Propaganda on Government Action and Inequality from David Leonhardt

July 10, 2020

It really gets annoying how all discussions of inequality in the media take the White Savior route, where we need the government to act to reduce inequality created by the natural workings of the market. David Leonhardt gave us another dose of this one today when he speculated about the state of the post-pandemic world.

While much of his speculation is interesting, he hypothesizes that we will see greater corporate consolidation in the post-pandemic world. He then says that this can lead to greater inequality, however, he holds out the hope that under a Biden administration, the government might take action to counter this trend.

First, it is important to note that increased corporate profits have been a relatively small factor in the rise of inequality over the last four decades. The vast majority of the upward redistribution was within the wage structure, with CEOs, Wall Street traders, doctors, and other highly paid professionals gaining at the expense of ordinary workers. Only about 10 percent of the gap between productivity and wage growth could be attributed to the shift to profits. Furthermore, the labor share had been rising in the tight labor market of the last few years, so this shift could well have been reversed completely if the pandemic had not hit.

This point is important not only because Leonhardt’s concerns about the impact of concentration on inequality may be misplaced, but because he ignores the real sources of inequality. In particular, government-granted patent and copyright monopolies have been a huge factor in the rise of inequality over the last four decades. Reducing their impact on the upward redistribution of income requires less government action, not more.

This point should be especially obvious to people paying attention to efforts to develop a vaccine to protect against the coronavirus. The government is paying companies billions of dollars to research and test a vaccine. Incredibly, it is also giving these companies patent monopolies, which will then let them charge whatever they want for a successful vaccine.

These monopolies are likely to be worth tens or even hundreds of billions of dollars to their holders. If the government instead went the route where it said that if it paid for the research, then it would be fully open and all vaccines developed can then be sold as cheap generics, it would both save the public an enormous sum in paying for the vaccine and mean that the shareholders and top researchers at these drug companies would not get so rich.

This issue of course comes up more generally. We will spend more than $500 billion this year on prescription drugs that would cost us less than $100 billion in a free market. The gap of $400 billion is roughly 20 percent of all before-tax corporate profits. There are similar stories in medical equipment, computer software, and many other major sectors of the economy.

If the government had alternative mechanisms to finance research and development it would redistribute less income upward, which would mean that we would have less inequality. The government also promotes inequality through its regulation of the financial sector, rules of corporate governance, and protection for highly paid professionals. (It’s all in Rigged [it’s free].)

Anyhow, it is apparently satisfying for policy types to say that we need good government to address the inequality that the bad market is giving to us, but this view has little to do with reality. First and foremost we need the government to stop structuring the market in ways that give us ever more inequality.

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