Today is the 100th birthday of the late George Stigler, who won a Nobel prize for his economics and would have won a second if they gave one for dry wit. This is not the best example of that wit, but it’s the one I remember most vividly: One day long ago I was walking across the quadrangle at the University of Chicago, when I felt a hand on my shoulder — a very large hand, because Stigler was a very large man (in the tall-and-lanky sense of large). He’d been away for a few months, so I was a little surprised to see him. Before I could say anything like “Welcome back”, Stigler asked me: “So, what’s become of that young lady you were squiring around before I left town?”. In a fit of circumspection, all I said was “Oh, she still exists”, and Stigler immediately replied, “Oh, how lovely. You know, I’ve never been a subscriber to this theory that says you should destroy them when you leave them.”
The Intellectual and the Market Place — Stigler’s classic defense of the marketplace against the discomfort felt by so many intellectuals — is well worth a quick read. Parts of it have been paraphrased so often by so many imitators that they’ve begun to seem almost trite, but none of the imitators has ever achieved Stigler’s panache. Besides, it’s been imitated so much precisely because there’s so much here worth saying. A few sample paragraphs to whet your appetite:
Several charges related to the dominance of self-interest have rounded out the intellectual’s indictment of the market place:
First, the system makes no provision for men whose talents and interests are not oriented to profit-seeking economic activity.
Second, there are cumulative tendencies toward increasing inequality of wealth, which—if unchecked—will polarize the society into a great number of poor and a few very rich.
Third, the game in the market place is unfair in that inheritance of property plays an immensely larger role in success than the efforts of the individuals themselves.
I shall comment briefly on each of these assertions.
The first charge is true—the market place will not supply income to a man who will not supply something which people want. People have enormously varied desires, but not enough of them wish to hire men to engage in research on ancient languages nor, sixty years ago, did they hire men to study quantum mechanics. The market place does not provide an air force or alms for the poor. It does not even supply babies. I conclude that a society needs more than a market place.
The second charge, that there are cumulative tendencies to ever-increasing inequality of wealth, is untrue. I would indeed ignore the charge for fear of reprimand from the Society for the Prevention of Cruelty to Straw Men, were it not that this strawman is so popular. In plain historical fact, the inequality in the distribution of income has been diminishing, and the diminution has been due to market forces even more than to governmental efforts. It is also worth noting that a modern market economy has a less unequal income distribution than either centrally directed or unindustrialized economies.
The third charge, that inheritance of property plays a dominant role in the distribution of income in the market place, is an overstatement. Inheritance of property is important, but it will give some perspective to the charge to notice that property income is only one-fifth of national income, and inherited property is less than half of all property, so less than 10 per cent of all income is governed by inheritance of property.
No useful purpose would be served by trying to appraise the proper role of inheritance of property in a few passing remarks. We should have to look carefully at the effects of inheritance on incentives; we should have to look at gifts during life, which are almost equivalent to bequests; and we should have to decide whether privately endowed colleges do enough good to offset the inevitable high-living heirs—whether we can have Carleton without having Tommy Manville.
If you have any favorite Stigler quotes, memories or insights, do share them either in comments or by email. I’ll post some more of them as the week goes on.
Very nice article. I liked the way he phrased the key question: “”What don’t we like about the market place; and, are
we sure that our attitudes are socially useful?”
And also:
“The law sets limits on
the disparagement of a rival’s product, unless
it is done in a book review in a learned journal”.
“I have told you
that you are intelligent; I now add that the
chief reason you are intelligent is that your
parents are intelligent”. I would agree with this if you replace “intelligent” with “educated”. I think the “nurture” aspect of this has a greater impact than may have been common perception in the 1960’s.
And I think he could be guilty of a bit of straw-manism also.
Well, I don’t question his grasp of economics, but history? Not so sure – “I believe, but with less confidence,
that the absence of major wars in that [the 19th]
century-the only peaceable century in history-was related to this reign of liberty.” Has he not heard of Napoleon? And Harry Flashman was kept pretty busy fighting wars for just about all of the second half of that century (according to G.M Fraser, who’s writings has also graced these pages).
