Friday, July 20, 2007

Compared to what?

Ben Bernanke has to be a good economist as well as a cool customer. I caught some of his televised testimony to Congress this week. The questioners used the occasion to position themselves squarely on the side of "fairness" and to assert their concern that there was too much inequality.

But writing in yesterday's WSJ, Arthur C. Brooks notes, "... the evidence reveals that it is not economic inequality that frustrates Americans. Rather, it is a perceived lack of opportunity."

Do most Americans aspire or envy? Cannot increasing wealth at the top signal greater opportunities to aspire to? Can that incite more entreperenurial activity? Do we then get more growth? "The rich are getting richer faster than the poor are getting richer. So what?" asks Brooks?

Robert H. Frank introduces the concept of "Positional Externalities." Greater income inequality is a source of unhappiness as it reveals itself via increasing consumption inequality. Frank makes an efficiency argument for a progressive consumption tax (to replace the progressive income tax).

Clearly status quo tax law and practice compare poorly with almost any reform proposal. Comparisons with reforms that would incite greater entrepreneurial success would be far more useful.