Globalization and Inequality--Posner's Comment

Becker has accurately summarized the International Monetary Fund’s recent report on the effect of globalization (meaning increased integration of the world’s economy) on inequality. (It is chapter 4 of the IMF's "World Economic Outlook" published this month and available online at http://www.imf.org/external/pubs/ft/weo/2007/02/pdf/c4.pdf.) In essence, the report, while acknowledging serious data limitations, finds that average incomes have increased significantly in most nations in recent decades, but that income inequality has also increased in most nations, mainly because of disproportionate increases in the incomes of the top fifth of the populations. The incomes of the other quintiles have increased too, but not as fast, so that overall the gap between rich and poor has increased although the poor are better off--just not as better off. Both the increase in average incomes, and especially the increase in inequality, are driven mainly, the report finds, by increased utilization of advanced technology, which increases the returns to high-skilled workers relative to the returns to low-skilled or unskilled ones. The report suggests that greater investment in education would tend to reduce inequality by increasing the proportion of high-skilled workers. I want to question three assumptions of the IMF report. The first is that increased income inequality is a bad thing, the second is that an increase in world average incomes is a good thing, and the third is that greater investments in education are bound to reduce inequality. I do not think that increased income inequality is bad (regrettable, unfortunate, deplorable, etc.), in general (an important qualification, relaxed below), when it does not involve any reduction in the incomes of a substantial fraction of the population. Suppose that over some period the average income of people in the bottom four quintiles of a nation's income distribution increases by 2 percent and the average income of people in the top quintile increases by 10 percent. The result is increased income inequality, but so what? Everyone is better off, and why should the fact that the rich are better off by a larger percentage concern anyone? What is true is that if the baseline is extreme inequality and many people are below the poverty level, a further increase in inequality can be politically destabilizing. Suppose 99 percent of a nation's people live in poverty and the other 1 percent are rich and over some period the average income of the 99 percent rises barely at all, lifting few above the poverty level, while the average income of the 1 percent who are already rich doubles. Such a pattern would exacerbate what would doubtless already be a high degree of social unrest. I argued in my blog post of December 10, 2006, that the continuing enrichment of the already superrich stratum of the American population is a potential source of political problems too. But concern with the impact of particular forms and degrees of inequality in particular countries at particular junctures in their history does not justify concern with a rise in inequality in the world as a whole, an approach that while natural for the IMF to take treats the entire world as if it were a single nation, thus abstracting from particular circumstances of particular nations, though it is the particulars that determine whether inequality is a serious problem. It might be argued that, given diminishing marginal utility of income, average and total human happiness would be increased if the incomes of the poor grew more rapidly than those of the rich, because presumably an extra dollar confers less utility on a rich person than on a poor one. But this observation would be pertinent only if rising inequality were a product of unsound policies, whereas the IMF report attributes it to economic factors, such as technological progress and absence of barriers to foreign investment, that are vital to continued growth in average incomes. The poor, unless consumed by envy, are not made better off by policies that leave them as poor (or make them even poorer) but reduce the incomes of the rich. Concern with inequality, it should be noted, is distinct from concern with poverty. It would be possible to alleviate poverty without reducing the share of income going to the wealthiest quintile of the population. Focusing on quintiles tends to break the link between equality and welfare. Suppose some adjustment in the tax code resulted in reducing the average income of persons earning $100,000 a year by 2 percent and increasing the average income of persons earning $50,000 a year by 1 percent (the difference reflecting the much larger number of persons in the lower income bracket and the deadweight cost of the tax increase on the higher-income taxpayers); would that increase average happiness? I doubt it. My second proposition is that, while again it is natural for an international organization like the IMF to consider increased global wealth a very good thing, there is no reason for any given individual to think that. None of us is a citizen of the world. We are citizens of particular countries, and our personal welfare is bound up with the welfare of our country rather than with that of the world as a whole. Do Americans benefit from the rapidly increasing wealth of China? Some do, of course, both as consumers and as suppliers. But there many losers (besides the obvious ones--those who make products that compete with imports to the United States from China), since China's rapid growth has increased the price of commodities such as oil, severely aggravated the problem of global warming, and contributed to the rapid growth of Chinese military power, which is a potential danger to the United States. Russia's increasing wealth has made Russia more bellicose and less friendly to the United States; and, in general, nations such as Russia that are rich in natural resources, especially oil, are not dependable allies of the United States--and they are all growing richer. And the technological progress that is such a big factor in increased world wealth makes international terrorism more dangerous than it would otherwise be. Where would terrorists be without cellphones, the internet and web, and cheap international air fares? Third, it is not certain that increased investments in education would result in less inequality. There is the cost of such investments to consider, and who within a society would bear that cost. (Taxpayer-subsidized tuition for students at Berkeley does not increase income equality in the United States.) One must also consider who would benefit the most from education. Suppose everyone in a nation had the identical opportunity to obtain as much education as he or she could benefit from. The abler students would receive a better education than the less able, and the preexisting inequality of human capital might persist or even increase. For notice that in the United States income inequality has been growing even though educational opportunities are abundant, with more than a third of the population obtaining some college education; most of the rest could obtain it as well if they thought they would benefit from it. Presumably, then, the countries that ought to be considering greater investment in education for the sake of reducing income inequality are those in which that inequality is greater than it is in the United States. In countries in which it is less, a greater investment in education would increase average incomes but might leave inequality unchanged--or even increase it to the U.S. level.

