How Not to Fight Income Inequality
Trying to combat income inequality through mandated wage compression is not just an odd preference. It is a mistake, as Mexico's president-elect, Andrés Manuel López Obrador, will find out in a few years, after much damage has been done.
CAMBRIDGE – Suppose two people hold different opinions about a policy issue. Is it possible to say that one is right and the other wrong, or do they just have different preferences? After all, what is the difference between an odd preference and a mistake?
A preference influences a choice that is expected to deliver the goal the chooser wants to achieve. A mistake is a choice based on a wrong belief about how the world works, so that the outcome is not what the chooser expected. Unfortunately, this may be a costly way to learn. It also may be inconclusive, because it is always possible to attribute the mistake’s bad consequences to other factors.
A case in point is the decision by Mexican President-elect Andrés Manuel López Obrador (AMLO), to lower the salaries of the higher echelons of the civil service, including himself, capping them at $5,707 per month. Many greeted the decision, announced in July, with glee. It showed that AMLO was committed to fiscal austerity and income equality.