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What Warren and Sanders Get Wrong About Wealth Inequality (And Capitalism)

October 17, 2019 in Economics

By Chris Edwards

Chris Edwards

Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., are fueling their presidential campaigns by generating anger toward the wealthy.

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Warren is blasting America’s “extreme concentration of wealth,” while Sanders is condemning wealth inequality as “outrageous” and “grotesque.” Both want to hammer the rich with a new annual wealth tax.

Moderate candidates on the debate stage Tuesday night were right to call Warren’s and Sanders’ tax and spending plans unrealistic. The almost twin leftists are also oblivious that wealth inequality may reflect starkly different economic causes. As such, their broad-brush denunciations of wealth are a useless guide to public policy.

Consider three different causes of wealth inequality: cronyism, crowding out and capitalism.

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Cronyism

Cronyism means businesses gaining subsidies and narrow regulatory benefits at public expense. Farm subsidies, for example, cost taxpayers and go to the wealthiest farmers. Cronyism increases inequality and undermines the economy, and so Warren and Sanders are right to complain about it.

Crowding out

Crowding out refers to government social programs displacing private wealth-building. Social Security, for example, reduces incentives for private retirement saving, and the program’s heavy payroll taxes reduce the ability to save.

Crowding out mainly affects the non-wealthy, so it increases wealth inequality. Warren and Sanders want to expand social programs, but that would make this problem worse.

Capitalism

The two candidates are also wrong about capitalism. The explosion of new technologies in recent decades has made many entrepreneurs rich. The Forbes list of the wealthiest Americans includes many people such as Robert Pera, founder of Ubiquiti Networks, which brings low-cost internet to underserved and rural areas around the globe. Such billionaires help uplift the poor, so punishing them with a wealth tax — as Warren and Sanders propose — makes no sense.

The three causes of wealth inequality are evident in cross-country comparisons. Sanders complains that the United States has more wealth inequality “than any other major country on earth.” It is true that our Gini …read more

Source: OP-EDS

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