Inequality at WSJ

By John H. Cochrane.  

"Andrew Blackman at Wall Street Journal asked several economists for ideas on “what to do about inequality?” As you can imagine, I argued with the question. If there is a question, it is opportunity not inequality.

Don’t kill the golden goose

It’s easy to reduce income inequality: Imprison the billionaires. Burn the evil capitalist businesses that generate their wealth and seduce us with wonders—iPhones, software, electric cars, Amazon, Walmart, miracle drugs, and so on. There, feel better?

Our billionaires kept a fraction of the benefit they generated for us by starting these innovative businesses. Their great wealth remains reinvested in those companies to serve us even better in the future. Just what is the problem?

It is right to worry about people of lesser means. But how does a kid who works at a carwash in Fresno even know how many billionaires there are, or what their net worth is?

We should worry about opportunity. Teachers’ unions destroyed his schools. Construction restrictions make moving to good jobs impossible. Business regulations, taxes, minimum wages and occupational licenses limit his opportunities. Social programs trap him by taking away a dollar of benefits for each dollar of earnings. To provide opportunity, start by getting out of the way.

Many people who worry about inequality hope to improve this kid’s life by taxing the innovators to send him a few more government checks—so long as he stays poor. But there aren’t enough billionaires to make a dent in the government’s ravenous appetite. And what a horrible vision: entrenched misery and idleness, in a stagnant society devoid of innovators, made only a bit better by a dwindling government check and dysfunctional social-service programs.

"Others who decry inequality want taxes to reduce the political power of the wealthy. But that hands even more power to the government. Fairly won inequality does not threaten democracy. Confiscatory taxation does. Don’t kill the golden goose.

*****

Forgive my brevity, there was a severe word count limit on this one. For an older and more comprehensive view, see this essay.

The other contributors were Emanuel Saez: “Tax the billionaires,” (to whom my first sentence is dedicated, with initially more colorful options), Raj Chetty: “Focus on upward mobility” (yes), Heather Boushey “Break monopolies” (Unions, more government spending), and Glenn Hubbard “Retrain workers for an AI-dominated economy” (I like Glenn a lot, but it was only 5 years ago that there was huge enthusiasm for retraining everyone to learn to code.) But you’ll have to go to WSJ for those."

Why Water Prices Are Rising

America’s water crisis is a governance problem, not a scarcity problem

By Julia R. Cartwright of AIER. 

"America is good at solving problems, but less good at recognizing when the “solutions” become the problem. Nowhere is this more evident than on your water bill, which has risen more than 27 percent over the past five years and is increasing at roughly twice the rate of inflation. Politicians and journalists point to aging infrastructure, climate change, and per- and polyfluoroalkyl substances (PFAS) contamination. They are not entirely wrong. What they often omit is how decades of well-intentioned government intervention have systematically weakened the market mechanisms that might otherwise help keep costs in check.

Consider gasoline. Drivers may not like what they pay at the pump, but the price is determined in global markets where no single regulator sets it. The market aggregates information from millions of producers and consumers and generates a price that, whatever its imperfections, reflects underlying conditions of scarcity and demand. Water operates very differently. Its price is shaped by a maze of legal doctrines, regulatory mandates, utility commissions, and interstate compacts accumulated over more than a century. Each layer places additional distance between the resource and the consumer, making prices less transparent and less reflective of underlying realities. 

This is what makes the situation so puzzling. Markets are remarkably effective at directing resources to where they are most needed. Hong Kong, Singapore, and Japan are three of the world’s most prosperous economies, yet they share one notable characteristic: a scarcity of natural resources. They possess little oil, coal, or rare earth minerals, and yet they thrive because markets reveal prices, coordinate investment, and allocate resources to their highest-valued uses. Scarcity, it turns out, is not an obstacle markets cannot overcome. It is often the very incentive that drives innovation and efficiency.

