The Solution to Income Inequality is to Empower People

Income inequality is on the minds of journalists and political candidates.  It’s on the lips of people who worry about social justice.  I think income inequality is a symptom and solving for it won’t change anything.  There are deeper problems that we can attack as a society which will do a lot for the symptom.

With the innovative technical tools that have been developed in Silicon Valley (and other tech centers), we have the ability to design policy to empower the individual. The promise of artificial intelligence, and virtual reality will enable even more tech tools that can make government policy a lot better, and cheaper.

The solution for income inequality isn’t simple.  It’s daunting to even tackle it in this blogpost.  Here are some assumptions that I make when thinking about the problem.

The policies that will solve for income inequality empower people.  They don’t “take care” of people.  People shouldn’t be warehoused and pushed aside or ignored from cradle to grave.  People are assets.  They aren’t liabilities to society. Successful policy isn’t about “handouts” or “hands up”.  Policy should make it easier for individuals to control their own actions, and make their own way. There is dignity in work.  There is dignity in the struggle.  There is no dignity in government handouts.

That’s not to say government doesn’t have a role to play.  It does.  Laissez-Faire works to a point.  But the problems are too deep, too ingrained for government to entirely walk away.

Our society is not based on a “zero sum game”.  It’s based on opportunity (the pursuit of happiness).  It’s not based on pure equality in every facet of life, but the equal opportunity to pursue life.  America is a capitalistic free enterprise society. This core principle ensures that income inequality will always be present in our society.  People will always be entering our society (and we want them) and transitioning through our society.  Usually, they start at the bottom.

Instead of focusing on income inequality, we should be creating policy that focuses on income mobility and economic opportunity.  Most of the policies on the books in America today make those two concepts harder to attain.

(end of assumptions!)

Why is it on the minds of so many in the tech community?  The largest US tech centers are located in intensely hard left wing Democratic areas, so the topic is talked about a lot.  Many of tech people I know inexplicably believe thatSocialist Bernie Sanders has the solution for inequality.  He is a Democratic candidate for President, and a Senator from Vermont.  If it scares Democrats that Trump is polling well, it frightens me more that someone like Sanders even gets traction.  Sanders solutions are not a solution.  Income inequality won’t change, and will be made worse.  By the way, Hillary Clinton doesn’t have any novel ideas or solutions about solving it either.  Her proposals would make it worse as well.

Paul Graham wrote an essay which was widely read and commented on which you can read here.  He is a leader in the startup tech community.  He startedYCombinator, one of the best tech company accelerators in the business.  His actions have caused you and me to have a better life on earth, and have created a lot of opportunity for a lot of people.

Mark Suster was on Bloomberg Television, and wrote about it here.  Mark is a successful entrepreneur and venture capitalist at Upfront Ventures in Los Angeles.  Mark is investing in the innovation of tomorrow.  One of the things I love about Mark is he is not afraid to put it out there.

Albert Wenger of Union Square Ventures in New York is thinking about it too. Because of the pace of innovation, and the displacement of traditional jobs, Albert proposes a basic income for people supplied by the government.  I agree with this in theory, but would take a far different approach to get there.  I would expand the earned income tax credit (EITC) significantly.

Paul, Mark and Albert lie on the left side of the political spectrum. Based on what I have read from them, Paul is probably more to the left than Mark or Albert.  All are highly intelligent.  All are principled.  All are straight (meaning honest), and good people.   I have met Mark and Albert personally, but have never met Paul.   Interestingly, on many topics I agree with the outcomes that they desire, but disagree on the road we should take to get there.

I decided to blog about this because I am on the right side of the political spectrum.  In the startup community, we are a minority.  I am an out of the closet Libertarian/Conservative Republican in Chicago.  For those of you that live around a bunch of Republicans, you can’t imagine how difficult it is to be out of the closet. For those of you that are like me and live in highly Democratic areas, you can empathize.  The community isn’t exactly welcoming, and in fact often is highly discriminatory.  Overtly so.

I believe in markets, and I believe that every individual wants the best thing for themselves and their children.  I also think debates about income inequality get entwined in normative economics which is not productive. Professor John Cochrane uses positive economics to solve problems.  He wrote about income inequality here and here.  Markets are central to human existence, and have been since the beginning of time.  Markets solve problems.

One of the reasons that I really enjoy seed stage investing is every time I make an investment, it creates the opportunity for a free enterprise business to make lives better.  Money is just a by product of the effort it takes to build a company.  The real reward is bringing your passion to life through hard effort.

When outsiders view the tech community, they tend to focus on the wealth that people like Mark Zuckerberg or Bill Gates have.  Zuckerberg and Gates are statistical outliers.  However, they created a lot of wealth for millions of others by creating the companies they built. Almost all tech exits are between $20M and $60M dollars for the whole company.  Those smaller exits create wealth for founders, employees, and investors but not like most perceive.  Gates created more economic opportunity by his creation of Microsoft than he ever will through his foundation.

What public policies get us to the point where everyone can take advantage of the opportunity that America offers?

Professor Gary Becker’s research provides the answer.  People do better when they grow up in a two parent household.  They do better when they have moreeducation.  They do better when they stay off drugs and when they are healthier.

We were warned by President Eisenhower about the “military industrial complex”. But, today we have massive segments of government and non-government organizations that benefit from the “Industrialized Poverty Complex”.  It benefits by keeping plenty of people in poverty.  American governments have spent trillions of dollars fighting the war on poverty with zero success.  More money isn’t the answer.

What public policies in place today are holding people back?  Here is one example.

Unemployment benefits are paid to the long-term unemployed.  Many on the right would simply end benefits after a fixed period of time.  On the left, the solution would be to increase the monetary renumeration in the benefit.

Instead, Unemployment benefit programs need to have skills training and a lot of help with matching workers to jobs.  Instead of a check, it should be structured as a voucher that lets individuals choose the training they want, and the job matching service they want.  The goal of any such program should be to train the worker to transition to a new job, rather than to simply provide cash benefits to allow them to meet their basic needs. People are an asset, not a liability.  Workers who have been  unemployed for more than 6 months should get training and then placed in jobs through wage-subsidy programs that allow some share of the wages to be paid by the employer and the rest to be paid by the unemployment insurance program.

Oh, by the way, entire businesses that help people will crop up around this problem if we focus on empowering individuals and not masses.

Here are the policies that have to be changed and structured differently if we want to make sure everyone has access to income mobility and economic opportunity:

• Minimum wage laws
• Progressive taxation and higher marginal tax rates
• Corporate tax laws
• Workers compensation laws and regulations
• Policies and regulations that make it harder for individuals to open small businesses
• Redistribution policies based on “fairness”
• Government mandated or enabled unionization of workforces
• Bureaucratic, centralized one size fits all standardization
• Policies discouraging marriage
• War on Drugs
• Mandatory sentencing for non-violent crimes
• Policies against school choice
• Subsidies
• Mandated regulation
• Estate tax laws
• Government control of large swaths of land (added from the comments)

It is not that our government has just gotten too big.  It has.  The other problem is our government policy is poorly designed.  It is designed to serve masses, and not the individual.  Policies limit freedom.  They limit choice.  One size fits all is a really bad way to regulate in a lot of cases.

Simply enabling freedom of choice will create opportunity that one can only imagine.

tip of the hat to Glenn Reynolds and Instapundit.

tip of the hat to Doug Ross.