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The Government Intervention

Gary Becker inequality encourages people to invest in their education. Redistribution, in

contrast, brings inefficiencies as higher taxes and government handouts deter hard work. The

bigger the state, the greater the distortion of private incentives.

In China and India it has been freedom and better incentives that have been integral to economic

growth, however some of the inequality that is apparent today is inefficient rather that growth

promoting. The Economist came up with various reasons:

1. Countries with the biggest income gaps, increasing inequality is partly a function ofrigidities and rent-seekingbe it labour laws in India, the hukou system and state

monopolies in China or too-big-to-fail finance in America. Such distortions reduce

economies efficiency.

2. Rising inequality has not, by and large, been accompanied by a smaller (and hence less

distortive) state. In many rich countries government spending has risen since the 1970s. Thecomposition has changed, with more money spent on the health care of older, richer folk, and

relatively less invested in poorer kids. Modern transfers are both less progressive and less growth-

promoting.

3. Recent experience from China to America suggests that high and growing levels of income

inequality can translate into growing inequality of opportunity for the next generation and hence

declining social mobility. That link seems strongest in countries with low levels of public services

and decentralised funding of education. Bigger gaps in opportunity, in turn, mean fewer people

with skills and hence slower growth in the future.

The area of inequality and social mobility showed that the USAs GDP growth was inversely

correlated with their inequality of opportunity, but not with overall inequality. Known as the Great

Gatsby Curve (see below) this suggests that countries with higher Gini coefficients tend to have

lower inter-generational social mobility.

http://econfix.files.wordpress.com/2013/01/great-gat-curve.png

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If we are concerned, as I hope we are, about fairness, justice and those on the

very lowest rungs on our society's economic ladder, there are far better ways to

redistribute resources and tilt our playing fields toward the disadvantaged than

by pushing legislation that costs us inefficiency without making any dents in the

underlying equity problemand through unintended consequences can actually

harm those most in need of assistance. The fact that proponents of the usual set

of policy prescriptionsminimum-wage laws, living-wage ordinances, rent

control, and so forthremain adamantly opposed to any means-testing for

recipients suggests that their agenda is much more finding ways to punish

corporations and tilt playing fields in their selfish favor rather than to help the

poor. In addition, these laws and public policy restrictions can have deleterious

effects on our economy as a whole as well as foster and re-enforce economic

nonsense. There are far better ways to address serious equity concerns in our

society than are usually touted on bumper stickers and protest posters.

"Far too many of our public policies are one-sided or asymmetric in nature and are

based on the assumption, in the face of very little evidence, that one allegedly poorly

informed, weak party needs protection from a powerful, unscrupulous economic

adversary."