Instead of denying that pay motivates people to earn their success—a concession that undermines the case for income redistribution—many advocates of redistribution deny that success is earned. If income is unearned, then we can redistribute it without slowing growth or reducing middle- and working-class incomes, even if incentives motivate effort, risk-taking, investment, and innovation. If pay is unearned, it’s fair to take it away.
Pay may be unearned for a variety of reasons. The price of talent—the wages of the successful—may rise for no other reason than talent is in short supply and cannot expand to meet the growing demand for it. In that case, a shortage merely redistributes pay from the rest of the economy to talent without talent doing anything more to earn its increased pay. If talent has done nothing to earn their increased pay, then taking away the increase will similarly have no effect on their behaviors.
There are other ways for pay to increase without the increases being earned. CEOs may raise their pay by engaging in faux negotiations with their cronies on their boards of directors. Competitors may cooperate in oligopolies to increase profits by reducing competition in order to raise prices or lower employee pay, which would be impossible if competitors truly competed with one another. Companies may use asymmetrical information to sell unsuspecting customers products they don’t need, increasing the companies’ returns. Hedge fund managers may use inside information to fleece naive investors. Political contributors may use the government to gain unfair legal advantages. Regardless of the means, when companies or workers increase their pay without serving customers more effectively than their competitors, we can redistribute their increased pay without detrimental consequences to the rest of the economy.
Whether advocates of redistribution show how much the 1 percent’s share of GDP has increased over time, calculate how much more the middle class would have earned if the 1 percent had earned less, or compare the faster growth in overall productivity to the slower growth in median incomes, the implied argument is the same. We can redistribute the success of the wealthiest without consequence because their success is unearned and comes at the expense of others. Otherwise, such calculations are misleading.
Purveyors of the success-is-unearned myth blame three different targets for taking what they haven’t earned: individuals, businesses, and political contributors. Each line of attack takes a different form. But all of them hinge on the same underlying premise—that growing success is unearned.
Ultimately, advocates of redistribution who believe inequality stems from rising cronyism advocate for using cronyism—minimum-wage laws, unions, and the political process—to take back what was allegedly taken unfairly by the 1 percent. The proponents of these policies mean well, but both their diagnoses and their prescriptions are wrong. Ironically, their solutions make matters worse for the very people they are intended to help. In the long run, they slow middle- and working-class employment and wage growth.
Efforts to deny the earned success of the 1 percent and link their success to the stagnant wages of the middle class in the long run simply do not withstand scrutiny. A massive misallocation of resources necessary to account for rising U.S. inequality—whether from cronyism, oligopoly pricing, asymmetrical information, monopsony, a shortage of talent, or any other form of unfair negotiation—should have slowed growth relative to other high-wage economies with more equally distributed incomes. Instead, U.S. growth accelerated.
There is a far more plausible explanation for both America’s relatively faster growth and rising income inequality: American innovators were more successful than their counterparts elsewhere. Simply put, they earned their success.
Adapted from The Upside of Inequality: How Good Intentions Undermine the Middle Class by Edward Conard with permission of Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © Coherent Research Group, Inc., 2016.