Harold, I think the twin-studies done since then have diminished the space for “nurture”. I believe it was Pinker who says its half nature and half random (usually phrased as “non-shared environment”, a catchall for the unexplained remainder).
Frank Knight, a predecessor at Chicago, seems to have been less enthusiastic about the market. I have archived two of his essays, “The Ethics of Competition” and “Ethics and the Economic Interpretation”. You can find them from here.
“Am I to admire a man who injures me in an awkward and mistaken at- tempt to protect me, and am I to despise a man who to earn a good income performs for me some great and lasting service?”
Perfect.
Reading Stigler’s response to charge #2, I wonder what is the basis for his saying that the market does not tend to produce increasing inequality? The “straw man” is still very popular, and Stigler simply asserts that it’s untrue.
TGGP: the intelligence vs education point is not just the inherited fraction of intelligence. I don’t think that educational attainment is quite so closely correlated to intelligence, regardless of how much of intelligence is inherited.
Arguing about nature vs nurture is just arguing about the mechanism by which you inherit from your parents.
I like the story I read – maybe from Thomas Sowell? – about Stigler and a student who came to his office to argue a grade.
Student – Professor Stigler, I don’t believe I deserved a D.
Stigler – I don’t think you deserved a D either, but that’s the lowest grade the dean will let me assign.
Stigler supposedly said “All great economists are tall. The only exceptions are Milton Friedman and John Galbraith.”
Friedman, of course, was supposedly around 5’3″ and Galbraith was at least 6’6″.
I was asking the same question William. I wonder what his basis is for simply saying, “It’s untrue.” It seems to me it has been growing. Though Katz and Golden probably have more to say on that than I do.
@William:
Which is the greater disparity? Between Henvry VIII and his poorest subjects or between Bill Gates and the poorest Americans.
You live in a country where the poor are fatter than the rich.
William,
At that time, some decades of data seemed to point to a decreasing disparity. Making the case now would take some ingenuity.
@ Ken B:
I don’t think that income disparity is about 1 person, but a certain top percentage of the population. I think if you do some back of the envelope calculation, you will see that the current day disparity is greater than that of Henry VII’s England and that it isn’t even close.
The poorest people in England were homeless beggars who would sometimes starve/freeze to death. The poorest people in the U.S. are homeless beggars who sometime starve/freeze to death.
Henry VIII didn’t own all of England since other nobility had claim to some of England. Let’s be extreme and say that Henry VIII was worth all of the farmland in England. 42,237,000 acres at a current day value of $ 8,000/acre sets his net worth at approximately $ 337 Billion.
England had a population of about 3,000,000 under Henry VII so the combined wealth of the top 1/3,000,000 (3.3e-5%) of the population was about $ 337 Billion in today’s dollars.
Currently in the U.S., the top 16/311,000,000 (5.1e-6% ) of the population has a net worth of $ 356 Billion.
@Will
Re: “The poorest people in England were homeless beggars who would sometimes starve/freeze to death. The poorest people in the U.S. are homeless beggars who sometime starve/freeze to death.”
The worst off people in any country might be near death, but a typical very poor (say at the 5th percentile) has a much higher income and standard of living than his equivalent in 16th century England. In the US a very tiny percentage is really subject to any significant risk of starvation, and the risk for them is fairly small as their is food available for them, they would only starve if they avoid the food that is there. In 16th century Europe on the other hand starvation was a real possibility for many people. At the same time I don’t think you can ignore “the richest person” and only focus on the percentage of the population. To the extent the non-rich do compare themselves to the mega-rich they don’t compare themselves to some abstract percentage as much as what the megarich have. While your wealth figures for Henry the VIIIth are too high IMO (inflation adjustment is tricky even over the short run, let alone over a half a millennium, but I think its safe to say the real value of land was lower then, even with land representing a much larger share of the wealth, there simply wasn’t the total level of wealth that would support anyone having a net worth of $356bil), he still would have had a lifestyle that towered over the norm more than say Bill Gates does today (see http://www.the-american-interest.com/article-bd.cfm?piece=907)
Also I think one person having a huge amount of wealth is an important point, people compare themselves to other people, not to abstract percentage points. If you have such a huge gulf between the specific person, at the top, and the rest, the fact that the specific person is a smaller percentage of the population doesn’t rally make things more equal. You can add to that the inequality of legal status and political power that was far greater between Henry and some peasant than it is between Gates, or Obama, and the average American.
