part of the problem is the primary selection process tends to drive proposals to the extremes. So what we have on the democratic side is a fairly strong distrust of markets and the sense that any kind of income inequality mitigation has to be at the expense of markets and regulating them and controlling them, which is basically the opposite in many ways of what I’m arguing. And then on the Republican side, it seems that, at least in the case of the President, while I haven’t heard him talk about the issue of income inequality really, implicitly in terms of things that he said about the struggles of the working class and displaced manufacturing workers, he seems to put some of the blame markets in the form of international trade in particular and immigration perhaps. I have yet to see a mainstream politician really make the kind of argument that I’m making, but I think it would have broad appeal, particularly to independent voters and moderate voters.

Corporations: Unfairly Demonized?

Bob Zadek: You pointed out that the president and many others will blame income inequality on markets. That’s like blaming markets for making diamonds so expensive. It is not the market. The markets only tell you through the price mechanism what something is worth relative to something else. The markets are simply a generator of invaluable information about relative costs. The markets don’t cause something to be valuable or not valuable. That’s a function of our old friends supply and demand. If we have a lot of something, it’s not that valuable. If we have less of something, it’s more valuable. That’s not the market’s causing it. It is the amount of supply versus the amount of demand. So to say markets cause inequality is an absurdity. Markets never cause anything to be worth anything. They immediately tell you the bad or the good news, what it’s worth relative to something else.

J.R.: I think there’s a lot of truth to that and one of the surprising things for me as an observer and somebody who studied economics is the focus that we have on corporations as a driving force behind income inequality. One of the reasons this is so surprising to me is that as I document in my book, corporations as a share of national income have really fallen as a source over the last 30 or 40 years. Even as income inequality has gone from about 10% of income going to the top 1% to about 20% going to the top 1% from 1980 to the present. So during this period of rising income inequality, corporations have become less powerful and less important in the economy. Yet we hear that the main reason that there’s a social divide between rich and poor and their power is out of control is due to corporations.

What is left out of that is that there’s been a sharp increase in the percentage of income and the percentage of people in the top 1% who are working for what are called S corporations or partnerships, often they have one or two owners. They’re not controlled by a huge number of stockholders. They’re not publicly traded. They operate in small local markets. They are not tapping into multinational markets. They’re not benefiting from globalization in any significant way. They’re often doctor’s offices, the offices of lawyers or real estate agents or hedge fund managers. There has been very little discussion about why they’re earning as much as they are. All the discussion has been on Amazon, Facebook, Apple and other major multinational corporations.

Bob Zadek: What makes these small businesses different from Amazon is that these small entrepreneurial businesses have no individual market power. They don’t set prices. They merely try to get the most they can. And if people are willing to pay what they charge, it is because the customers have determined that it is worth it. There’s no market power whatsoever. So that is as close to a pure market value of what services are worth as you could get. It’s the perfect market. There’s no monopoly. They just get the most they can, but what they can get is a dictated of what a willing buyer is willing to pay. That’s so significant and that shows that capitalism — that free markets — are simply helping us determine what something is worth relative to something else.

Future Practical Steps to Reducing Income Inequality

Bob Zadek: Now, Jonathan, there are a lot of influences and market leaders and politicians and aspirants for high public office who are glued to their computers and radio listening to this show. We have some time left. What are the lessons you want them to learn so when they go and plead for votes and offer a cure for income inequality, they least have a data driven cure. What are the lessons of the book that you will share with all of us, including all of the influencers who are listening this morning?

J.R.: I would say, let’s curb bad income inequality and keep the good income inequality. I think there are two organizing principles that we could try to think about implementing in order to do that. One is to provide equal access to public goods and services to a much greater extent than we have now. And the other is to provide equal access to markets. I don’t think that everybody should have the same genes, and everybody should have the same parenting experiences when they’re raised as children, but that the things that are funded by the public, particularly education services, should be provided on an equitable basis. Throughout U.S. History and into the present we have what I think is a fairly unequal distribution of access to high quality education services.

African American children, and to some extent Hispanic children, often living in segregated neighborhoods are assigned to schools where the teachers are objectively not performing as well. This isn’t always the case. There are some fantastic teachers working in poor schools in poor neighborhoods, but because of the history and present reality of segregation, which is itself caused by government regulations and the housing market and zoning and other aspects of government regulations that emerged during Jim Crow, access to schooling, which happens through the neighborhood, it’s still highly unequal. So we need to do a better job in making sure that high quality services are provided to people living in those neighborhoods.

We also need to break down the artificial barriers that keep people in segregated neighborhoods. I think the most important of these are zoning laws that make it illegal to build anything other than a single family home on a large lot in many of the richest neighborhoods in the country. We can do better as a society in terms of providing the equality of opportunity, particularly through public services.

The other thing which I would mention is the equal access to markets portion of that. So one of the important ways that we don’t have equal access to markets is through the housing market. That causes a huge number of problems. Some people think like zoning laws could be compared to an airline offering a first class ticket and a coach ticket.

But that’s not really what’s happening. It’s more like local governments can prevent an airline from even flying. Say you’re a rich homeowner living in an affluent neighborhood and you’ve got 10 acres and you would love to sell this to a developer who could build an apartment complex and you can make a fantastic amount of money because the number of people living on this land would support a very high flow of rental income that you could benefit from. You’re prohibited in almost every rich neighborhood in the country from selling your property to a developer who would turn it into apartment building because of zoning laws. So that’s a mutually beneficial exchange that is not allowed because homeowners associations have some influence and control over local zoning processes.

The U.S. is very extreme on how it regulates housing compared to other countries and we have greater economic and racial segregation as result. For people who would like to live in better neighborhoods this is bad. But it is also bad for everybody because it creates higher housing prices, particularly in the big city. So doing way with those laws would be a very important first step to allowing greater participation, more equitable participation in the market. Other reforms are some of the ones that we have emphasized where I would try to take power away from the associations that control who provide professional services. A lot of those regulations are at the state level, but there are a few at the federal level that I would like to discuss as well.

Bob Zadek: What you have really said in almost every syllable of your remedy is two things. I would summarize it in two ways. Number one, it is reforming governmental action in order to cure income inequality, which means you don’t have to fix the immediate problem of taking from A just to give it to B, which kind of sounds immoral to me. And number two, you are saying the markets are the solution to the problem. That allowing access to markets, which is the phrase you used, will in and of itself be great strides in curing income inequality. Let the market solve the problem itself without the need to do wealth transfers which have a sense of immorality to it.

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Bob Zadek

Bob Zadek

http://bobzadek.com • host of The Bob Zadek Show on 860AM – The Answer.