Vox Clamantis in Urbe. Who Cares What Other People Earn? or Income Inequality Part I

by Jacob Oppenheim

Over the past year, I have written a series of columns about housing regulation, transportation policy, and occupational licensing, among other topics, which address how seemingly sensible government mandates may lead to significant impoverishment, especially in urban areas. Before addressing the issue of income inequality, it is worth reviewing these ideas and linking them together to see how seemingly well-meaning mandates have amounted to a regressive transfer of wealth from the poor to the rich. In 1950, only one in twenty workers had a job that required some form of licensing; today, that number has reached one in three. Jobs that require licensing are overwhelmingly held by low- and middle-income workers. Licensing stifles competition, protects the wages of incumbents, and constitutes a highly regressive tax on the unemployed, in the form of long training periods (it takes 140 days to become a manicurist in Oregon), and expensive, useless coursework (frequently only available at for-profit institutions), and testing. A recent report from the libertarian Institute for Justice is littered with examples of the sheer ridiculousness of our licensing regime, a system that would be comical were it not for its perverse consequences.

For those who have a job, however, a thicket of overlapping rules, regulations, and mandates makes housing far more expensive than it should be. Given market competition, the price of housing should fall to equal the cost of construction, a value ($300 per square foot) so low that decent housing could be afforded by the working poor of New York. Yet, by creating restrictions that limit where one can build and how dense one may build there, we limit the supply of housing, especially near public transportation. A brief glance comparing the area around any outer borough express subway stop with that around, for instance, 86th Street and Lexington Avenue in Manhattan, should easily convince one of the vast untapped potential for building housing within the city. Were these regulations overturned, the exceedingly long and expensive processes of community approval and environmental review would keep most potential builders from the market. After all, who has the ability, except the largest real estate firms, to continue to borrow money amid interminable delays without seeing any returns? Perhaps the greatest example of the well-off sticking a finger in the eye of the poor is historical preservation. The large tracts of land that wealthy, mostly white, members of the urban elite have cordoned off from development, to avoid having to pay the economic cost of living at low density in prime locations (mostly in Manhattan), are perhaps the clearest example of the rich “rigging the game” against the lower and middle classes.

Provided a job and housing though, there are still sclerotic and wasteful local and state bureaucracies that frequently appear to be more concerned with providing good jobs to members of the American Federation of State, County, and Municipal Employees (AFSCME) than with providing services to the public at large. I have covered the issue of corrupt transit-worker pensions and how archaic work rules force the MTA to expend far more on labor costs than it should. I intend to return to these subjects in the next year to demonstrate how even the best reform proposals cannot be implemented without a shredding of the public-sector union contracts that bind the hands of those who want to serve the populace at large.

Rather than focus on the inequality of income, we should focus on the costs of living a healthy, productive, and fulfilling life. Many of the proposals I have outlined above would work by decreasing the cost of living, mostly in the form of housing, which frequently consumes more than one-third of an individual’s income. Over the past 50 years, the cost of food has dropped from 33 percent of average household income to 7 percent, mostly due to increases in agricultural efficiency. Manufacturing is a marvel of efficiency: today 80 percent of poor households have air conditioning, up from 34 percent in 1970, and three in four own a car or truck. Electronics and entertainment devices are cheap enough that two-thirds of poor households own a DVD player, and half own a personal computer. Liberalizing the housing market and the services sector by ending most forms of occupational licensing would make the money earned by the poor travel much further. Lower rents would allow stores and restaurants to charge dramatically lower prices. The cost of groceries and especially restaurant meals in New York City is due mostly to the extremely high commercial rents that local merchants must make up for in the cost of their goods, not the high cost of preparing quality food. A brief trip to a decent suburban restaurant is convincing in this regard. The poor deserve to be able to purchase the necessities of life with enough left over to afford some measure of luxury and savings.

Ultimately, we cannot determine the optimal level of income inequality for economic growth, social peace, and the pursuit of happiness at a societal level. It is easy enough to imagine a level of general prosperity high enough that even extreme inequality would not pose a problem: if nearly everyone makes enough money to purchase all he or she can reasonably consume, who cares if a few outliers make one hundred or one thousand times as much? Income inequality is a canard, distracting us from the true causes of societal impoverishment. On the local level, these constitute extreme regressive transfers from the poor to the rich in the form of occupational licensing, housing regulation, and an inefficient and corrupt public sector. On a national level, these are the issues that dominate the national debate: the exploding cost of healthcare and the similarly enormous rise in the cost of higher education. These are the debates we should be having, rather than wringing our hands in anguish over income inequality. In my next column, I will explore the roots of income inequality and further demonstrate how little of a threat it poses to society.

July/August 2012

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