Not that inequality is something I really care much about anyway. I care about the welfare of the poor, but not how their welfare compares to that of the rich. If everyone else stays the same (or considering economic growth, improves as much as they otherwise would have), but the rich do even better (than they otherwise would have), I don’t consider that horrible, unless the extra improvement for the rich did come at the expense of someone else (and typically it does not).
Also see
The Increasing Invisibility of Income Inequality
by Don Boudreaux on May 9, 2004
http://cafehayek.com/2004/05/the_increasing_.html
Stigler says is addressing the intellectual’s dislike of all things commercial, an ideological distaste for the market, from a view that something good cannot come from something so base as pure self-interest. His essay does not argue that the market is perfect. It would be wrong to read it in such a way. However, it is also an easy target to point out the errors of such a narrow minded ivory tower dweller. As such, I think there is a tendency (and perhaps an intention?) for the piece to be read as a more general argument in favour of an unregulated market, and as such is Stigler’s use of the straw man.
My feeling (although I may be wrong) is that nearly everyone acknowledges that the market is good at some things, and has led to increasing wealth for everyone. I don’t think the critics of “the market” are generally arguing for a command economy, soviet style. What is argued about is the extent to which we should interfere with the market to avoid some pitfalls, and maybe make it better. Stigler himself acknowledges that we need more than the market and that inherited wealth has some role in wealth distribution.
So to the second point above: “there are cumulative tendencies toward increasing inequality of wealth, which—if unchecked—will polarize the society into a great number of poor and a few very rich.” This should become an argument not about whether the market will lead to an entirely polarised society, but whether we could or should make adjustments to make society less polarised than would occur with an unregulated market. The argument given – that differences are diminishing – may be due to regulation and taxation rather than the market, so is not an argument for the market.
There are in the piece false comparisons between time periods, continued in the discussion above. In pre-historic time, there were very few laws regulating the market. We now have lots of laws regulating the market. We are now much better off than the people then, and also possibly more equal. So comparing on a historical basis could be an argument for market regulation.
Similarly, comparing freedom of enquiry of current universities endowed by business with Oxford and Cambridge of 1800’s is not evidence of the effect of business endowment on freedom of enquiry.
“Just as real markets have some fraud and
monopoly which impair the claims for the
market place, so the intellectual world has its
instances of coercion and deception, with the
coercion exercised by claques and fashion. But
again these deviants are outside the logic of the system”.
Well, where to start here. Monopoly is not outside the logic of the system of economics, but very much a part of it. And the argument that one thing has bad effects, so therefore bad effects in another thing are OK, is one of the better known fallacies (possibly two-wrongs-make a right?).
“There is food for thought
in the fact that racial discrimination has diminished
earlier, faster, and more quietly in
the market place than in political life.” There may be a few black people denied certain jobs until the law eforced equality who would disagree with this statement.
“I shall therefore merely mention, in passing,
that both fields pay a fair amount of attention
to packaging and advertising”
Well, there is a difference of degree here, I would argue. Whilst intellectuals may pay some attention to advertising and packaging, there are products in the market who’s existence entirely depends on advertising and marketing.
“The market place responds to the tastes of
consumers with the goods and services that
are salable, whether the tastes are elevated or
depraved. It is unfair to criticize the market
place for fulfilling these desires”
True to a point, but possibly the existence of the marketplace as the sole provider has an effect on those desires – partly through the efforts put into advertising. The feedback effect should never be ignored.