Comments

[James N. Markels]

Corey: "Yeah yeah yeah, incentive theory... yay. One hole... ALL real innovation and hard work is done without a statistically significant chance at becoming super-rich."

Is that what you tell yourself to excuse personal laziness and failure? I mean, really now. If you think Sam Walton, Warren Buffett, and Bill Gates were lazy bums with nary an original idea to offer, you're just deluding yourself. Besides, it's not all about becoming "super-rich," as I can be merely "rich" and still get plenty of luxuries. I can even be "middle-class" and afford things at Tiffany's. The more productive I am, the more I make, the more luxuries I can afford. That is a good thing, to give me incentive. The incentives thus do NOT only exist for the very few, as you mistakenly argue. The super-rich only inform me as to how much is truly possible. The fact that there is a chance is enough. Take lottery tickets, for example.

Corey: "Another hole... the people who become super-rich are almost exclusively not the same people that cause corresponding sea-changes in productive science, technology, or social services."

Let me guess: only the things Corey finds valuable are the things that it is morally acceptable for someone to get rich at. One thing I'm sure infuriates Corey on a daily basis is that the people around him value goods and services far differently than he does. What was that he was saying about counting heads earlier?

Corey: "Another hole... most if not all of the increased productivity since the 1960s is attributable to advances in computer and other technologies that actually made work EASIER."

So? I'm saying that taking away luxuries would reduce productivity. I haven't claimed that luxuries will ensure constantly rising productivity.

Corey: "If no one produced yachts then more people would be available to produce medicine."

On what basis? Guys who build boats are physical laborers. Different skill set. At best you could argue that we'd be better off with fewer plastic surgeons and more regular doctors, except once again we're dealing with How Corey Values Things rather than How The World Values Things.

Corey: "The fact that luxury goods drive production and investment does not disprove my assertion that other goods would drive production and investment better."

People always think that, and governments then try to make it happen, and they always fail. Haven't you learned? When a bunch of Coreys sit around deciding what society should be allowed to have, society fights back by sitting on its hands.

As for the bit that possession corrupts -- the power you would give to yourself or the government to control what is produced and what people should be allowed to have is far more corrupting than any luxury ever created. And besides, if you think owning something nice will corrupt you, you must have a really low opinion of your own self-control.

