Here’s a key lesson of economics: Trade is good, but trade with people very unlike yourself is even better. I’m a teacher who eats beef, drives a car and lives in a house. I don’t need other teachers so much as I need students, ranchers, autoworkers and architects. If your neighbors love gardening as much as you hate it, you’ll find it easy to hire a gardener. If it’s the other way around, you’ll do well in the gardening business.
The lesson spills over beyond the markets for goods and services. We learn new ways of thinking and new ways of living from people who think and live differently than ourselves.
We thrive on diversity — diversity of skills, diversity of interests, diversity of lifestyles, diversity of religious and political outlooks, diversity of culinary and artistic tastes, diversity of lifestyles, and, lest we forget, diversity of income. Capitalists need workers and workers need capitalists. A wealthy factory owner won’t stay wealthy for long if here’s nobody to work the assembly lines. A middle-class assembly line worker won’t be middle-class for long if there’s nobody building factories.
Let us then celebrate diversity, not try to extinguish it. And let’s not forget that diversity of income — or, if you prefer, “income inequality” — is just as much a blessing as diversity of skills, preferences, cultural outlooks, and ways of living.
The economist Thomas Piketty argues in his bestselling book that income inequality is frequently perpetuated by the accumulation of large stocks of capital. That’s all the more reason to celebrate, once you remember that one person’s accumulation of capital is another person’s opportunity to earn a living.
Remember too that “the accumulation of capital” is a fancy phrase for “the conservation of resources”. To accumulate capital,
you’ve got to spend less than your income, which leaves more goods available for the rest of us. How could anyone object to that?
The Piketty-ites have an answer: They believe that the accumulation of capital, even when it’s healthy in its own right, can go hand in hand with the unhealthy accumulation of political power. Therefore they support, for example, a hefty inheritance tax to preclude a de facto right wing coup.
Ironically, it was the solidly right wing columnist Pat Buchanan who once wrote a series of columns supporting a hefty inheritance tax to preclude a de facto left wing coup, based on his belief that second and third generation heirs to great fortunes tend to lean left. (Buchanan seems to have backed off this position around the time he decided to run for president.) The truth is that some heirs lean left and some lean right. And that’s not surprising in view of the lesson we started out with: Our natural allies are not necessarily the people we most resemble. Rich capitalists are not all in league with each other, and there’s no reason why they should be.
If you nevertheless believe that the capitalists have been busily rigging the system in their own interest, you’ve got to admit they’ve done a spectacularly bad job of it. How else to explain the quintuple taxation of capital income, where you can invest a dollar that was taxed the day you earned it, then pay corporate income taxes, dividend taxes, capital gains taxes and inheritance taxes on the income it throws off? Surely any concern that the rich are calling the policy shots should melt away in the face of actual policy.
(Please don’t respond that capital gains are taxed at a lower rate than ordinary income. When you tax the same income multiple times, what matters is not any single rate, but the accumulation of *all* the taxes.)
In fact, there are good reasons in theory to suppose that things work the other way — in a democracy, it’s much easier for the 99% to exploit the 1% than the other way around, and the richer the 1% get, the more vulnerable they become.
So there is little to fear from diversity in income, just as there is little to fear from diversity in culture, religion and sexuality. All forms of diversity can seem a little scary at first, but stamping them out is almost always a tragic mistake. The very rich are different from you and me. Let’s celebrate that.
You raise on objection to taxes on capital gains: the multiple levels of taxation. But there is also the objection that nominal gains are also taxed. If you hold gold costlessly, you would be mostly taxed on general inflation, rather than your speculating skill on gold as a commodity. http://en.wikipedia.org/wiki/File:Gold_Spot_Price_per_Gram_from_Jan_1971_to_Jan_2012.svg
Clever to put the issue in terms of “diversity”.
Seems to me concern over ‘govt capture’ is a(nother) good argument for limiting the sphere of influence of govt.
And on a broader argument about ‘socially stability’, it seems to me “all inequality is not equal”; i.e. whether it derives from a corrupt kleptocracy or free and voluntary interaction ought to be viewed quite differently by all involved. (Unless of course we have politicians reliably stoking the fires of entitlement and resentment.)
#1 – yes Martin Feldstein did some of his earlier notable work showing how non-indexation can create stiflingly high tax rates on investment.
Still not quite sure why all Piketty-ites are focused on decreasing wealth rather than decreasing what can be done with political power. It seems to me the former one attempts to treat a symptom, where the latter one attacks the cause.
1. I’d like to hear more about the benefits of diversity of income. All else being equal, I’d think that the opportunities for beneficial exchange increase if everyone is wealthy than if some are wealthy and some are poor. We might imagine circumstances in which poor people might benefit from stuff, and would be willing to buy the stuff if they had the resources, but they don’t, and vendors might benefit from selling stuff, if only they could find people who could afford it. In what circumstances does a surplus of wealth prohibit mutually beneficial transactions?
2. For what it’s worth, it is unclear to me that Piketty argues that wealth accumulation is bad (but for political consequences). Rather, I understand him to argue that it is suboptimal relative to a world in which the wealth is more evenly dispersed. Which brings us back to Question 1, above.
3. Here’s a counter-argument: Within any era, contemporary concentrations of wealth permit investment in intellectual property — research, music, architecture – that can be a blessing to posterity, even if contemporary people suffer for lack of consumption. Thus, while we honor Egypt for the Pharaoh’s pyramids, even if (I speculate) the resources used to build the pyramids might otherwise have been used to raise general living standards. Arguably egalitarians might want to bestow greater honor on societies that invested in increasing the food supply, and otherwise left relatively few physical traces behind….
4.
Landsburg states that the test of burden is “the accumulation of *all* the taxes” – yet then cites as evidence of burden the fact that there are multiple types of taxes rather than citing evidence regarding the accumulation of burden.
