Better Market-Oriented Proposals That Reduce Income Inequality

I was initially excited to see that progressive Dean Baker has written a piece on “Eight Market-Oriented Proposals That Reduce Income Inequality” for AEI. It begins promisingly by criticizing overly strict occupational licensing for high-skilled workers.  But it then studiously avoids the really big wins.  Namely:

1. Immigration.  High-skilled immigration reduces conventionally measured inequality by making high-skilled workers more abundant relative to low-skilled workers.  And low-skilled immigration drastically reduces properly measured inequality by moving the absolutely poor to First World prosperity.  Estimates of the size of this effect are vast.

2. Housing deregulation.  Letting developers build more housing in expensive areas of the country directly reduces inequality by making housing more affordable.  And it indirectly reduces inequality by making it more affordable to live in high-wage areas of the country.  Estimates of the size of this effect are also vast.

To be fair, Baker does discuss occupational licensing as a barrier to high-skilled immigration.  But that’s only the tip of the immigration iceberg.  And his only “market-oriented proposal” for real estate, bizarrely, is a surtax on vacancy!  On the surface, he’s got a decent case:

A vacant property tax can have a similar effect on the real estate market to that of reducing unemployment benefits and other supports on wages.

But this misses the bigger picture: A vacancy tax also reduces the incentive to build housing in the first place, so it’s a lot more like a tax on firing workers than a reduction in unemployment benefits.  In the short-run, such a tax saves jobs, but in the long-run, it makes employers nervous about hiring.  A vacancy tax, similarly, keeps rental units on the market during bad times, but reduces the long-run payoff for construction.  Baker is flatly wrong to say, “Unlike most taxes, all the side effects of this tax are positive.”

Governments around the world willfully create poverty and inequality.  I’m glad to see Baker calling attention to these ugly facts.  But focusing on relatively minor and not-so-market-oriented examples spreads the false impression that government-sponsored poverty and inequality is but a marginal issue.  Alas!

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