Tyler Cowen writes, “The economic fallout from these events [the crashes, the bailouts, the nationalizations] is dominating the headlines. The intellectual and ideological fallout we are just beginning to contemplate.” Here's what I'm beginning to contemplate.
If a high level of income inequality is a side-effect of voluntary exchange according to just rules, then what's the problem? Market liberals tend to suspect there is no problem. What I'll call “democratic liberals” think there's a huge problem: the threat of economic inequality to democracy. Market liberals support democracy and democratic liberals support markets. The main disagreement, I am convinced, concerns views over the point of democratic institutions and their function in securing liberal values.
Some apparent democratic liberals are so fixated on the intrinsic value of deciding things collectively that any liberal commitments they may have turn out to be completely incidental. (Benjamin Barber is a good example. There's a good bit of liberal rhetoric, but he is a Rousseauvian “forced to be free” democratic communitarian — a straightforwardly illiberal view in my book.) I think of those people as “democracy fetishists” and I set them aside.
Non-fetishistic democratic liberals see a certain ideal democratic system as either instrumental to or constitutive of a society guided by authentically liberal values. In either case, sound democratic institutions are necessary to the security of our basic liberties. Democratic equality, according to which each citizen has an equal voice in determining the rules under which they must live, helps ensure that no group is able to dominate, oppress, and exploit other citizens. “One man, one vote” is a fundamental principle of democratic equality, but it's usually seen as insufficient. Adult citizens may be on equal footing when it comes to votes, but we are very far from equal in “political resources” — all the means at our disposal for shaping the ultimate product of the democratic political process. Campaign finance rules are generally meant to secure relative democratic equality by limiting the inequality in certain political resources. One of the chief arguments for public financing of primary education is that citizens require some development of their intellectual capacities and a certain fund of knowledge in order to be able to effectively defend their interests in concert with others my means of the democratic process.
And then there is the idea that simply limiting economic inequality through redistribution will limit inequality in political resources, and thereby limit the ability of the rich to rig our institutions to their advantage. Paul Krugman, an archetypical democratic liberal (and one who understands markets very well, thank you), thinks this is already happening. For Krugman, it is so urgent to combat economic inequality because the liberties of most are threatened if the super-wealthy few are able to capture the institutions meant to secure the liberties of all.
But I don't get it. First, there is often an assumption of class interest that is clearly false. The self-interested voter hypothesis does not do well generally. And the wealthy are very far from unified in their politics. As Gelman et al point out, the poor tend to vote pretty much alike (Demmocrat) but the rich are quite divided. Judging from their book, the best way to cut it I think is this: rich people who go to church are Republicans. Rich people who don't are Democrats. But isn't this a distraction?
It seems to me that money is a relatively insignificant source of inequality in political resources. I've shared a house with two different guys who have clerked for the Chief Justice of the Supreme Court. Those guys probably had more influence in determining the effective policy of the U.S. government, just as a matter of doing their day-to-day work, than it is ever possible to buy with campaign ads. A JD from Yale, Harvard, Chicago, etc. is a ticket to professional networks that exert immensely disproportionate influence on the political process. Or consider Tyler's other former debate partner, Randall Krozsner, now on the Fed Board of Governors. Could the wealthiest man in the world hope to influence American economic policy more than Krozsner? Unlikely. Indeed, Ben Bernanke's Fed is basically unilaterally controlling the American and world economies without asking any of us for input. But the point is not the Bernanke is the most powerful man in the world. The point is that MIT and Harvard economics Ph.D.s have political resources that money cannot buy. Neither Marty Feldstein nor Paul Krugman need be in government to matter more to economic policy than a billionaire could dream. I don't mind this. I like the technocratic elitism of the U.S. economics and legal bureaucracies. But then it's hard to get exercised simply because some people are really really rich.
It strikes me as comical that our economy is now more or less ruled by a benign technocracy almost entirely outside democratic control, but most democratic liberals choose to complain that some billionaires are getting bailouts. If the problem with economic inequality is the threat to democracy due to large inequalities in political resources, shouldn't democratic liberals be freaking out over the fact of the Federal Reserve, or about the immensely disproportionate influence on public opinion and policy by New York Times columnists and ulta-elite academic economists? It seems to me that if you're not completely fliping out over these things, you can't be genuinely interested in democratic equality. So if you insist on flipping out over income inequality anyway, it can't be a certain ideal of democracy that's animating you. You're going to need a different story to tell.
Here's my story. Roughly meritocratic inequalities in political resources are OK. We want the democratic process, which cannot be counted on to yield high-quality policy, to be constrained and guided by legitimate experts. But then if wealthy people are better-educated, and better-educated people are more likely to make quality decisions about policy, than a democratic system more responsive to the wealthy than to the poor is more likely to deliver quality policy (i.e., policy that does what it is intended to do). And if wealthy, better-educated people are more likely to be committed to liberal values overall, and there's evidence that this is the case, then money-based inequalities in political resources may deliver liberal goods more reliably than a system under strict and comprehensive democratic equality.