Hard to say what would constitute evidence of “rigging.” I subscribe to the theory that many people are motivated to accrue the power to consume a/k/a wealth. By that standard, capitalists are accruing wealth like never before – even after taxes, and even as the US accrues deficits. In short, the status quo seems to be benefitting the wealthy as never before, yet may prove to be unsustainable because too few of the benefits are invested in maintaining the status quo. Why isn’t that evidence of rigging?
I disagree with the idea of the “quintuple taxation of capital income, where you can invest a dollar that was taxed the day you earned it, then pay corporate income taxes, dividend taxes, capital gains taxes and inheritance taxes” because “you” do not pay the inheritance tax since it is impossible for a dead person to pay tax. The inheritance tax is the first time the income is taxed.
It seems to me that the place where inequality becomes “bad” is when it prompts violent actions (i.e. USA labor disputes in the late 19th and early 20th centuries).
In the USA at least, those who seem prone to protests/violence insurrection/separatist tendencies are more of the tea-party who think there should be more inequality.
So there probably isn’t enough inequality in the USA.
@nobody
“Landsburg states that the test of burden is “the accumulation of *all* the taxes” – yet then cites as evidence of burden the fact that there are multiple types of taxes rather than citing evidence regarding the accumulation of burden.”
I feel the burden is on you to show the tax burden would not be diminished by abandoning corporate income taxes, dividend taxes, or CG taxes. If you visit 5 stores habitually and usually spend money at all of them, spend we *expect* your total store spend to be diminished if you stopped going to one of them?
Apologies: “should we expect your total store spend to be diminished if you stopped going to one of them?”
I don’t get it. Aren’t people like Picketty saying that wealth is becoming too concentrated into too few hands and therefore hurting “diversity” of wealth ?
“1. I’d like to hear more about the benefits of diversity of income.” -nobody.really
Such diversity encourages people to use their creativity to take risks to make things that may make us better off. Without such diversity, we may not be nearly as well off as we are now.
Landsburg makes a pretty serious error by conflating the (true) assertion that trade improves people’s well being with the (false) assertion that NEEDING to trade is better than not needing to trade.
If I have lots of apples and you have lots of oranges and we both want an equal number of each, trade makes us both better off. However it doesn’t make us better off than if we had each started with an equal number of apples and oranges.
Trade is great precisely because it mitigates against the problems of inequality (whether it’s of the apple, orange or income variety). Saying more inequality is good because it leads to more trade is like saying more hunger is good because it leads to more food.
All diversity is not good. We should not necessarily celebrate diversity in health or sanity for example.
The taxing of capital income may be a gain for the rich if they are disguising earned income as capital income. They then pay the smaller tax *instead* of the larger income tax, not in addition to.
Lindert (1986) http://www.stanford.edu/group/scspi/_media/pdf/Classic_Media/Lindert_1986_History%20of%20Inequality.pdf
studied inequality in the UK since 1670. There was an inegalitarian trend during the industrial revolution, followed by greater equality since WWI. Few would say that the greater inequality during Victorian England was better than the relative equality attained during the latter half of the 20th century. Inequality of itself is not a good thing.
Whilst browsing, I came across the Victorian Equal Opportunity and Human Rights Commission. I was wondering if someone had a time machine, having just been reading about the British industrial revolution, until I noticed the address was Melbourne. Anyway, they point out that inequality correlates with reduced wellbeing.
The question is not is some inequality a good or bad thing, but do we have too much or too little of it. If it is increasing it could be for reasons that are not good.
Nathan #10: Interesting point!
Nathan #10’s point is neither interesting nor correct. Nathan doesn’t understand that mutually beneficial trade occurs principally because of the dynamic gains from specialization identified in the first few pages of Adam Smith’s Wealth of Nations, as well as because of the principle of comparative advantage. Were Nathan familiar with these explanations for the ubiquity of trade, he would not have posted that comment.
#10:
If Bob and Sue both like apples and oranges equally, and they are both highly skilled at growing apples and terrible at growing oranges, then they both end up with a bunch of apples and (maybe) a few oranges.
Throw some inequality or differences into the mix and now Sue is better at growing apples than oranges. Bob and Sue trade, and now both are better off as they have more oranges available instead of an apple surplus.
The problem is that you assume both are somehow endowed with exactly what they wanted. Sure, if everyone likes the same things and is equally skilled at making them then there’s no point to diversity nor need to trade.* Fortunately, we don’t live in a world so boring as that.
*Unless preferences or skills change over time along the same curve for everyone, such that all teens are equal, all elderly are equal, but teens =/= elderly. In that case even with everyone equal diversity will still exist and trade will still be beneficial.
Nathan Ashby (#10):
If I have lots of apples and you have lots of oranges and we both want an equal number of each, trade makes us both better off. However it doesn’t make us better off than if we had each started with an equal number of apples and oranges.
Yes! This is exactly the same point. If we start off identical, we don’t gain from trade. (The important exception, as Don Boudreaux points out, is that even identical people can gain from trade if they exploit economies of scale. But put that aside for now.)
But no matter how poor or rich you are, the arrival of a trading partner will always make you better off than you started out — and the more different that trading partner is from you, the more good he’ll do you.
Yes, of course, it’s always better to be rich than poor. That’s not the comparison I was making. Instead it’s this: *Taking as given* your income, your preferences, the mix of goods you own, etc, are you made better or worse off by the existence of a trading partner who is very different from you? Answer: better.
Your discussion of democracy makes logical sense, but it’s just theory. There’s political science literature examining the evidence:
http://econlog.econlib.org/archives/2014/05/exploring_eliti.html
SL: ” in a democracy, it’s much easier for the 99% to exploit the 1% than the other way around…”
Steve, I thought one of the lessons of Public Choice, of the work of Mancur Olsen, was that small, more-easily-coordinated, groups usually win out in the political marketplace over large un-coordinated groups.
There are a few problems with inequality that I don’t think you’ve fully addressed.