So all in all an amusing and interesting piece, which points out the good things markets can do for us, and argues that we should think twice before deriding it wholesale. The lightness of tone ensures pleasant reading, but may detract from the rigour. Frank Knights writings (linked above) may be of great value, but unfortunately I found the writing style too opaque, and I did not get to the end.
@WillA:
Well your facts are wrong but to keep things simple let’s go back to the time of Caesar. The poor don’t even own themselves.
More generally you want to use income figures it seems. A better standard would include all kinds of measures, like life expectancy, medical care, and leisure time, etc. The poor now in western market countries really do not starve unless there is some complicating factor like menatl illness. Most of them have TVs and a lot of leisure time. The gap between haves and have nots is narrower now than ever before in history.
@ Ken B and Tim Fowler:
Stigler’s 2nd point was about inequality of wealth i.e. Net Worth. It wasn’t about inequality of income. It wasn’t about standard of living of the people at the bottom 10th percentile.
You seem to be arguing that there was more inequality of wealth in the past, but you aren’t supplying any numbers/calculations that support your point. In order to calculate this, you need to state the net worth of a given percentile. (Well actually Tim Fowler supported my point by saying my calculation of Henry VIII’s net worth was too high).
If you are arguing that the market is what increases the standard of living of the bottom 10th percentile, then you could compare one of the following:
– The standard of living/percentage living in poverty, infant mortality, etc. since the 1970’s when the U.S. started dropping tax rates, pensions, relaxing regulations, etc. and started given more power in the marketplace vs. now.
or
– Choosing a market based country that doesn’t have social security, unemployment insurance, minimum wage, health care, etc. and explain how the standard of living is better of for the bottom 10%.
Or is your argument something like:
Looking at countries like Sweden which has a low poverty rate, and low infant mortality is proof that the market increases the standard of living of the bottom 10%.
@WillA:
Let’s recap. William wrote:
“I wonder what is the basis for his saying that the market does not tend to produce increasing inequality?” I at least an responding to that, and my example compared a modern market country (USA) to a more or less pre-market country.
The answer is: market countries where there has not been an increasing inequality. Most market countries fit this bill. And YES Sweden is a market country, so yes Sweden would count as a case. Having social security and public health care etc is NOT the same as not being a market country.
@WillA:
Are you thinking Tim and I are contrasting welfare state vs market? Beacuse I at least am not, and I do not think Timothy is but he cans speak for himself.
How anyone can argue that my assertion that you need to look beyond income to all forms or goodness — access to healthcare, leisure time etc — is not about “net worth” is beyond me. All these things are “assets”. How much would Henvry VIII pay for the access to health care etc that even the poor in America enjoy? A lot. So that is a form of wealth the poor enjoy now that must be factored in.
Consider living in Cockaigne where you have all the food, clothes, entrainment you want free; you have free doctors, free medicines. But you cannot get figs; figs cost money and only I have all the money in the land. I have in fact 12 trillion billion dollars and no-one else has a penny. Is that a land of greater or lesser disparity than Tudor England? If you only count money as wealth it is one of greater disparity.
@ Ken B:
I freely admit to being slow on the uptake and not as intelligent as almost all commenter on this site.
I do however understand that neither Henry VIII nor his subjects had good healthcare, nor cell phones, nor TV’s. They also had a shorter life expectancy.
What confuses me is how to use this information to answer the question you posed:
”
Which is the greater disparity? Between Henvry VIII and his poorest subjects or between Bill Gates and the poorest Americans.
”
Are you saying that because neither Henry VIII nor his subjects had access to good health care that he had the greater disparity?
I always thought that wealth disparity was calculated based on net worth. If you consider access to healthcare, food, and education, then does this mean that everyone in a communist country has a positive net worth?
If this is the case, is the following a true statement:
The great thing about communism is that it is an economic system in which everyone has a positive net worth and the wealth disparity is very small.
