Great article here on “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity” by Luigi Zingales, esp the Pigouvian angle. It was also heartening to read the other day that some at the Fed are arguing for the end of TBTF — the revolving door between regulators and regulated has gotten so incestuous I’m starting to think Glenn Reynolds’ 5-year, 50% surtax on earnings from such comings and goings might need to be taken more seriously. Unfortunately tickling Leviathan seems likely to be a growth industry for at least the next four years.
But one thing annoys me in this article, which has some great points about being pro-market vs. pro-business: the obligatory plaint about income inequality. The focus on this is something that’s been bothering me for a while.
Income/wealth inequality isn’t a real problem, that notion is rooted in a false zero-sum view of the economy — most of the wealth around today was newly created over the last 50 years, and your neighbor getting richer doesn’t actually make you poorer. Consumption inequality is a bit more logical (and is fun to get angry about) but it doesn’t really matter much (especially if you look at absolute consumption levels over time, which are always rising for all quintiles). In a sensible discussion of inequality, the focus needs to be on production inequality — consumption has always been limited by available production, since the first humans started making food and tools.
In other words, if we care about living standards, rather than complaining that some people/countries/communities are being way too productive (rent-seeking aside, everyone agrees that’s bad) we should be asking why the poor are not becoming more productive (in the sense of actual contributions, not just measures of “worker productivity” which are largely governed by capital inputs). Unfortunately that gets into very uncomfortable questions about culture and choice, and as a society we don’t seem to be able to handle that debate very well — the notion that poor people are choosing to be happy consumers rather than productive workers, and thereby making society poorer, is one that people just do not want to face. It’s much easier to think of the poor as victims of… well, something or other… even if their consumption is rising faster than their contribution to production.
But as we get richer as a society, the marginal incentives to produce get smaller and smaller — who wants to work 70-100 hour work weeks in a world that produces so much wonderful utility to consume? Personally I think one would have to have an ambition verging on mental illness to want to be a CEO these days. Maybe instead we should be asking “how free do we want to be, to let people decide how rich or poor they will be?”
Comments
27 responses to “Inequality and Iniquity”
Isn’t there some degree of concern for how that imbalance affects a society? I am not in favor of soaking the rich or egalitarianism but rather the feedback loop that occurs when you have a small group of people who can effectively buy legislation to favor themselves and their own interests at the expense of free markets and free people. It’s a crony capitalism feedback loop.
Perhaps this problem is solved by your last question but I don’t see us heading toward liberty. Rather the opposite.
Yes, that’s a primary point of the article — the problem isn’t wealth creation, that just makes everyone better off, the problem is rentseeking politicians/regulators.
It’s sort of like the old “resource curse” canard — as later research showed, the problem was never the presence of resources, it was the corruption of the government.
“…we should be asking why the poor are not becoming more productive…”
Ask and ye shall receive.
The reason the American poor are not becoming more productive is because they are firmly attached to the teat of the Welfare State via EBT, Section 8, WIC, unemployment insurance, all as part of the Dem-Communist Party voter recruitment program.
Imagine the Grapes of Wrath, but without any necessity to travel to the orchards of California (or in today’s case the oil fields of North Dakota)for a job.
But honestly, we cannot call any American “poor” in an economic sense. Poor in spirit, yes, but not materially.
There is no need to be concerned in this society as to who has how much. What can you do with a little less money than another guy can do with a little more? Travel,Maybe. Eat better,No, its all just calories and who needs more these days. Entertainment,hardly,with choices like Netflix,cheap hdtv’s,free concerts in the park.Clothing,not as long as Target and Walmart are to serve. Its all just ENVY with a capitol EN.
the only people who end up poor are those who the rising costs of the welfare state punish through inflation and higher taxes, and who refuse to knock up and marry some girl to take advantage of welfare. At my income, if I weren’t working two part time jobs at about 65 hrs a week, and I married and had 2 kids, I could be on $500 of EBT a month, at the very least. But I don’t do that because it wouldn’t be right to force other people to pay for my life choices. Plus, I am one of those “poor” people who has a computer, nice cell phone, two TVs, and AC, so I can’t really complain too much.
Dave’s question, “we should be asking why the poor are not becoming more productive”, is older than the Republic. It goes into culture and lifestyles.
See Colin Woodward’s _American Nations: A History of the Eleven Rival Regional Cultures of North America_ for many examples of how New Englanders tore their hair out over the disinterest of Appalachian Scots-Irish in bettering their condition, and the latter’s insistence on leisure at the cost of squalor.