First, inequality may, at some point, be destabilizing politically and socially. At some point , the 99% might wake up to the fact that they vastly outnumber the 1%, and could, with concerted effort, easily bring about redistribution via political mobilization or forcible expropriation. I wondering whether you think it possible that inequalities of wealth and income become so pronounced that they give rise to political and actual violence? Perhaps you don’t, in which I can understand that you may find that the current flare-up of concern about inequality may be addressed with nothing more than requests for the celebration of “diversity.” Another strategy is to continually remind the 99% how much better off they are relative to the billions of people living in truly dire poverty elsewhere in the world, or relative to their parents, grandparents, and ancestors — the one’s that lacked indoor plumbing, electricity, cellphones, automobiles, etc. Do you think these palliative measures will suffice to defuse the potential for serious social conflict?
The second problem with inequality is that it can result in financial instability. As claims on real wealth — goods and services — accrue disproportionately to the 1%, the 99% frequently find that the only way they can afford big-ticket items of real wealth — homes, cars, higher education — is by borrowing money from the 1%. A huge proportion of the claims on wealth held by the 1% take the form of debt owed by the 99% (mortgages, auto loans, student loans, credit card debt). Because significant defaults on the repayment of this debt occur frequently (and necessarily, as the “return on debt” almost always exceeds both the growth of the real economy and the value of the stuff purchased with debt), financial crises big and small have become a recurrent feature of the global economy. Do you think these recurring debt crises can be managed in such away as to avoid both the collapse of the global credit system, and the political and social crises such a collapse would engender?
I think there are other problems as well — some moral, some economic — but, for the moment, I’d be interested in your opinions on these two.
I maintain the focus should be on the *source* of the inequality rather than divining some “optimal amount”.
E.g. free exchange simply gives one the option to improve one’s status quo.
Harold you seem to correlate the standards of living from two different eras; perhaps the industrial revolution is what made it possible to posture more egalitarian later. Which may in turn have impacted the subsequent rate of gain in living standards.
On things like “the need to trade” or “better if everyone were wealthy”, of course it’s always tempting to play the all-else-equal game and say ‘if only we could wave a wand and make some people relatively better off’ in the ST, without undermining the dynamics of a system that (many believe) makes us all better off over the longer-term. But that’s a false choice.
I’d like some good reasons for why inequality is a problem at all. Maybe sometimes it is a symptom of something pernicious going on, but diseases are not cured by fighting symptoms. There are some utilitarian arguments based on diminishing marginal utility, there is the Rawlsian argument, and some say that people just don’t like inequality, but I find none of these convincing. What else is there?
Ah, the creativity/risk-taking theory: A person’s willingness to use creativity and take risks is not intrinsic, nor driving by the individual’s wants or needs, but rather is driven by a social dynamic related to differences in the amount of wealth people have.
Too bad the theory does not specify whether relatively affluent people are more creative/risk-taking or less. Otherwise, we might try to test it by observing the behavior of the relatively affluent or relatively poor classes to see if we can detect greater or lesser amounts of creativity/risk-taking.
And who knows? There might be something to this theory. It might not occur to me to aspire to acquire a certain kind of car, or jewelry, were it not for some more affluent person acquiring them first, and this aspiration might drive me to be more creative or take more risks. And if I lived in a more egalitarian society, it might not occur to me to compete for status on the basis of wealth and not, for example, on the basis of athletic or artistic prowess, or social proximity to the leadership class.
That said, I’m skeptical that these dynamics drive a lot of economic activity – certainly not relative to wealth. I suspect a society in which everyone is wealthy would exhibit more creativity and risk-taking (measured in absolute terms) than a society in which half are wealthy and half are poor.
Ah, the “threat of starvation is the only reason the rabble will work” theory. Stories about affluent businessmen and doctors and lawyers and bankers – they’re all myths! Obviously if they were affluent, they wouldn’t work! If they’re working, obviously they’re not affluent!
To be sure, as people get more money, they consume more of all (normal) goods – including leisure. Experiments involving a basic income guarantee (BIG) demonstrate that people receiving these guarantees reduced their number of hours worked, on average. (But mostly, this reflected the fact that some parents dropped out of the paid labor force altogether in order to spend more time raising kids. It also reflected the fact that people took time off work to go to medical app’ts, and to attend to sick spouses/kids/parents.)
And yes, greater affluence would alter people’s behavior. During the Great Depression people couldn’t afford new socks, so they darned up the holes in their socks. Today we’re richer, and socks are cheaper. Thus, what may have been a rational behavior in the 1930s is no longer a rational behavior in 2014. Yet the economy has not collapsed.
As people invested more time in leisure, less in labor, the economy would experience a supply shock, not so different than the OPEC supply shock of the 1970s. And we’d develop similar coping strategies. In the 70s we built more fuel-efficient cars, and drove less, and listened to ABBA albums. Today we’d build more robots and listen to MP3s of Momma Mia. And if we couldn’t invent a robot to scrub toilets, then we’d pay people handsomely to perform this task.
These costs would be incorporated into the economy, and would reduce output at the margin – but only to the extent that people who previously were working preferred to consume leisure. That is, we’d have fewer goods but be better off because we’d be choosing to substitute leisure. The only people who would regard this as a problem are people who obsess over things we measure – productivity, output – to the exclusion of things we don’t measure – the value of leisure. Whatever the shortcomings of Landsburg’s perspective, he doesn’t have this shortcoming.
And this is an important distinction between an oil supply shock and a labor supply shock: The oil supply shock caused a reduction in hours worked, triggering unemployment. The labor supply shock would be caused by a reduction in hours worked – that is, by people choosing leisure. The shortage would trigger an increase in price (wages) and a reduction in consumption (employment) at a new equilibrium. But unlike an oil supply shock, society would retain all the tools for returning to the status quo if we wanted to. It’s just likely that we wouldn’t want to.
I have a dumb question…
Can someone reconcile the two ideas for me please?