Corey: "I do think everyone has a right to own a home for their family. What is keeping me from doing so is others asserting a right to have their home be worth nearly a million dollars."

Wait, I have a right to have my home worth a million dollars? Sign me up! Give me a million dollars! Oh, wait...that's not quite how it works. Your frustration leads to these mistakes. You have to step back and take a breath. Look at the bigger picture, the "data" if you will. It's not all about your frustration. You happen to be on one of the most profitable career paths in America. That you're complaining about it boggles the mind.

Corey: "And the truly ironic thing is, that all this time while I have been chasing a home and the quiet modest freedom of home ownership that I remember from my childhood, I have been constantly accused of hypocrisy for continuing to 'sell out' to higher and higher bidders."

Get new friends. Seriously.

[Jack]

Corey makes some good points, but I think, for the jury, that instead of counting million buck yachts at the Marina Del Ray that the following sums up the situation better"

"The United States is one of the richest countries in the world (2nd behind Kuwait), and in 2000, the mean wealth was $144,000 per person.[6] In the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation's wealth."

Followed by this very nice chart:

http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States

In short, that despite the wealth of our country nearly half of us are grubbing for but 1% of that wealth with (by definition) typically only median income (one third of average income) to deploy.

Perhaps that explains much of the reason that the worn out bungalows of his, and my own, parents command ten years of working folks income as compared to just two years that of our working class parents in the 60's.

But in the short run Corey keep your powder dry, while standing still paying rent, you're probably doing much better in terms of asset building than those lip deep in debt in a declining housing market that has outrun the ability of prospective buyers to buy them.) Consider that sans appreciation they are paying $4,000 plus interest taxes and substantial maintenance. This pull back will get worse before it gets better especially as bankers are reminded of their responsibility to their lenders.

Another good point of Corey's is that as cutthroat "competition" seems the watch word of the day, truth is capitalism is far more dependent on cooperative efforts to add value by one's labors and creativity than beating the other dog to the bone. Or so it seems from here......... Jack

[Corey]

"People always think that, and governments then try to make it happen, and they always fail. Haven't you learned?"

Yeah, because our government is doing a real bang up job right now right? People haven't been this dissatisfied since Nixon left office. I call failure.

"Guys who build boats are physical laborers. Different skill set."

When I call for redistribution of production then I am of course anticipating redistribution of job titles. That's why I support this thing called education.

"How The World Values Things."

You mean the market right? I don't listen to invisible hands or voices. Market preferences are dominated by the rich. One person one vote. :)

[Vasilis]

"The more productive I am, the more I make, the more luxuries I can afford. That is a good thing, to give me incentive. "

You must know that this is not true, right? Especially in the US. The salaries of CEOs have been shown time and again to not be correlated with anything except the movement of the stars in the sky, and certainly not with performance or productivity. There are shareholders howling at this for the past at least five years. Moreover, the reduction of taxation on assets (stocks etc, including the carry that hedge funds make -- which low level of taxation even Warren Buffet considers a bad idea) means you get rich by being rich, and much more so today than 20 years ago. This is an option not open to productive workers of any class.

[James N. Markels]

Vasilis: CEOs appear overpriced because they don't "produce" in the same way as other workers, but there is no doubt that an excellent CEO can make millions, if not billions, of dollars in difference. Also, CEOs often face noncompetition and nondisclosure restrictions that can make it hard for them to get a similar job at another business. The CEO naturally requests more money in exchange.

Jack: No, you're not "grubbing" for just one percent of the wealth. A person can have good income and little wealth. Are we supposed to worry about them because they have leveraged their net worth for entrepreneurial means? A person can be like Corey -- just starting out, not worried about wealth accumulation while building a career. The data is much more complicated than you think it is.

And you're right -- capitalism depends on cooperation, even between companies. Difference is, capitalism's cooperation is voluntary, not forced.