Water, by comparison, is an unusually ordinary resource. It is more abundant than oil, easier to treat than rare earth minerals, and across much of the United States, it literally falls from the sky. So why is America facing a slow-motion water crisis while Singapore can recycle wastewater to semiconductor-grade purity? The answer is not geology or climate. It is governance.

Some will argue that water is fundamentally different—a natural monopoly with relatively inelastic demand and pervasive externalities, where actions upstream affect everyone downstream. Those characteristics are real. Yet similar challenges exist in markets for oil, coal, and rare earth minerals, and markets have still found ways to move those resources across oceans to countries that possess little or none of them. To understand America’s water challenges, we must go back to a series of legal and political decisions that began before the Civil War and have compounded ever since. Let’s dive in (pun intended).

The first distortion predates federal regulation entirely. American water law split into two doctrines before the country was even fully defined. In Eastern and Midwestern states, riparian rights gave water access to whoever owned adjacent land; geography, not prices, determined access. In most Western states, prior appropriation, “first in time, first in right,” meant whoever diverted water first held the senior claim, regardless of the proximity of future landowners. Neither doctrine consistently allowed water to flow to its most productive use, as both locked allocation in place by accident of history. This was not a free market distorted by regulation, but one that was never permitted to form. 

On top of that foundation, Congress layered environmental mandates over many years. The Clean Water Act (1972) and the Safe Drinking Water Act (1974) set uniform standards every utility must meet, regardless of local conditions or costs. Each new regulated contaminant means a new compliance cost passed directly to ratepayers with no competitive check. PFAS regulations (2024) alone now add an estimated $1.5 billion annually in system-wide costs.

Meanwhile, most Americans cannot choose their water provider. One pipe, one utility, no exit.

Investor-owned utilities have learned to leverage that captivity through mechanisms that pass capital costs to ratepayers, combining the pricing power of a monopoly with limited cost discipline.

This dynamic, where customers have nowhere else to turn, creates a system ripe for upward price pressure with little accountability. And the Colorado River Compact (1922) illustrates just how deep this dysfunction runs: negotiated by political compromise, it divided water among states by seniority of claim, locking in agriculture’s consumption of 80 percent of the river’s flow simply because those rights are oldest. Meanwhile, cities that would generate far greater economic value per gallon are legally prevented from buying that water at any price. The result is a river stretched to its limits, serving yesterday’s economy by law, while growing urban centers go thirsty by design.

Decades of regulations that distorted water prices also resulted in them being too low in some 

municipalities. These layered laws subsidized the construction of entire cities in places that markets never would have chosen: dry desert cities like Las Vegas, Phoenix, and Tucson. The logic was circular: keep prices low enough that growth looks cheap, and the growth generates political constituencies that demand prices stay low. It is precisely the logic of subsidizing flood insurance for beachfront homes, except the moral hazard here is measured in millions of people and entire metropolitan economies that now require ongoing federal intervention just to stay hydrated. 

The solution is to move water more fully into the market, allowing prices to reflect scarcity and capital to flow toward conservation and innovation. In practice, that means a managed transition in which rates gradually move toward market levels, whether higher or lower. Most importantly, it means eliminating the policies that created the problem: below-cost agricultural water contracts, federal development subsidies that ignore water costs, and interstate compacts that lock 1922 decisions in place indefinitely. It also means stopping policies that make it artificially cheap to build the next Phoenix in the desert.

Your water bill isn’t rising because water has become more expensive. It’s rising because we’ve built a system specifically designed to ensure that price has little to do with it."

The Labor Share Fell. So What?

By Alex Tabarrok . 

"The share of Gross Domestic Income accruing to labor has been declining in recent decades while the share accruing to capital has been rising. In the graph below, I show labor compensation as a share of GDI (left axis). Labor share has indeed been trending down–some of this could be an artifact of the data, e.g. an increase in proprietor’s income (labor) mislabeled as capital income, more pass throughs and so forth—but for the purposes of this post I will accept that the labor share has declined. What does this mean?