– “more you save (and don’t consume), the more there is for everyone else to consume”
with
– “Keynesian-esq multiplier effect, aka. spending is great! for everyone else!”
Sorry, this might be very obvious, but i’ve only had limited exposure to economics and can’t figure out the right keywords to google.
Thanks!
I sense both Ashby and Landsburg have points.
I sense Ashby means to say that we don’t need to assume that one side has some huge surplus relative to the other in order for trade to be beneficial. And Landsburg emphasizes the idea of reciprocal needs being necessary for trade to produce benefits. But we should clarify that we may be able to benefit from trade even if we have the same stuff, provided we have different tastes; or even if we have the same tastes, provided we have different stuff.
This statement of the issue artfully elides over the issue of wealth: “But no matter how poor or rich you are….” “*Taking as given* your income….” So here’s the $64000 question: Imagine you and I are as different in wants and needs as you can. Indeed, imagine I’m destitute and have nothing you want. How does trade help us?
Thus, it’s all well and good for Landsburg to say, “Yes, of course, it’s always better to be rich than poor. That’s not the comparison I was making.” But that *is* the comparison that Piketty is making: A world in which wealth is more broadly dispersed is likely a world with more trade. If you value trade, therefore, you may well value wealth redistribution.
#21
Ohhh, now I get it. All those affluent lawyers and bankers and doctors are using that extra downtime that their wealth affords them to take extended vacations in Guatemala where they all passionately sew the $4.99/pack socks that I buy at Walmart. That explains it. I stand corrected. In fact, I’m sure the bike courier that the lawyer uses to send contracts to the banker is quite wealthy himself and only took that minimum-wage job for the fresh air and exercise.
Yes, everyone would work less and stuff would be cheaper if we were all wealthy because, you know, like technology and leisure.
miko:
You are confusing the question of *how much* I’d like you to spend over your lifetime with the question of *when* I’d like you to spend it.
The less you spend, the more there is for the rest of us. So if you decide to be a lifelong miser, I’ll be very happy.
On the other hand, Keynesian theories of the business cycle tend to imply that, given your lifetime spending, we’d prefer that you do more of it in times of recession and less of it in times of relative prosperity.
ahh that make sense now. Thanks for the help!
Bravo, Steve! This is a great post. Recasting “income inequality” in terms of income diversity is exactly what the debate needs. I have argued elsewhere that using the term “income diversity” is the best way to turn the Left’s argument on its head. The ongoing debate has, unfortunately, been hijacked by semantics. Who can favor inequality, after all? Since the very people who decry “income inequality” are usually big fans of “diversity,” using “income diversity” is a good way to make them think more deeply about the issue.
Of course, it’s also true that diversity can be either good or bad. Diversity means having more options available, giving a better chance of optimizing one’s benefits. But diversity can also make interaction more difficult. With the case of your gardening example, the best option is for one of my neighbors to love gardens AND gardening while I love gardens and hate gardening. Then I can hire my neighbor to do what I won’t do myself. On the other hand, if we are too diverse, where I hate both gardens and gardening, then my neighbor’s interest has no value to me and we have no basis for trade.
By extension, “income diversity” is a much better term than “income inequality,” since the former naturally invites discussion of the positives and negatives, while the latter, through its pejorative connotation, is a merely rhetorical device intended to shut down honest discussion.
nobody.really (#23),
You say “Imagine you and I are as different in wants and needs as you can. Indeed, imagine I’m destitute and have nothing you want. How does trade help us?”
The answer is that if you are destitute and I am wealthy, no matter how different our tastes and wants, it’s impossible for us not to have some basis for exchange. Why? Because no matter how destitute you are, you still have the capacity to supply labor, and if I am wealthy, it means (according to Adam Smith) precisely that I am able to command or purchase a large amount of your labor. In fact, my wealth is of no value to me whatsoever UNLESS I use it to purchase labor to do the things I’d rather not do for myself. This latter point ensures that, for a fixed amount of wealth, free exchange can only reduce wealth inequality/diversity, since wealth flows from capital to labor.
Then why does wealth diversity sometimes increase? Well, in a free market, this only happens when overall wealth is increasing. For example, in the short term, some members of society are able to use innovation more effectively than others. The innovation greatly increases overall wealth, and those who make the innovation possible reap the benefits. This is precisely what we have seen over the last few decades with the digital revolution, and it’s the main reason why income diversity has been growing. It’s a good thing–it means we all have more economic options than before. But over the long run, that newly created wealth will flow from capital to labor. Witness the poster boy of the tech revolution, Bill Gates, as he distributes his vast wealth through his foundation. What else can he do with his money besides using it to purchase the labor of others?
Wealth diversity is only bad in the long run when it is maintained by force or government fiat, as happens in the typical oligarchy (see Russia).
R17/ I don’t think Steve’s comment on the large group exploiting the small is at odds with the work of Olson. Olson commented on the ability of a small group (e.g., American sugar producers) to successfully lobby the government to get sugar tariffs that benefited them far more than their lobbying costs. With the costs of the legislation being spread over the population as a whole, you or I would have little incentive to mount a countering effort. Their small size can be a benefit. Of course, they need to make sure there is sufficient obfuscation of their intent (“saving American jobs” works well as a general mantra) or, better yet, no general understanding of even the existence of such programs.
Here, Steve is talking about the richest 1% being exploited by the poorest 99%. One doesn’t need stealth (look at the take back Wall Street movement and the like—they love PR and don’t hid their intent). It is completely acceptable in a large part of the population for someone to argue for higher income tax and estate tax rates for the rich simply because they are rich. The Olson case is a movie with behind the scenes power brokers. I believe Steve is referring to the throngs of villagers storming Frankenstein’s castle.
This is unclear to me. Some people are incapacitated: mentally ill, chemically dependent, in comas. Some people are incarcerated. Some people are already fully occupied raising kids.
This is unclear to me. Remember that guy you saw at the highway exit holding the sign saying that he was willing to work? Remind us, how did that exchange go between you?
