Conservatives are supposed to be comfortable with the idea of inequality. After all, we’re not all equally talented and if we don’t allow people to make the most of their talents, then the economy as a whole will suffer. In other words, enforcing equality makes us all poorer.
But might there be circumstances in which it is inequality that makes us all poorer? Joseph Stiglitz, whose new book on the subject is extracted in Vanity Fair argues that such circumstances apply to our present economic crisis.
For a start, growing inequality causes what he calls the "consumption problem":
- "Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do."
Another way of expressing this idea is that the rich save a greater fraction of their incomes than the rest of us. But should conservatives be worried about this? Surely, more saving means more investment – and that’s good for the economy, right? Well, that depends on what the rich are investing in. If it’s government bonds, then inequality creates a line of credit for spendthrift governments.
Another issue that Stiglitz identifies is the "rent seeking problem". Unusually for an economist, he bothers to explain what rent seeking actually means in this context:
- "The word ‘rent’ was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to ‘wages,’ for example… The term "rent" was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly… In a broad sense, "rent seeking" defines many of the ways by which our current political process helps the rich at the expense of everyone else, including transfers and subsidies from the government, laws that make the marketplace less competitive, laws that allow C.E.O.’s to take a disproportionate share of corporate revenue… and laws that permit corporations to make profits as they degrade the environment."
Conservatives should make a lot more of the rent seeking problem. For one thing, it challenges the infantile leftwing obsession with how much money successful people make and, instead, asks us to consider how they made it. Where people work hard to make and sell useful goods and services then that should be recognised and rewarded. But where money is made through rent seeking, then it is the undesirability activity in question that should be targeted – for instance, reckless lending by banks – and not an arbitrary level of income that would punish the genuine entrepreneurs and innovators on which our prosperity depends.