Chapter One

Egalitarianism and the Market

            When the definitive history of the twentieth century is written, one of its major themes will be the rise of the modern welfare state.  The twenty-first century will have to decide whether this great experiment with redistributive government was a success or a failure.  I argue in this volume that it has been largely a failure.

            In 1900, government played a very small role in the day to day activities of American citizens.  There was no income tax.  No Social Security.  No federal welfare programs.  No minimum wage laws.  No federal involvement in education.  No affirmative action.  Government was truly small and limited, spending well under 10 percent of our incomes in total, with the federal government spending only about three percent. 

            No one today would describe our government as either small or limited.  Government now spends more than a third of our incomes, with the federal government alone spending more than 20 percent.  Most of this spending is on welfare state programs, that is, programs which have as a major goal or consequence the transfer of income earned by some people to other people.  Roughly two-thirds of federal spending is of this type.

            Welfare state policies have both benefits and costs.  The benefits are generally obvious, as they take the form of government providing goods, services, and cash to people.  Many of the costs are not so obvious.  While the taxes required to pay for these programs are often apparent, there are many hidden costs that go largely unrecognized.  A major purpose of this book is to explain and document these hidden costs.

            For example, are you aware that your before-tax income is substantially lower as a result of the welfare state?  The research cited later in this book suggests that the average American has a before-tax income that is about 25 percent lower today as a direct result of the redistributive policies adopted in the twentieth century.  That is a substantial cost, and it is not the only cost we bear in paying for the welfare state.

Chapter Three 

Group Inequalities 

            When the word “inequality” appears in the news media, as likely as not it is in the context of recognizing disparities among groups:  Blacks earn less than whites; Hispanics earn less than whites; women earn less than men, and so on.  At first glance, it is surprising that so much attention is given to these inequalities among group averages because the differences are much smaller than those that separate, for example, the poor and the rich (irrespective of race or gender).   Differences among groups do exist, however, and egalitarians harp on any differences that help to promote their redistributionist agenda.

            The conventional wisdom holds that group differences are the result of discrimination in a racist/sexist society.  This seems to contradict our conclusion (in Chapter One) that markets tend to generate “equal pay for equal work”—that all workers who are equally productive will receive the same wages regardless of race or gender.  But our analysis there did not incorporate discrimination.  In this chapter we will extend the basic model to include discrimination, with some surprising results—notably we will see that discrimination may exist and yet have no effect on the earnings of discriminated against groups.  We will explain this analysis in the next section, and then turn to a consideration of what other factors may contribute to differences among group outcomes.

            First, however, some facts that cast doubt on the view that discrimination is the sole reason for differences among groups.  From the decennial census of 1990 we learn that the median family income of blacks was 66 percent of the overall median, while the median for Hispanics was 80 percent of the overall median.  These figures, of course, are widely known and comport well with the discrimination story.  But we also find that the incomes of Chinese families are 20 percent above the national median, and that Asian Indian families have incomes 49 percent more than the national median.  Further, Japanese families are 38 percent higher and Jewish families are also 38 percent higher.[i]  If discrimination is the overriding determinant of differences in the economic fortunes of groups, how do we explain the higher incomes of these groups?  Does society discriminate in favor of Japanese, Chinese, Indian, and Jewish families and against whites?  Of course that is not true, but these facts should suggest that factors other than discrimination are capable of producing substantial differences among groups.