The point is not that wealthy people don’t hire poorer people. The point is that wealthy people often already have all the labor they require. The act of negotiating for more labor may seem sufficiently burdensome as to discourage the attempt. See, for illustration, your (lack of interaction) with the guy holding the cardboard sign).
This is unclear to me. Imagine Piccasso’s time is worth $10,000/hr. Rather than take time to mix his own paints, he hires an assistant at $10/hr to do this. Before the transaction, each party has his own net worth. At the end of 1 hr (ignoring taxes), the amount that the assistant’s net worth has increased by $10, whereas Piccasso’s has increased by $10,000. It looks to me as if inequality has grown, not shrunk.
@30 Nobody.Really
I found it interesting that you didn’t just move to the argument that your complete destitution also erected another barrier: education.
Doctors preserve life. Attorneys do attorney stuff, and bankers make economists go bald. Their affluence, or likelihood of their affluence is directly connected with their educational enhancement to the labor (read: stuff they contribute) to society (the economy). If someone is a doctor, they may find a need for a nurse. If someone is an attorney, they may want a paralegal. If I’m a banker, I may find use in a secretary, or an accountant.
It seems to me, it is more typical in the economy that the skilled are inclined to employ the skilled. In fact, the more important the employer is, the more likely it is that he needs a higher level of skilled employees. Bill Gates might be a good example: Microsoft has Lawyers, Financial Analysts, Computer Scientists, and a multitude of other career fields that require higher education.
My personal wager is that there are more of these career fields that require specific education than there are of careers like Custodians, Housekeeper, or Houseman listed on their company website for available vacancies.
That’s just me, though.
Very Sincerely & Respectfully,
0
Great post. But, I choked on my beer when I came to this:
Sorry, hit the submit button on 32 too soon. I choked because the quadruple taxation works exactly like Steve Landsberg says if you are a middle (maybe upper middle) class wage earner or small business owner trying to save for retirement or to educate the kids. The rules change dramatically for the 0.1% If you don’t think so how do you explain Mitt Romney’s $100 million IRA, Jeff Imelt’s $0 corporate tax bill for GE or Secretary John Kerry’s wife Teresa Heinz’ perpetual six figure income as trustee of her daddy’s tax exempt foundation. I’d say rich have done aa pretty good job of rigging things in their favor and throwing up a smoke screen that the rest of the upper 25th percentile pays the price for.
#30 – The Picasso example is not clear to me. The premise was for a fixed amount of wealth. In your example Picasso’s wealth increases by $10,000 – presumably because he used that time to create a picture. It also decreases by $10 because he paid the worker to mix paints. However, the total wealth has grown, so it is not a fixed amount of wealth. Perhaps it is reasonable to ask if a fixed amount of wealth is a reasonable assumption.
In #28 Brian says: “In fact, my wealth is of no value to me whatsoever UNLESS I use it to purchase labor to do the things I’d rather not do for myself.”
But what if that wealth could be spent on things produced by capital instead of labor? Imagine a world where all work is done by machines. The wealthy man need never hire the services of the poor man.
Wealth creation has always brought with it job creation. Farming was more productive than hunter/gathering, but required much more labor on the land that could *only* be done by farmers. Industrialisation required workers in the factories. Nearly everyone could train to the level where they could add value by using their labor on the land or in the factories.
It is possible that this will continue. Every development of wealth creation will also bring with it a demand for labor. But is it not also possible that new wealth could be created without requiring any human input? In this case the new wealth has no mechanism to redistribute from the capital owner to the labor provider.
Brian says “This is precisely what we have seen over the last few decades with the digital revolution, and it’s the main reason why income diversity has been growing. It’s a good thing–it means we all have more economic options than before. But over the long run, that newly created wealth will flow from capital to labor.” Or it may not.
nobody.really (#30),
I am going to assume that when you say something is not clear, you really mean either that you think it’s not true or that you’re not sure that it’s true, as opposed to not understanding what was written. You can correct me if you meant the latter.
You say that some people are incapable of supplying labor. Well, yes, this is true in some cases. People who are incapacitated for health reasons, in a coma, or who are small children all fall into that category. I will grant that point. But the others you mention are choosing not to offer their labor, which is a different issue. But the point, again, is that wealth is the capacity to buy or command labor. Anyone with wealth, then, has a basis for exchange with anyone who is capable of supplying labor. Whether they choose to act on that is up to them, but the basis for exchange exists.
I made this point because you seemed to be questioning that very basis when you asked “how does trade help us?” My own take on your question is that you are interpreting “trade” too narrowly, such that someone with no material possession would have nothing to trade. But trade should be understood more broadly as exchange, such as when I offer you some material possession of mine in exchange for your labor.
Your point about the guy along the highway misses the mark. There certainly is a potential basis for exchange between us. He is advertising his capacity to supply labor. I can choose to purchase it or not, but that has little to do with whether he is destitute.
You also say ” wealthy people often already have all the labor they require.” Oh really? Do you know any wealthy people who have their surplus wealth sitting around in pots or hidden under the mattress? I don’t. And why does that matter? Because it means that they found a way to exchange their wealth for human labor. Did they invest it in the stock market? They are giving it to companies to purchase the human labor for them. Again, since wealth is the capacity to purchase human labor, wealth is of no use to anyone unless they use it for that purpose. In my experience, most wealthy people got that way because they or a relative proved to be adept at finding productive uses for their money. In other words, they never have all the labor they require.
Regarding your Picasso example, I did say “for a fixed amount of wealth.” A given transaction need not decrease wealth inequality/diversity between the two parties. But in the larger system, wealth still flows from capital to labor. After all, Picasso will use his additional wealth to buy more food and wine or a bigger house or to travel more, in which case it is all flowing to labor.
Your point about the Irish potato famine is correct–I should have said when overall wealth is increasing or decreasing.
