How Would Milton Friedman Attack Income Inequality?

When Dr. Friedman’s views on economic freedom are invoked nowadays, it is often lost that he was very concerned about the plight of the poor and the potentially disruptive nature of problems like widening income inequality.

Over the past decade, the matter of growing income disparity between the richest and poorest Americans has been gaining traction in the public policy and political arenas. Just this summer, the sci-fi movie Elysium posited that all the world’s super rich would eventually move to an orbiting space colony to separate themselves from the problems of the masses. Over the past few weeks, media coverage of efforts to raise the minimum wage have spiked. And in his December 4 speech, President Obama cited income inequality as “the defining challenge of our time.”

It is crystal clear that existing differences in educational access for rich and poor tend to drive the income inequality gap wider.

Whether you agree with the president’s prioritization of this issue or view it a hyperbole, it is still a relevant public policy concern that deserves the nation’s attention. Ignoring an ever-growing underclass of poor people is neither fiscally sustainable nor morally defensible.

Dr. Friedman offered two ideas to address income disparity:

1)  the negative income tax
2)  “universal” school vouchers for all families

The first, the negative income tax, was intended as an immediate response to the dual problems of low-wage workers and a costly and inefficient welfare superstructure. With a negative income tax, all citizens would be required to file a tax return. If their allowable deductions and/or tax credits dropped their taxable income below zero, they would receive a payment based on a rate applied to this negative income (maybe 50 percent). This system could be easily designed such that low income workers would see their wages subsidized directly by the negative income tax. Dr. Friedman explained in simple terms how a negative income tax works in this 1968 episode of Firing Line.

The second idea, universal school vouchers, is focused on attacking the income disparity problem more systemically. This idea is intended to shift the education marketplace to a more consumer-oriented model with a central goal of giving all students access to a high-quality education…rich and poor alike.

It is crystal clear that existing differences in educational access for rich and poor tend to drive the income inequality gap wider. With school vouchers, money currently spent directly by government to pay teacher salaries and operating costs for school buildings would, instead, be allocated at the discretion of parents (i.e., consumers). Thus, poor parents would no longer be locked into sending their children to only the government-assigned school in their neighborhood. They would have the ability to choose a different school for their child, if they wanted, just as upper middle-income and rich families can now do by moving to a wealthier school district or paying private school tuition. As an added benefit, when faced with the market pressure, all schools will be compelled to focus more directly on quality and individual student needs. Dr. Friedman eloquently defended his voucher idea, in the face of hostile questions, in this 1980 televised event in New York City.

There is no doubt that leveling access to high-quality education will, over time, result in more leveling of the nation’s income distribution.