Perhaps you are right on the point that consumption is limited always by production, but you miss what that point means. At any point in time, wealth is zero sum. For a given finite amount of production the distribution of x amount of goods to person A means that x amount of goods is not available to persons B, C, and D. You then make the quite tendentious assumption that wealth distribution today does not affect production tomorrow (and the possibilities for wealth distribution in the future). That is plainly wrong. As Henry Ford noted at the beginning of the last century, when his line workers do not take home sufficient wages to purchase Model T automobiles, the market for Model Ts is quite limited. Henry Ford then increased wages. The problem with the US economy today is that businesses (private equity and Fortune 500 types) like to pay low wages outside of the US but sell their products back into the US and pocket large profits based on their “avoidance” of US wage scales and regulatory costs.
The problem is that when US consumers do not earn wages, they cannot buy anything and your economy stagnates.
Economies are more vibrant when rules within the system prevent the type of wealth maldistribution evident today.
It is not a matter of “productivity,” it is a simple matter of assigning property rights in the correct place in the first instance.
Anybody who subscribes to the Ford myth has no business calling anybody else “tendentious.”
The inportant thing is not what you think Ford did or why you think he did it. What matters is he pissed of the Feinstein types who steal from the poor without contributing anything. Think about it. He understood and knew how “tendentious” the slobs place is in our world.
The Senators types need to hang on to their hats. The odds of the hat being there in ten years is slim to none. The hords of the unwashed are a’ comin. Good luck.
The poor run into several problems outside of any choices they themselves make.
1. The welfare system is set up to keep people on welfare. The system needs to be modified to push people up (income, job prospects, productivity) and out of the welfare program.
2. Public education offered to the poor is substandard compared with public education offered to middle class or wealthy. This public education is often substandard to the education that can be purchased from the top private institutions.
3. Given the lack of education provided, the working poor are stuck in production or manual labor jobs that are cheaper to run overseas.
A conservative solution would be to:
1. Make welfare offer less money to people who do not work at all WHILE providing some level of extra assistance to people who work full time minimum wage jobs.
2. Provide school funding by statewide revenue instead of local property taxes AND provide the same government dollar on a per student basis.
3. Find a way to keep the jobs in the US. In the long run its cheaper to pay a little more for goods if that means fewer people are on welfare.
There is obviously a lot of inequality, and it doesn’t take a genius to realize it’s a symptom of something gone wrong.
We need more programs to serve as, at least, speed bumps to the growing gap between rich and poor. It’s not just wealth, but power.
The poor are being increasingly marginalized, thanks in no small part to policies you keep supporting.
You pose questions about ‘why the poor are not becoming more productive’ and diminishing marginal incentives to produce as we become richer (and thus meet all our needs). I think a lot about this as I ponder the ill effects of the income/wealth gaps.
Much current discussion is about a need for entitlement reform. We have people on social security, SSI, food stamps, medicare/medicaid, unemployment insurance, veterans benefits, earned income credits (and other tax credits) to name some programs and they are funded in various ways. Our jobs deficit looks as if it might be here to stay and our aged demographic is growing.
The participation level in programs like the above must be very high. Why not get rid of all of them and move to a guaranteed minimum government payment for each individual (a la Charles Murray) and replace with an income tax approach that kicks in at some level above these guarantee levels and is phased out as income rises and is actually recovered at some level of income. Minimum wage laws would not be needed. People would work for incremental improvements in their living conditions (when they have talents or skills with market value) – or not, if they have no desires.
While some commenters insist on wringing their hands over how UNFAIR it is that successful people are “allowed” to keep the fruits of their labor …
#Julias have no problem “simply taking what is given”
btw, if some are “uncomfortable” about having a real dialogue on why hardcore poor (the multi-generational subset of the fluid larger class of poor) stay that way because of both culture and choice, it is because the Left fetishizes them .. not because they really care, but because they are useful politically.
Think of teh childrens! Won’t you just think of teh childrens?!
Or perhaps the place to begin a discussion of welfare is with corporate welfare. There are obvious no brainers like the ethanol mandate or the special tax treatment for carried interest. There are other more specialized subsidies as well. There is no reason dividend and capital gains income should be treated differently than ordinary income (those tax treatments merely bake into the system certain structural and financing privileges). Interstate highways subsidize the trucking industry and all companies that use trucks for shipping. We might be better off if we banned trucks from interstate highways and made everyone ship on private sector railroads. All “public” education past 8th grade is really a subsidy for corporate job training. All federal college aid is as well. Perhaps companies should pay for all education for their workers past the 8th grade. Welfare is quite a bit more than food stamps and housing programs. The mortgage interest deduction is a subsidy directed at the housing industry. “The non profit sector” is subsidized by preferential tax treatment for donations — and by their tax exemptions.