Regarding Tyler Cowen, I haven’t read his book but I certainly won’t dismiss his thesis. Let me say simply that the so-called hollowing out of the middle class we’ve seen in advanced countries, especially the U.S., is precisely a case of wealth flowing from capital to labor. Middle-class Americans are fabulously wealthy compared with most of the world and they are using their wealth to purchase the labor of poorer people elsewhere. Naturally, this reduces the wealth gap between them and the rest of the world. That the wealthy are getting richer indicates that they are using their wealth for productive purposes. It seems, then, that wealth is being allocated exactly the way it should be–those who use it more productively are the ones who have it. Those who use it for consumption have less of it. It’s the beauty if the invisible hand in action!
Finally, regarding Bill Gates, what he is doing with his foundation is exactly what we mean by “trade” in the general sense, namely exchange. He is using his wealth to buy the labor of others for the purpose of investigating his ideas on how to improve education and public health, etc. It’s not redistribution, which means shifting resources around FOR THE PURPOSE OF reducing differences in wealth. Redistribution does not buy labor and there is no “exchange.”
I hope that makes my points more “clear.”
Harold (#34),
I agree that my claims for wealth flow will face a challenge as technology becomes increasingly capable of mimicking what humans do, and especially as machines become intelligent. My suspicion is that we will find new ways to define what we mean by labor. The basic human desires for human social interaction and for being productive can never be fully satisfied by machines alone, so there will be plenty left for humans to do. But it’s also worth noting that if machines eventually provide for us everything we want, then there will be no need for wealth at all, and the flow of wealth will no longer be a relevant idea. This would not so much falsify my argument as simply make it inapplicable. In any case, while such a thing might happen eventually, it’s not going to happen anytime soon.
Ignoring Piketty (I haven’t read the book, although I like some of the questions he asks, but don’t know how he reached his conclusions), I agree inequality is good, to a point. A society with a Gini coefficient of 0 means that everyone has the same income, which means nobody has any motivation to work harder to get ahead. A society with a Gini coefficient of 1 means 1 person has all the income for the society. I think we could all agree that Gini=1 is not good either. So the simple question is, what is the right level of inequality?
Brazil has a Gini coefficient of 0.6, which is high compared to other countries. The lowest are at about 0.25 (Norway, for example). The U.S. is in the middle; is that good or bad? I have no idea.
nobody.really:
“Remember that guy you saw at the highway exit holding the sign saying that he was willing to work? Remind us, how did that exchange go between you? ”
I can speak to this from personal experience. I have approached such people on several occasions, and each time, the willingness to do anything in return for a handout proved to be insincere.
See Stossel’s Freeloaders segment on it: http://youtu.be/4teq7aKTNJ4
Harold:
” Farming was more productive than hunter/gathering, but required much more labor on the land that could *only* be done by farmers”
We don’t know that much about the transition from hunter/gathering to farming. It doesn’t seem likely to me that the skill barrier was very high, as you imply here. It’s a big lifestyle change, to be sure, and that creates a barrier in itself. Once someone made the decision to transition to farming, I don’t believe there was much to prevent them from doing so.
For those who aren’t employable in any way, the notion of exchange wouldn’t seem to apply. To me the point there is there is no alternative “system” to address that, other than it’s a primary purpose of a social safety net – which will be more solvent the more wealth the rest of society generates through free exchange.
@Al V et al – neither a Gini coefficient of 0 nor 1 is really possible in a system of free *exchange* of value. But again to me the main issue should be the *source* of a particular distribution, rather than – or at least before one can assess – what is an “optimal value”. To rehash an old argument, we wave a wand and set everything equal, then from there people choose to pay to watch Wilt Chamberlain play. So he accumulates wealth (again) — as a direct measure of the benefit he provides to others (and before we’ve mentioned taxation at all). So do we wave the wand continuously (and if so do we still expect Wilt to perform?). And why exactly should we expect any of this to be destabilizing, and how exactly does fairness enter in?
And I’ll concede that point. And while we’re at it, wealth is the ability to buy or command capital, and labor is the capacity to buy or command labor, and labor is the ability to buy or command capital. Great.
Now,returning to the original topic of this post: Piketty expresses concern about income inequality, and favors redistribution to aid the relatively poor. Landsburg argues that redistributionist policies would harm “wealth diversity” which is important for trade. I question this assertion. I speculate that poor people would be happy to engage in more trade if only they had more resources with which to do so; thus, if we value trade, it is far from clear that we should prefer a world with more “wealth diversity” rather that a world with greater redistribution.
I offered the example of having nothing to trade only as the clearest illustration of the weakness in Landsburg’s argument: For someone in those circumstances, redistribution would clearly be more beneficial than “wealth diversity.” Alas, this example has distracted people from the main point. So let me acknowledge that most people will have something to trade, and will benefit from trade.
So, back to the main point: Could we achieve greater trade if poor people had more resources – even if, after redistribution, affluent people had somewhat less resources?
Again, this is unclear to me. What does “a fixed amount of wealth” mean? In my understanding, trade makes people wealthier; indeed, I don’t know why people would engage in it otherwise. So I don’t understand a discussion of trade occurring within a context of “a fixed amount of wealth.”
…And from labor to capital, and from capital to capital, and from labor to labor. Great.
But now that we’ve established that a given transaction need not decrease income or wealth inequality between parties, what cause is there to believe that transactions in general must decrease inequality?
So, to rephrase: In a free market “wealth diversity” increases only when overall wealth is increasing or decreasing — but not under those rare occasions when it’s constant? Again, this is not clear to me. Moreover, I’m not sure what relevance it has to questions about the relative merits of “wealth diversity” or redistribution for promoting trade.
Again, I find nothing “natural” or inevitable about any change in the wealth gap. Wikipedia lists world Gini coefficients since 1800. While disparities between the wealth of middle-class Americans and the rest of the world have been large since colonial times, the data has shown increasing disparities until 2005, when we observe the only break in this trend. (And see the reservations and provisos about relying on the Gini coefficient about relying on the Gini coefficient.)