Re. income inequality, while it is true that a poor person in the U.S. today has a small cash income, food stamps, subsidized housing, Medicaid, and welfare provide a level of implicit income that is far greater than what was available in the 16th century or even the 19th century. It’s pretty well documented that income is more unequal today than it was in the 1950s, but I would argue with anyone who feels that income today is more unequal than at any time before 1900.
That seems correct Al. However the current income inequality still exists and it’s quite large. Yet I don’t think that the right course of action is to demand the rich to pay more; much like I don’t think the correct treatment of a sick person is to attach leeches to them.
Maybe that’s too much of a stretch because taxation does play a part in the income distribution of the nation. But I think that it is very evident, based on work by Katz and Goldin among a myriad of other research papers, that the major contributor is our stagnent educational system. Recently I picked up a paper at N.B.E.R. with an abstract that said additional spending towards our educational system can account for 12% of the reason why we see our income distribution the way it is today. Another saying that replacing 5-8% of our “bad teachers” and replacing them with “average teachers” would boost our national scores up to the top.
Personally I find it sad that America is turing to “soak the rich” policies when, in its past, we’ve been largely against it. A lot of political scientists think that it’s probably because we all think we can achieve a rich status. Yet over the recent decades, this idea has been worn away essentially because technology has been leaving us in the dust. So populist policies come to surface.
@ Chicago Methods:
I’m a member of a generation (40-50) that was able to pay our way through good public universities by working minimum wage jobs because of “Soaking the Rich” policies which funded the universities.
I paid $ 500 per semester to go to a top ranked university and the minimum wage was $ 3.35/hr. Today tuition at that school is $ 5,000, but the minimum wage is not $ 33.50/hr.
As my friend Ken B said above, “And YES Sweden is a market country”. I personally find it sad that we don’t look at other market countries that soak the rich (like Sweden) and try to emulate what they do.
I also find it funny that many people who say you can’t throw money at education live in school districts where the citizens have voted to give themselves higher property tax value so that they will have good schools.
@Will A – “In order to calculate this, you need to state the net worth of a given percentile.” – Not necessarily. Its not all about percentiles. Again an individual having the type of wealth and power compared to the average person that Henry VIIIth had, isn’t diminished in importance by 16th century England’s low popylation compared to the US. Comparing the top person, or a certain number of people at the top, to the rest, is just as legitimate as comparing percentages.
More important than that is KenB’s point that “access to healthcare, leisure time etc” amounts to a useful asset or assets. Don Boudreaux makes a similar point in the blog post linked to in my previous comment. And beyond that that Henry had a lot of political power and control, which to me is a more important inequality than income or financial net worth.
I don’t agree that we are less equal now than under those circumstances, but I do agree that we have financially become less equal in recent decades (if not as much as some seem to think).
But the claim “there are cumulative tendencies toward increasing inequality of wealth, which—if unchecked—will polarize the society into a great number of poor and a few very rich” is false. The inequality of wealth gets larger because as everyone gets richer over time the disparity is also increasing, not because its some zero sum or near zero sum game with the rich taking from everyone else.
And to the extent inequality has increased, that simply isn’t a big issue to me, as long as the increased inequality is primarily from creating new wealth and not from seizing it from others. Inequality is close to a zero issue for me, in and of itself. The rich getting richer, if it doesn’t make anyone else poorer in real terms, is a plus not a minus. It would be a bigger plus if everyone gets richer (which has actually happened but the rich have gotten richer to a greater degree). I care about the absolute welfare of the poor, or the wider group of “not rich”, but not so much the relative wealth (at least not as an issue itself, to the extent that high inequality causes greater support for statist intervention, then there is a problem, but its the intervention that’s the problem not the inequality, even if it was part of the cause for the intervention). I don’t think envy is a good basis for political policy.
Now to the extent the government actively supports the rich getting richer I do have a problem. Not that they get richer, but that they do so through rent-seeking, with the government directly or indirectly taking from others and giving to the rich.
How was the economy run under Henry VIII? Was it not essentially a market economy? Any difference between equality now and then is a red herring.