Corey: I didn't think you'd be able to come up with a government that does redistribute wealth well. That's because there isn't one. As for education, you can't mandate that everyone is going to be good at being a doctor, or a lawyer, or engineer. Some people are good at blue collar stuff. You'd like to mold people to fit your wants and needs, but it doesn't work that way. It's one thing that parents learn very quickly when raising children.

As for markets being dominated by the rich, the simple answer is: only in your head, dude. Aside from the really high-end items that you already disdain, you're the one setting the prices, not them. Think about it. It's not like each rich person eats three hundred times more food than you do.

[Jack]

James good comments, thanks, though I think you gloss over the reality of increasing inequality which most seem to agree is not a good thing for a still semi-functioning democracy; including Greenspan.

Vasilis: CEOs appear overpriced because they don't "produce" in the same way as other workers, but there is no doubt that an excellent CEO can make millions, if not billions, of dollars in difference.

........ Indeed they do appear overpriced by nearly any measure perhaps that of the 2,000% increase over 25 years, or going from an already high (compared to other nations) of 80 times worker pay to over 500 times. In the mature industries, most are employed, very few make billions of difference and certainly not in the area of increased productivity. Would Blue Cross be a fine example? Any genius of new efficiencies? Any creative new products?

...... If CEO's worthy of their gleanings do make billions of difference surely it's high time for some of it to "trickle down" to the team players of lesser salaries whose productivity and contribution is also difficult to measure, assuming those "billions" come from something other than squeezing more widgets out of a fixed labor cost. I'm reminded that Volvo was built on a commitment of no one in the company earning more than ten times that of the least. Such is not the case in our "beleaguered" auto industry and Ford is finding their boutique marques of Volvo, Jag etc "unprofitable" and perhaps to be sold off.

Employees too face high risks of mid-life unemployment as we've seen with waves of downsizing, tech and automation advances, and outsourcing. In more than one company the entire work force' last days were spent teaching new Chinese owners how to operate the, soon to be shipped, equipment. No "non-compete" of course just their specialty no longer exists; finishing up unskilled labor is the pot metal parachute for all too many.

Jack: No, you're not "grubbing" for just one percent of the wealth. A person can have good income and little wealth. Are we supposed to worry about them because they have leveraged their net worth for entrepreneurial means?

........ "Worry?" Perhaps. As wealth exacts a rent it's a part of the reason for laments such as Corey's that the "ends don't meet" even for a couple further up in both education and earning capacity than most. As 40% of us enter the "silent auction" to find 99% has already been sold, we've the Hobbs choice of walking away empty-handed or grubbing at inflated prices for the few remnants.

While we give lip service to a meritocracy offering upward mobility to all the truth is rapidly becoming very different.

Items: Flat wages at median level and below. The sharp increases in wages in the topmost rungs. The yet higher rate of consolidation of wealth at the top. And even then, the Walmart heirs using their extreme wealth to buy a presidential campaign against the "death tax" that their own inherited fortunes will not be lessened in passing to their indolent heirs such that they too can enjoy undue influence over the remnants of our democracy.

Worry? Yeah, when this country is divvied up to lords and serfs there's no new frontier in which to try again.

[Vasilis]

James: "CEOs appear overpriced because they don't "produce" in the same way as other workers, but there is no doubt that an excellent CEO can make millions, if not billions, of dollars in difference. Also, CEOs often face noncompetition and nondisclosure restrictions that can make it hard for them to get a similar job at another business. The CEO naturally requests more money in exchange."

This is out of step with currently research results and current opinion of experts in corporate compensation. Read anything except the WSJ, including Financial Times, the International Herald Tribune, the financial pages of the NYT, for scores of articles on the topic. This explanation doesn't fly any more.