That said — hey, there’s a break in the trend! That’s encouraging, I guess.
The famed wealth of the US middle class notwithstanding, the policy Landsburg is contesting – Piketty’s – involves a 2% tax on fortunes over $4 million (among other things). Thus, by the standards relevant to this discussion, the US middle class are not part of the rich. It might be interesting to know whether global trade has closed the wealth gap between most people in the world and people who own more than $4 million. My Picasso example comes to mind….
Ultimately, all of this is beside the point, which is this: Which policy would better promote trade?
Uh, I think you’re forgetting a step there – the step that involves transferring some portion of the wealth to the mechanism financing the social safety net. That’s what Piketty is proposing (at least in part).
Interesting! Landsburg hypothesizes that “income diversity” promotes trade. Here we have a measure of income diversity (albeit with caveats). Now we need some measure of trade (making whatever adjustments are deemed appropriate), and we may have a model for testing Landsburg’s thesis.
If it’s any help, Wikipedia reports that both Bangladesh (per capita income of $1,693) and the Netherlands (per capita income of $42,183) had an income Gini index of 0.31 in 2010. So here are a pair of data points to aid a comparison of the relative affects of income vs. income inequality on trade.
Steve, would you say that, taking my level of income as given, it is better for me if there is diversity of income above AND below my income level, or is it better for me if everyone else in the world makes more than I do (but still at a range of different incomes)?
Upon further reflection, it seems that you answered my prior question when you said:
“Capitalists need workers and workers need capitalists. A wealthy factory owner won’t stay wealthy for long if here’s nobody to work the assembly lines.”
it seems odd to me to think that I would want there to be people in the world who are poorer than I am, but I guess I just have to think about it a bit more
Henri Hein #39 – I have expressed myself poorly. I meant it could only be done by people. My point was that as you say it was possible for most people to become farmers, but the innovation that increased productivity also increased demand for labor.
Brian #36 ” if machines eventually provide for us everything we want, then there will be no need for wealth at all, and the flow of wealth will no longer be a relevant idea.”
If we were seeing the start of the transition to a society where machines produce everything we want, then we may see an increase in inequality as more resources transfer to capital from labor.
Iceman #40 “To rehash an old argument, we wave a wand and set everything equal, then from there people choose to pay to watch Wilt Chamberlain play. So he accumulates wealth (again)” You are speculating that after waving the wand people would be prepared to pay to see Walt. Maybe they would derive sufficient satisfaction from their own lives that they would not need to watch others as a diversion. It also rather depends on what you mean by “everything equal.”
The Gini coefficient stuff is interesting, and the diagram relating equality with growth in particular:
http://en.wikipedia.org/wiki/File:Berg_Ostry_2011_Chart_4.gif
This leads to this article:
http://www.imf.org/external/pubs/ft/fandd/2011/09/berg.htm
The authors conclude that it is not so much starting growth that is the problem, but sustaining it – particularly for developing economies. They have correlated inequality with years of sustained growth and found a reasonably strong negative correlation. When looking at which factors were most important for sustained growth, they found that Gini coefficient was the most important. In fact, “10 percentile decrease in inequality increases the expected length of a growth spell by 50 percent.”
How does this reconcile with other work? In a perfect market, any attempt to re-distribute from wealthy to poorer will result in a decrease in efficiency. It may be true that in a perfect market growth, then inequality only grows when overall wealth is increasing or decreasing, as contended by Brian. However we do not live in a perfect market. What Berg and Ostry have done is look at the world we actually live in, and concluded that equality is important for economic growth. They say “Of course, inequality is not the only thing that matters but, from our analysis, it clearly belongs on the list of well-established growth factors such as the quality of political institutions or trade openness.”
@Henri Hein,
http://thecolbertreport.cc.com/videos/w58dfp/the-case-against-charity—bill-o-reilly—john-stossel
“back to the main point: could we achieve greater trade if poor people had more resources…which policy would better promote trade?”
It’s unclear to me that that was the point. Perhaps it was that trade *is* a “policy” that doesn’t require policymakers. Which would certainly seem worthy of celebration.
That is, you ask if people would trade more if we could improve their situation, while trade *is* a natural way for them to improve their situation.
To say something is good is not necessarily to suggest we must try to engineer more of it. First do no harm, lest one get too much of a good thing.
Of course we may seek to improve some people’s situation, but so they can live better, not for the purpose of promoting trade; if anything, the benefits of trade suggest we require somewhat *less* activist policy to achieve a particular ‘equity’ goal.
We also don’t need Piketty to tell us we want a social safety net to help the helpless; he’s clearly arguing for something else with talk of political instability.
Again it seems the true issue there would be the scope of govt. And guess what, his proposal would provide one more reason to lobby and peddle influence.
To all citing Gini coefficients – I’d still like to know first how a system based on voluntary exchange is destabilizing or unfair.
Harold – the basketball example extends to any product or service that improves the lives of even the eminently self-satisfied, like iphones or what have you.
Ever notice that some people are so enamored of their religion that they’re willing to make factual assertions about its consequences – but then become defensive if you suggest actually testing those assertions?
Landsburg faults Piketty’s redistributionist policies on the grounds that they would impede “economic diversity” which promotes trade. Maybe that’s accurate; maybe it isn’t. I say, let’s find out. If the optimal amount of trade naturally arises in any system, that would be interesting to know. (Indeed, I’d be interested to know how to gauge the optimal amount of trade. I tend to think that more is better, but perhaps iceman has some insight about the need to avoid “too much of a good thing.”)
Bottom line: We don’t know if we don’t look. Among the types of diversity Landsburg praises, I guess, is the fact that we don’t all subscribe to the same religion or are willing to take the same conclusions on faith.