 

The natural response is to think that because the share going to labor has fallen and the share going to capital has risen that there has been a transfer of income from labor to capital. That is possible but it is not the only interpretation and it does not follow mechanically from the share data.

I have also plotted total compensation to labor (in real terms) in the graph above and far from shrinking it is higher than ever and growing. Moreover the right axis is logged so you can also see that outside of recessions the growth rate of labor compensation looks quite steady (similar slope over time). (Labor compensation per member of the labor force is noisier but looks similar).

The recessions in 2008 and 2020 are worth noting because these are periods when the labor share was high and locally at a maximum! The reason, of course, is that GDI was shrinking in these periods more than labor compensation. In other words, capital takes a bigger hit than labor in a recession. This is a good reminder that a high share of GDI is not what workers most care about–a high absolute level of GDI is more important for the bottom line.

In short, the data are consistent—not proof of, but consistent with—a story in which capital has become more productive, raising output. More productive capital also raises the demand for labor, so while more of the new output goes to capital in the first instance, the pie is growing and labor’s absolute compensation has grown with it. Yes, if the shares had stayed constant and output had grown just as much, labor compensation would have been higher still. And if my grandmother had wheels, she would have been a bicycle."

Comment from Scott Sumner

"People often assume that if labor's share is falling then capital's share is rising. That is not always true, as GDI also includes depreciation and indirect business taxes, both of which have been rising as a share of GDI. So capital's share has risen by considerably less than labor's share has fallen.

Matt Rognlie showed that much of the rise in capital income has been the implicit rent on owner-occupied housing, which is not what most people think of when they hear "capital income". Another part of the rise is labor income being reclassified as capital income for tax purposes.

To the extent that inequality has increased, I suspect it's due more to a growing share of labor income going to the top 1% of earners."

The Impacts of Parole Supervision

From Jeffrey Miron.

"California, New York, and other states have lessened parole for exiting prisoners, hoping it will improve their reentry outcomes. One study of Illinois’ efforts

reveal[s] that the reform reduced the share of these prisoners who returned to prison within one year by 9–10 percentage points … This reduction was almost entirely due to a lower rate of technical revocations of supervision.

Further, there was

no evidence that the reform affected crime rates among released prisoners … [as] the absence of supervision reduced the likelihood of parolees committing crimes, offsetting any increases in crime associated with fewer technical revocations. … [Also,] longer terms of parole supervision diminish the benefits of lawful behavior because parolees face the ongoing threat of technical revocation.

The researchers also

conducted policy simulations to estimate the impact of reducing existing … [parole for low-to-medium offenders] by half. … [The] findings indicate that such a reform would reduce the average prison population by roughly 3 percent and likely cause no harm to public safety.

Altogether, the study

demonstrate[s] that existing parole systems increase reincarceration rates through technical violations of supervision conditions without bolstering public safety."

A cut in the corporate income tax rate leads to a larger expansion of clean firms

See The Environmental Bias of Corporate Income Taxation by Luigi Iovino, Thorsten Martin and Julien Sauvagnat.

"Abstract

We study the relationship between corporate income taxation and carbon dioxide (CO2) emissions in the U.S. We show that CO2-intensive firms benefit more from the tax advantage of debt, and pay lower income taxes on their capital income. Building on these new facts, we provide evidence that a cut in the corporate income tax rate leads to a larger expansion of clean firms. We develop a multi-sector general equilibrium model that accounts for our evidence and quantify the impact of corporate tax reforms on aggregate emissions. A policy that eliminates the tax advantage of debt could reduce aggregate emissions without affecting GDP."

After 40 Years, No One Has Produced a Workable Single-Payer Health Care Plan

Vermont passed single-payer legislation in 2011 and abandoned the plan after three years of failure. Why?

By Veronique de Rugy. Excerpts:

"Brookings Institution economist Jessica Riedl has spent years waiting for one [a workable legislative proposal for single payer]. Her challenge is simple: Show us a progressive bill that specifies (a) a provider payment system that actually saves money under America's existing, already expensive health infrastructure, and (b) a financing mechanism to replace the roughly $32 trillion in private premiums and out-of-pocket costs that would need to be covered by federal taxes over the next decade."