There is a huge welfare problem, on the business side. Perhaps another question to as is why can’t we do away with every single business subsidy and structural preference?
“you have a small group of people who can effectively buy legislation to favor themselves and their own interests at the expense of free markets and free people.”
A small, limited gioverment would take care of most of this problem. I fear that genie is out of the bottle.
Harry, exactly which conservatives (and don’t think that is synonymous with Republicans) are for crony-capitalism?
wilky beat me to it; you don’t want people buying special favors from government (though it really is the other way around, government has the guns so they get to say ‘hey, nice business you got here; be shame if anything were to happen to it’) you take away the power of the government to grant such favors.
Free Markets, not crony ones.
I have considered that I would be very happy with cheap beer, a subsidized apartment, riding the bus, etc. if I can have an internet connection, games, and books.
I think you could easily do that in today’s society.
I don not choose that because I have kids.
Great link Bill, thanks for sharing.
Also thanks to Tom Holsinger, that’s a great point and I appreciate the reference, have to get that on my Kindle. Most people do not choose to be highly productive. Should they? As I alluded to earlier, I do not think we can call their choice irrational, especially with the declining incentives to produce. The outliers are the people working 70-100 hours a week and involuntarily donating half the fruits of their efforts to society.
Harry — it’s a problem, no question about it, local tax incentives are particularly egregious. But remember, Solyndras aside, “corporate welfare” means a tax reduction. Few personal welfare recipients will ever be net tax providers.
Cobacoba98 — I realized this as an undergrad in the 1990s, when I made $17K. Sure, I had a tiny room in a decrepit rooming house, but I could afford cable, AC, a nice TV, beer, and I was getting laid. I was pretty happy.
Harry — Yes, but we don’t live at a fixed point in time, we travel through it.
Your argument assumes you could achieve the same production under a “more optimal” income distribution. Again, unless you think anyone could do what the 1% do if you handed them equivalent resources, this is a very unpersuasive line of argument. It’s much more likely that (as Tabarrok and Cowen often argue on their blog) we are entering a economic regime in which it is increasingly difficult to increase useful production for a variety of reasons — and there are increasingly smaller rewards for doing so — and as a result smaller segments of the population are capable of achieving such increases. (On the other hand, of course, we have higher living standards in this regime than in past regimes.)
Or to put it another way — it’s a fallacy (a common one) to assume that income distribution is optimized where aggregate demand is maximized, especially if you’re trying to get there coercively. In no sane world does anyone imagine that we’re better off if LeBron James, Steve Jobs, or the CEO of Walmart is replaced by a random person, because we all understand that certain resources (be they entertainment, technology, or retail goods) are far better utilized by certain people than certain other people. Likewise, we shouldn’t assume better outcomes will result from more even income distributions.
James,
In re: your point #2
Teachers unions.
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Let me add – if you want to learn you don’t need to be educated. If you don’t want to learn you can’t be educated.
Buckminster Fuller said that a time was coming when it would be an honor to be on a production team.
I believe that time has arrived.
The only question is what system do we use to support the non-producers that also supports production.
Harry Huntington,
Not a student of logistics I see.
Here is a test: why did the use of horses increase until 1905 despite the ubiquity of railroads?
Question #2
Why do goods get shipped on aircraft.
Question #3 – which may give a hint for #2
What is the meaning of “time value of goods” ?
Harry,
If education is required please tell me how I became an aerospace engineer with out the benefit of the “required” education?
James,
How do you propose keeping the diamond mining jobs in the US?
Output1 –> Input —> Output2
How can you keep Output #2 in business if you raise the cost of his inputs by protecting output#1 ?
You all might like, sometime, to read Cyril M. Kornbluth’s The Marching Morons.
He had part of the problem right. Our problem is that our poor-by-choice aren’t morons. They have very carefully weighed the odds. They aren’t stupid at all, they’d just rather get welfare than work.
It’s less morons vs intelligent than “I’d rather live off the teat” vs “I’m too proud to take charity”.
As a member of the latter group, I have to admit we are losing.
‘They have very carefully weighed the odds. They aren’t stupid at all, they’d just rather get welfare than work.’
If those who prefer being productive are losing this conflict, and entitlement spending projections say they are, (though entitlements are provided to productive and non-productive alike), we should take steps to acknowledge these ‘facts’ and behave rationally with a plan instead of continuing our ad hoc responses.