To be fair Will, Sweden has been trying to move away from “soak the rich” policies for quite some time simply because it discourages entrepreneurs. The founder of Ikea had to move to the United States because he was getting hounded.
Moreover, roughly about 1/3 of the United States population moves from incredibly poor to incredibly rich very frequently. In fact, if you really want to see where corporate stability lies, it lies in Europe. Companies fail and grow far less in Europe than they do in the United States. The biggest concern right now is the fact that wages in the United States have been stagnent since about the 80’s, if I’m correct. The primary reason for that is that now, more than ever, working smart is the name of the game, not hard. Again, this is due to increased competition via more open global trade. Bottom line, you can’t get a highschool degree anymore and work on cars the rest of your life. We have machines to do that now. We need to find a way to move to a higher standard of education.
You’re right that prices have gotten outrageous for higher level education. But again, attacking the situation by putting a band-aid on something that needs surgery is not going to solve the problem. But I will admit that I have no idea how to tackle the cost problem towards higher education. My basic instinct tells me that a voucher system and breaking up the teachers union – giving the power to the students – might have a positive effect, but then how many teachers would there be? My logical guess is not very many. So I don’t know.
P.S. Now that I think about it, maybe there might be a way to move to a high-yield teaching system. Maybe there isn’t an economy of scale happening. Besided, from the books that I’ve read, there is little statistical success between having small class sizes and large ones.
@ Tim Fowler:
I being serious here when I say “well said”. You make some excellent points.
Look at China who has started to embrace the market. The wealth inequality in China is much larger now than 20 years ago. Is this a bad thing? The poor in China are no worse off (and probably better). The rich are for sure doing better. This increased inequality is not a bad thing.
However, I believe that past data points to the fact that “increasing inequality of wealth, which— if unchecked — will polarize the society into a great number of poor and a few very rich”. This seems to have been the case in the U.S. when there was a not so bloody revolution of kicking the marginal tax rates to 90%, creating social security and minimum wage.
Political parties pray on fears that people have. Republicans push the fears of a government take over. Democrats pray on the polarization of poor vs. the wealthy.
I’ll make you a deal. If the wealth disparity continues to increase and Republicans have been able to push through a non-progressive tax (i.e. the Democrats claims fall on deaf ears), then I will agree with you and Stigler.
Just to be clear, I’m not saying that it’s right for people who have homes, food, free education, TV’s, Cell Phones, etc. to be hateful of people who are wealthy. But regardless of whether of not it is fair, it seems to happen more as wealth inequality increases.
@ Chicago Methods:
A recent study contradicts what you are saying about movement between economic classes:
http://www.oecd.org/dataoecd/2/7/45002641.pdf
I don’t think the oecd would necessarily be concidered a wacko organization like PETA.
I’m a social democrat who reads Prof. Landsburg for 2 reasons:
– Reading another point of view is fun.
– He makes me question my own beliefs and has helped to make me more rational.
Assuming you are somewhat conservative, you might find the study interesting in the same way (or you might say what a bunch of pinko hoooey).
It is possible however that America is toward the bottom in social movement and that the increasing wealth/education gap might be associated with this.
“Moreover, roughly about 1/3 of the United States population moves from incredibly poor to incredibly rich very frequently.” I find this a surprising statistic – I assume it is made up?
“Is this a bad thing? The poor in China are no worse off (and probably better).”
I do not know about China, but in UK the poor were arguably made worse off as the rich got richer. The Enclosures acts led the way to modern, productive farming, but on the way denied many peasants access to their land, and their livelihoods. This created a pool of destitute workers for the factories in the towns. So the industrial revolution may have required it, but perhaps it could have been done without so much misery. I would not be surprised if similar things are occuring in China, and they certainly are in India.
Will A. Nice link to the OECD paper. Figure 5.7 – 5.8 is quite striking. If social mobility is the aim (which of course is not entierly true), then some things USA has got right , and some wrong. Progressive tax system is good, and USA scores badly here. However, not grouping by “ability” young and not enrolling some students in vocational training are both good, and USA score top here. Also intergenerational educational mobility tends to be lower in less equal societies, so the rich getting richer whilst leaving everyone else behind is not good in this context.