"Despite hundreds of legislative proposals and multiple presidential campaigns built around the issue, no one has met the challenge."

"the proposals are only aspirational. They enumerate generous new benefits with great enthusiasm and then instruct the secretary of Health and Human Services to figure out the rest. The phrase "The Secretary shall" appears 62 times in the Sanders bill alone."

"European countries built modest, government-controlled health infrastructures from the ground up over several decades. They contained costs—meaning, among other things, they rationed care—as they expanded access. America did the opposite.

We built the most expensive, technologically advanced, sprawling health system in human history, which consumes nearly 20 percent of gross domestic product (GDP), under mostly private incentives and market pricing. As Riedl puts it, "We cannot simply pay European prices for the more vast American health infrastructure that exists."

The central theory of single-payer savings has always been this: Slash payments to providers to offset the surge in the use of universal, no-cost-at-point-of-service coverage. The Congressional Budget Office (CBO) took a serious look at this fantasy. Its conclusion was that national health expenditures might actually rise, and demand for care would outrun supply. The final result would be European-style rationing, delays, and forgone services, all leading to worsening health care.

Then there's the inconvenient question of how to get the tax revenue needed for a single-payer system to replace private health care premiums, out-of-pocket expenses, and state health programs. Although neither Sanders nor Jayapal has an answer, the Committee for a Responsible Federal Budget does. Financing a Sanders-style system would require a new 32 percent payroll tax, a 25 percent income surtax, or a 42 percent value-added tax, more than doubling every individual and corporate income-tax rate.

The CBO found that such a system would reduce GDP by 6 percent to 10 percent by 2030. From a movement that claims to care about working Americans, that number deserves more than silence.

The state-level record confirms what the nasty arithmetic and voters' disgust tell us. Vermont passed single-payer legislation in 2011 and assigned an expert commission to make the numbers work. After three years of failure, Gov. Peter Shumlin abandoned the plan, admitting that the required 11.5 percent payroll tax per company plus the 9.5 percent income tax per Vermonter (with small businesses paying both) would be politically unsurvivable even in Sanders' home state. Colorado voters rejected their single-payer initiative in 2016 after analysis showed that even tripling taxes wouldn't cover the costs.

Back in California in 2022, the state's nonpartisan legislative analyst estimated that the proposed single-payer system created by the California Guaranteed Health Care for All Act would cost between $494 billion and $552 billion annually. Imagine the taxes needed to more than double that state's spending overnight.

After the bill died without a vote, Assemblymember Ash Kalra (D–San Jose) reintroduced it in February 2026, and it failed to advance again a few months later. California has now killed single-payer twice in four years."

American Idle: The Work Ethic Goes Out of Style

One in 3 working-age American men aren’t so much as looking for a job

By Jason Riley. Excerpts:

"1 in 3 men were neither working nor looking for a job in April. Among males 20 and older, the 66% labor-force participation rate is down from 73% in 2006"

"the work rate for men 20 and older fell by more than 13 percentage points between 1965 and 2015."

"the fraction of men without jobs of any sort in the broad twenty-to-sixty-four group went from 10 percent of the total to almost 22 percent"

"the percentage of wholly jobless prime-age men shot from 6 percent to nearly 16 percent"

"It results . . . from an unwillingness to search for work" 

"work rates and LFPRs for white men today are decidedly lower than they were for black men in 1965"

"labor participation rates of married black men twenty-five-to-fifty-four are higher than for never-married white men in the same age group"

"foreign-born males who come to the U.S. in search of work also tend to have higher work rates"

"Neither married men nor immigrants are stealing these jobs"

"The more likely culprit is a social safety net full of generous government benefits that allow men who won’t work to subsist"

"Welfare and disability programs . . . are easily gamed by design"