[James N. Markels]

Vasilis: I think the common consensus is that CEOs are overpriced, but that doesn't mean that CEOs still won't be able to command such a price from those who think it's too much. Why? Because companies compete with each other to land CEOs, just like law firms compete with each other to land the choicest associates, which is another area where people think that businesses are paying far more than they should. While a given first-year associate fresh from a clerkship at the U.S. Supreme Court is a rare bird and usually of exceptional ability, they are rarely, if ever, worth the $200K+ that big firms are willing to pay them. The firms even know this, but pay anyway, because if one firm lowers their offer then the other firms may refuse to lower theirs to ensure that they get the associates and the more reasonably-priced firm doesn't. And while on average that would seem like a good deal for the lower-priced firm, losing those associates may mean a loss of cachet or influence, and will mean missing out on those rare associates that are actually worth the price (or perhaps far more).

Corporations not willing to match the bidding wars over the "best" CEOs may be better off in the long term, but they know that by missing out on those CEOs, they are taking a chance in reduced performance that could make a lot of difference. Jack may think that there's not much difference to be had, but CEOs like Lee Iacocca (who created the whole Lean program of efficiency) have indeed made billions of dollars in difference. CEOs that grow market opportunities and/or make the business more efficient can easily be, in big companies, worth the price.

Jack: Part of the problem is that your argument makes assumptions that simply don't pan out. There is no "silent auction where 99% has already been sold." From food to cars to houses and more, there is more out there to be bought than ever. The very notion that people can't find stuff available for sale is patently ridiculous. The issue is only whether a buyer can afford the wares, and this is an issue of credit for those with little liquid assets for purchasing. A person doesn't have to be rich to have good credit and be able to get decent mortgage rates. When people, high income or not, screw up their credit, it makes ownership harder. The problem is when people adopt the attitude of "who cares, I'll never be able to afford anything in this capitalist world" and blow their credit.

Further, if money bought political power, we would have had President Steve Forbes for a while now. Doesn't work that way. And besides, opposition to the death tax has strength not just because the Waltons might want it. There are serious policy arguments to be made in its favor. Dismissing it as merely a gambit for the wealthy to champion is wrongheaded, to say the least.

[Bill]

I think Posner's first point, that increased income inequality is not "bad," is not quite correct. Indeed, he himself mentions a (relatively extreme) scenario where he admits income inequality would be bad. I think generally, the consenses would be that really high levels of income inequality are bad, but not as bad as overall increases in living standards are good.

[akatsuki]

I would suggest the largest negative outcomes over rising inequality are essentially the behaviours that it creates. Those at the bottom generally feel resentment and envy of those at the top. Those on top use their money in "rent-seeking" manners (e.g. hedge fund tax rates at 15%) which creates barriers to entry.

The end result will generally be an unfair society regardless of how the inequality starts. This scenario will play out even if both groups are moving up in wealth at different rates, as comparative wealth is a more desirable item than absolute wealth. Eventually the policies sponsored by the rich few will adversely affect the lower brackets leading to justified resentment and hostility.

@James Merkels- In a society where everyone is in relatively similar financial strate, the death tax is immaterial. However, when there are disparities, it's potential to amplify the income gap is problematic to say the least.

[James N. Markels]

The death tax has nothing to do with income.

The simple fact that people have different abilities and skills mandates unequal outcomes. It would actually be far more unfair to mandate income equality than to allow doctors to make more than fry cooks. The only problem, it seems, is that some people think that income inequality should be cabined to some extent so that those of lower income won't get too pissed at those with more income. But this is a self-serving argument, as those who allege such dissatisfaction are the same people who try to gin up that dissatisfaction with neo-socialist theory.

Frankly, while leftists tsk-tsk-tsk about income inequality, the general American public doesn't really care. If they were really angry about it, they'd be picketing Gates' house, protesting Trump's projects, and booing celebrities like Oprah and movie stars with their million-dollar movie deals. But they don't. The dream is not to bring the rich down, but for people to find a way to become rich. That's why reality shows are so popular. And it's why the jealousy that spills forth from folks like Corey seems so out of place in the American discourse.

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