Harold: Why do you say that if social mobility is the aim then a progressive tax system is good? A progressive tax system would seem to be a major barrier to social mobility. (In order to move from one wealth class to another, one needs some high-income years, the impact of which is reduced through a progressive tax system.)
“Why do you say that if social mobility is the aim then a progressive tax system is good” I am making an assumption that social mobility is helped by reducing the effect of circumstance on educational achievments. Figure 5.7 in the OECD report shows the USA has minimum progressivity rate (0.04) and highest effect of individual circumstance on educational attainment. Netherlands the oppposite. We may expect this, since subsidised education will benefit the l;ess well off more. We know that education is a major driver of wealth class, so this effect must drive towards more social mobility. Progressive tax may reduce social mobility in other ways. It is not possible to say from this data which would be the stronger. The high tax in your high income years may not reduce your social class, since all people in the class are affected equally, so your relative position is unchanged. It may mean that your time spent in the higher class is not quite so high as with a less progressive tax system.
@willA
Re: “I believe that past data points to the fact that “increasing inequality of wealth, which— if unchecked — will polarize the society into a great number of poor and a few very rich”.
I don’t see that at all. Before the recession, to the extent the middle class was shrinking it was shrinking more by people becoming rich than becoming poor. The main increase in inequality is a dew people becoming hyper-rich, and their income and wealth going up over time compared to the norm, so the “few very rich” part might be true, but the rest of society isn’t moving in to poverty.
As for 90% income tax rates, they are amazingly foolish. If they apply widely (and historically they didn’t) they suppress economic activity (to the extent they can be enforced rather than evaded. If they are evaded, or can legally be avoided with loopholes, they distort economic activity as more effort goes in to avoiding taxes, than making efficient investments. They are unreasonably, and anti-freedom. Even if you don’t care about that they are beyond the revenue maximizing rate. Lower taxes would bring in more revenue.
I only skimmed through the study you posted a link to, but it seemed to be showing that some other countries have more income mobility than the US, not that people on the top in the US stay there, or that no significant number of people move to the top.
I 2nd Steve Landsburg’s point about a progressive tax system being a potential barrier to wealth/social mobility. Its not just that the higher income taxes on those with high income make it harder for them to achieve high wealth (and may cause some to think the extra work and/or risks to take the step beyond wealthy to rich or very rich, isn’t worth it), it also contributes to a problem at the bottom end, along with a phase out of benefits and tax breaks. For people in certain specific situations the effective marginal tax rate (I’m borrowing that term from someone, perhaps Mankiw, anyway its the extra money going to the government or not going to the person from the government, from changes in taxes and benefits) can be close to 100%, in some (perhaps rare) cases it might even be over 100%.
@ Tim Fowler:
The argument isn’t whether a growing number of poor should do foolish things. The argument would more of do they do foolish things because of a polarization of a growing number of poor.
Yes, “Before the recession, to the extent the middle class was shrinking it was shrinking more by people becoming rich than becoming poor”. So when we had a shrinking number of poor no one was complaining about the Bush Era Tax Cuts.
After the recession, more people became poor and the Bush Era tax cuts all of sudden became an issue. A growing number of poor has polarized the country.
I really am interested to see what happens in the next ten years. This period of time seems like a good testing ground for a lot of economic theories.
If you want we can place (a small dollar) bet on something like, if in the next 5 years, the market is allowed to act without backlashes in the U.S. you win.
If any 2 out of the following 3 backlashes against an open market in the U.S. happen I win:
– Public cries for a harsh crack down on immigration from top ranking members of a major political party in a effort to get the votes of the poor.
– Public cries for protectionist policies from top ranking members of a major political party in a effort to get the votes of the poor.
– Public cries to increase the taxes of the wealthy from top ranking members of a major political party in a effort to get the votes of the poor.
