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Interview: Focus on income inequality misplaced

GMU's Cowen sees reduction in opportunities to advance as a growing problem

Much political debate in recent years has focused on income inequality in the United States and what, if anything, the federal government ought to do about it. Tyler Cowen, professor of economics at George Mason University and director of the Mercatus Center, has studied inequality. While in North Carolina to deliver Duke University’s Hayek lecture, Cowen discussed income inequality with Mitch Kokai for Carolina Journal Radio. (Click here to find recent CJ Radio episodes.)

Kokai: We know that this has been a big issue, especially among Democratic politicians, in recent years — saying that that is a huge problem in the United States. When you, as an economist, look at this issue, is this as big a deal as people are making it out to be?

Cowen: I would reframe the problem a little. I see the issue as lower opportunity at the bottom. The problem isn’t the gap between the top and the bottom. If Bill Gates or Steve Jobs earns a lot of money selling a product at a global scale, that’s a good thing, not a bad thing. But opportunity in this country, in some ways, has dried up for a lot of people. The single biggest thing we could do to fix this would be to improve our systems of education, especially at the K-12 level.

Kokai: So the idea of focusing on income inequality — not the right way to look?

Cowen: I would focus on barriers to opportunity, which for many people have gone up. So we shouldn’t deny the problem, but again, the gains of the well-off are not causing the lack of opportunity for the less well-off. So I think “inequality” really is the wrong word to be framing this with.

Kokai: When you hear the politicians, whether it’s those on the Democratic side or Republican side, and talking about what we ought to do about the economy, are any of them on the right track, from your perspective? Or do they all have things that they could do to improve their programs?

Cowen: None of them are on the right track. That’s pretty obvious at this point. There have been a lot of ideas in the debates this year, a lot of passion, but not that much careful analysis really, on any side.

Kokai: So if we were trying to look at the biggest economic problems that the United States faces right now, where should we be looking? What kinds of things should we be looking at doing?

Cowen: Well, with respect to the lack of opportunity, another big problem we have is that it’s much more costly to move into a dynamic city, to try to get a better job. So in the 1950s, the 1960s, if you wanted to move to Manhattan, Los Angeles, places of that kind, as a way of getting ahead, you were able to afford cheap living quarters. But they don’t build more land, and we’ve put a lot of regulations and restrictions on building.

So this is now much harder. I think this is a major problem. It’s a silent problem. On any given day, there’s no crisis that you see. But it does mean that it is harder for people to find pathways to opportunity. So I think we ought to do more to deregulate building, especially in our most dynamic cities. And I would start with San Francisco.

Kokai: And this is certainly a situation [in which] the people who are already there see some benefits from having the tight restrictions. But as you mentioned, if you’re not already there, this creates a major barrier, doesn’t it?

Cowen: Especially if they own real estate. They don’t want to deregulate the market. But we more and more have an economy where the people who got there first entrench themselves and protect their privilege by passing laws and regulations. And again, this is one of the biggest problems for the American economy today. And it does contribute to what people are describing as this inequality problem.

Kokai: Is anyone who has any position of power looking at this situation in the right way? Or are we just chasing things that we shouldn’t be chasing when we’re talking about improving our economy?

Cowen: The political dialogue on remedying America’s opportunity problems … people are pretty aware of education. But very often, they’re not willing to do that much about it. One nice thing about North Carolina is simply what percentage of the students are, in some way, outside of the state system — be it home schooling, private schools, schools which are not certified or accredited in the typical way. So this makes the system here more competitive.

But I think in at least half of America we need more school choice. We need more experiments with charter schools, more home schooling where that’s appropriate or possible. And a lot of it’s a question of political courage. I think at this point a lot of people know.

But when you look at building restrictions, that has received a lot less attention. It’s much more invisible. And we need a much more open dialogue about that. And in some ways, this is maybe more likely to come from the Democrats than the Republicans.

Kokai: And why would that be?

Cowen: The people who suffer the most from this, very often, are either Democratic voters or probably they potentially would be Democratic voters if they were to vote: people who are new to this country, people who are lower-income, possibly ethnic minorities. They’re the biggest losers. But again, I don’t think there’s a lot of awareness of this problem compared to, say, debates over the minimum wage.

Kokai: So if Democrats were very interested in dealing with the issues that are the issues of their voters, we might actually see some action on these things? Some positive action on these things?

Cowen: There’s some talk. There’s not much action. If you look at the people who are on President Obama’s Council of Economic Advisers, a lot of them are well aware of this problem. I don’t mean to speak for them, but I think they would agree with some version of what I’m saying.

But these regulations are state and local. And it’s quite entrenched. The role of the federal government to do something is not so great. One thing we could do is just to put more building regulation at the state level rather than the city level. And when that’s the case, there’s a lot of data that state regulators tend to allow more building because they’re less captured by the very local landowners. So that’s one thing we could start by doing. We’re not close to doing it, however.

Kokai: You talked about regulation on building. Another thing that we’ve often heard is about the number of regulations, or the amount of regulations on people who want to start a business, the entrepreneurs. Is there a lot of work that needs to be done there as well?

Cowen: Occupational licensure is a big problem. Now, over 30 percent of the jobs in this country require some kind of legal license. And you may think this is necessary for, say, a doctor. But when you look at a barber, an interior decorator, these are just barriers to competition. They keep people out. They raise prices for consumers. There’s just no good reason to have them.

But again, at especially the state level, it’s hard to see a lot of change has happened because of inertia, and there are entrenched interests. And the people who are most aware of this tend to be talking and operating at the national or federal level, not at the state.

Kokai: Now people who follow these issues very closely have probably seen some of your blogs at MarginalRevolution.com or your column in The New York Times. But if you had the ear of a politician who’s about to say, “OK, we’re going to come up with some new policies,” what would be the first policy you’d like to see them do that’s a change from the status quo? … Let’s say, generic Republican politician. …

Cowen: I think the Republicans need a new language for talking about poverty and thinking about opportunity. Too much of the platform, for too long a time, has been about tax cuts for the wealthy. And right now, we’ve already pledged that money to the elderly. If we were to cut taxes now, we’d actually end up raising them even more five years from now.

So I don’t think that strategy makes much sense. I think the kinds of people who are voting Republican are narrowing in some disadvantageous ways. And the very recent Donald Trump phenomenon, I think, is a result of the fact that a lot of concerns of the Republican Party, as an institution, have become increasingly disconnected from concerns of actual voters.

Kokai: How about if you had a chance to speak to a dynamic Democratic politician who wants to make some positive change? What’s the first thing?

Cowen: I would say, “Teach your party some basic economics.” A $15 minimum wage is a terrible idea. That’s actually more than most manufacturing workers in Mississippi earn. It would put a lot of them out of work.

Think of trade and exchange in markets as a positive-sum game. Don’t talk about the corporations being evil all the time. Go into a kind of panic because a majority of the young people in your party are voting for Bernie Sanders, who is a self-professed socialist, and most of his economic ideas are very badly off. So I wouldn’t really know where to start.