Piketty, among others, argues that income/wealth inequality causes government to cater to the interests of the wealthy at the expense of everyone else, which could prove destabilizing in the long run. Harold @ 50 cites a study arguing that inequality impedes economic growth in the developing world, which could prove destabilizing in the long run.
As for me, I’m not making an argument grounded in instability or unfairness, but on fact. Landsburg argues that a policy of redistribution would impair “economic diversity” and thereby impede trade. Maybe; maybe not. Let’s find out.
What we *do* with any information we discover is a whole ‘nuther question. I suspect that even Landsburg’s ardor for trade would not suffice to prompt him to advocate redistributionist policies. But we haven’t come to that bridge yet.
Luke: The former.
Really? We value another man’s relative poverty?
Do tell.
“That said, I’m skeptical that these dynamics drive a lot of economic activity – certainly not relative to wealth.” -nobody.really
So, incentives don’t matter?
“I suspect a society in which everyone is wealthy would exhibit more creativity and risk-taking (measured in absolute terms) than a society in which half are wealthy and half are poor.”
Creativity is never a problem. Prisoners exhibit a great deal of creativity in a locked down environment to sustain a shadow economy (and inequalities are pushed to other margins).
Re: Risk-taking? So what happens when someone in this Rodenberrian society of your’s takes a big risk on something stupid (or even something that sounds really good) and loses their wealth? Do they get more in order to maintain equality so they can keep making bad choices? What encourages them to exercise more care and prudence in their decisions?
Yup, incentives matter to creativity and risk-taking. My argument is that you will experience most of these incentives whether or not you’re richer or poorer than your neighbors. However, your ability and willingness to act on these incentives may be enhanced by the presence of wealth.
(I don’t know what “and inequalities are pushed to other margins” means. Are you suggesting that trade eliminates inequalities within the context of a prison shadow economy – that is, that no prisoner gains greater wealth/status via trade than their peers? I’m no expert, but that would not be consistent with the depictions of prison life I’ve seen.)
Sure enough, this is a bona fide challenge of wealth redistribution.
I favor some form of social safety net that people get even if they have squandered their previous resources. And while it’s generally more efficient to give people liquid assets (cash), in case of the social safety net it may make sense to try to convey assets in a less liquid form (e.g., housing vouchers, food stamps).
Beyond that, and in an ideal world, we’d then issue a check to every person, period. This would create the least disincentives for the recipients. I understand Alaska issues checks to every resident based on the state’s oil revenues, and certain Indian tribes issue checks to each member based on casino revenues, so we have models for observing how such income streams affect people’s lives. And, as I mentioned before, we have a few studies of providing people with a Basic Income Guarantee (BIG).
But the program I’m describing would be maximally burdensome to those financing it – even if they would also receive a check. Larger taxes alter people’s behavior more than smaller taxes, so this would be a factor to be weighed in the analysis.
We could reduce the burden on those financing the program by targeting the checks solely to those meeting some criteria – but this then potentially distorts the behavior of those receiving the checks. And if the criteria you are interested in is relative poverty, it does creates some incentive for relative poverty – or, at least, incentive to produce whatever indicia of poverty the program relies on. So there are trade-offs.
And some people here may have faced these trade-offs. Maybe you’ve been on need-based forms of public assistance and had to worry about whether taking a given job would cause you to lose some benefit. In my case, I had need-based scholarships. My college job mostly had the effect of reducing the amount of scholarship dollars I received – but I only realized this after the fact. The irony is that, thanks to need-based aid to the poor, the marginally poor often face the highest marginal tax rates.
But in a real Rodinberrian world, the thing people place at risk is not so much their wealth but their lives.
How does one “gauge the optimal amount” of apples?
Interesting that you analogize to religion, because answering with “beats me, whatever number people freely demand” seems more like agnosticism, with a dash of humility (and fairly grounded in economic theory to boot).
BTW for what it’s worth, I live near some Indian casinos and all I can say anecdotally is that surprisingly, given the sums involved, some observers see the resulting “BIG”-type distribution as having largely generated increased idleness, alcoholism and in-fighting. But now I’m definitely working without a net.
Really enjoy having you in these threads nr.
51-52: Seems logical enough in terms of expanded trading opportunities – “taking my level of income as given”, if I’m the poorest person in the world who could I hire to mow my lawn?
50 – “We don’t know if we don’t look”
But what are we looking for? We might redistribute and get more trade but less utility. (E.g. you’ll buy an apple whether your consumer surplus is 10 cents or 10 dollars). Or people might have less need to trade. Which wouldn’t necessarily suggest we shouldn’t do it anyway — I think a disconnect here is that saying differences make any level of trade more fruitful is not to endorse inequality as a vehicle to “*promote*” trade, which is what it seems you are (reasonably) objecting to. Just because something is good doesn’t make it an end in itself, or even a proxy for general goodness. We may want to redistribute and thereby reduce “differences”, knowing full well that this makes the world, say, less interesting and dynamic by lessening the need for people to interact with and benefit from each other. Frankly isn’t this what the welfare state is in essence?
PS Beware drawing conclusions from comparisons with developing countries – e.g. didn’t someone point out Bangladesh and the Netherlands have the same gini #? It often seems the reason they’re still developing gets back to the underlying *source* of the inequality.
PPS Capt J Parker 33 – can you explain to me what the purpose of the corporate income tax is at all?
Good weekend to all.
nobody.really:
Really? We value another man’s relative poverty?
Do tell.
If you’re looking to hire people, you’ll generally find that the poorer they are, the cheaper they’ll work.
SL 57, on why we might value someone’s relative poverty: “If you’re looking to hire people, you’ll generally find that the poorer they are, the cheaper they’ll work.”
Oh Steve! Next you’ll tell me that if I am poor and unemployed I might value a richer man who will give me a job. Pshaw!
It’s amazing you can’t see the illogic of your own statements.
“….in a democracy, it’s much easier for the 99% to exploit the 1% than the other way around, and the richer the 1% get…” So exploited they are getting richer… um hmm.