I don’t consider anything by the oecd “kooky” and I would be offended, if I were you, if someone did say it was off-its-rocker.
In any case, I reviewed the work that I read and you’re right Harold, I misquoted. The rapid changes that come from being a dirt-poor entrepreneur to a tycoon mogule can account for 1/3 of the inequality gap, as quoted from Raju’s book Fault Lines. I apologize:
“I find that household income volatility, measured
by the transitory variance of household income, accounts for more than half of the total income variance”:
http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I2-P109.pdf
This was quoted in Raju’s book, Fault lines:
http://ideas.repec.org/a/bin/bpeajo/v25y1994i1994-2p217-272.html
More recent work from P. Gottschalk and R. Moffitt:
http://ideas.repec.org/p/boc/bocoec/697.html
Again, this isn’t very surprising to me due to the deregulation process we have seen over the years resulting in less corporate stability in the United States, compared to Europe, which The Economist magazine has commented on. In any case, this paper provides a small insight on this subject:
http://fordham.bepress.com/cgi/viewcontent.cgi?article=1024&context=crif_seminar_series
My concern, again, is that we are tackling the problem from more of a passionate, “soak the rich” perspective and not anaylzing other options, considering the work by Christina and David Romer, where tax changes have very large effects. A tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent. There may be other options out there which are less painful and can have far greater positive aspects:
http://www.nber.org/papers/w13264
Especially when we see that the problem may lie elsewhere and could possibly be improved relatively easily:
http://www.nber.org/papers/w16606.pdf
P.S. To be honest, in the spirit of Robert Aumann, I’m intrested in where the differences are. If you have any more work that you could send me, I would appreciate it Will.
Like most things, I am probably wrong on this, but I’ll use myself as an anecdote to my point.
I’m a computer programmer who has thought about stepping out and doing consulting/staring my own business. If I was single no big deal. But I have to take care of my family and the thought of not having health insurance and what could happen scares me.
So I choose to work for someone else and stay in my current social class. It is possible that countries that have more mobility have it because of the assurance of health insurance and not because of a progressive tax.
It would be interesting to plot a cowardice-entrepreneur curve. Something like how many entrepreneur start their own business given certain social assurances.
E.g. If we provide everyone with health insurance, top students with free college, but kill social security, then 20% more small business are created every year. However 33% of these business fail because cowards don’t know how to run businesses.
This of course has nothing to do with whether or not we have a progressive tax, it is more about finding the sweet spot of how to spend our tax dollars however they are collected.
“This of course has nothing to do with whether or not we have a progressive tax, it is more about finding the sweet spot of how to spend our tax dollars however they are collected.”
That is certainly correct Will. It’s hard to pin down that sweet spot when other reports convey that a 60% taxation rate on the rich would generate the most optimal amount of money for the government.
It’s still a bit of a toss-up for me.
@Will A
Re” – The argument isn’t whether a growing number of poor should do foolish things. The argument would more of do they do foolish things because of a polarization of a growing number of poor.”
Perhaps, but outside of the recession, I don’t see a growing number of poor.
Which doesn’t mean there won’t be “a backlash” anyway. Politics and emotion are unpredictable a lot of the time.
If a growing number of poor are going to polarize the country, then we are going to get polarized every time we have a recession. I don’t think we can really avoid them, so if what your saying is true I’d have to hope that the effect goes away when growth returns, rather than being a one way ratchet. The poverty levels are not a one way ratchet.
As for “public cries for xxx from top ranking members of a major political party” I wouldn’t take any bet against such a thing except for the really extreme crazy examples “public cries for building a memorial to Chainman Mao”…, or something similarly bizarre. And even for that, I wouldn’t be my house on it.
@Chicago Methods
Re: “Again, this isn’t very surprising to me due to the deregulation process we have seen over the year”
In the late 70s into the 80s maybe, but generally we haven’t been deregulating. Some areas get deregulated, others have regulations shifted around, which is called a deregulation when it isn’t, and others just have regulations piled on high and thick. Overall, the number of pages of active regulation increases each year.