« Inequality in Income and Wealth—Posner | Main | Abrupt Change of Authoritarian Regimes-Becker »

01/30/2011

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Hyena

Tyler Cowen has already pointed out that income inequality based on skills and education has not, in fact, been that bad. Rather, most of the skyrocketing inequality is concentrated in the financial sector. It's difficult to see how college education or increasingly technical skills matter when the vast majority of the proceeds have, in fact, gone to traditional traders/dealmakers and not to quants, etc.

I think the "skill-biased change" argument has been put down by the data.

OnePlusOne

Becker: “However, they [people] are justifiably unhappy about large pay to CEOS who badly manage their companies, huge bonuses and stock options to executives who took unreasonable risks and then were bailed out by the Fed and the Treasury, and other big paydays for work that (perhaps unjustly) does not appear to be particularly socially valuable.”

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The banking risks were taken with money that paid dismal interest simply because there is a mandatory collectivist system that obligates everyone to subsidize the risk differential between the dismal interest rate on deposits and the potentially huge returns that can be made by investing the money of depositors into risky investments. The name of that subsidy is F D I C.

Per FDIC, a banker can put $1 of his own money, collect $15 from depositors, pay them the dismal interest that corresponds to low risk (since the money is insured by FDIC – read, forcibly guaranteed by the people) and then take the entire $16 and invest it into risky propositions. If the banker wins his risky bet, he pockets the profit. If he looses, he looses at most $1 and FDIC (i.e. the people) pay the remaining $15. That is the very nature of F D I C. It is an asinine system where we all offer to pick up the tab for risky investment behavior and then we complain that bankers (and depositors) actually do take that risk.

We can try to regulate Bank behavior in an utterly futile attempt to close the road to any risky bet that millions of bankers will ever try to get into, or, we can simply remove the racket by withdrawing FDIC and implicit “too big to fail” insurance. Then, those depositors that seek safety will put their money into truly safe deposits, like , say money market mutual funds, which BTW are not FDIC insured but where depositors have never lost money, save two instances in the entire 30+ year history of the funds where depositors only got back something of the order of 97c on the dollar.

But the masses are stupid, and politicians who gain importance fame and fortune by selling regulation to the people, are smart. So the masses will continue on the utopia of trying to finally comprehensively regulate all banking behavior, spreading havoc with the pernicious effects of collateral regulation, and then creating an even bigger centrally planned bubble at the end.

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The reason that inequality has increased is, primarily, that the benefit to humanity from individual innovation is now much more highly leveraged. That is simply because the benefits of innovation nowadays become accessible much faster to many more people on earth. Higher aggregate benefit to humanity is accompanied by higher reward. There is nothing unfair about that, and, from a utilitarian perspective, it acts as a strong incentive to create things that will benefit millions, if not billions of people. In other words, nowadays, innovation spreads around the globe much faster than in the past, benefits many more people than in the past and thus rewards for those who participate in these highly leveraged standard of living enhancers is also much higher. I fail to see how this is unfair or how suppressing it will be ultimately more beneficial to humanity.

The people in the West can either honor their innovators, allow them to keep the rewards of their work, and enjoy the faster pace of standard of living enhancements for almost everyone, or they can engage in the politics of envy and seal the fate of their children’s standard of living being reached by the 3 billion people of the fast developing world (China, India, Brasil, Russia). It’s just as simple as that.

Ruth Murphy

I would definetly like more information on Inequality and surrounding information...
Thanks

Nemi

I don’t agree with the term good inequality. Of course incentives (of which present inequality isn’t one, put future possibilities of certainly is) is important – but if these incentives lead to, say, computers and inequality – there has been a positive outcome (computers) and a negative outcome (inequality). No need to blur them together.

Jeffrey

http://michael-hudson.com/2011/01/why-america-had-a-90-income-tax/

Simon LaFue

For much of the quarter century following WWII, the top tax rate was 90%. Yet during that time, the USA economy grow splendidly. Check the productivity and GDP per capita growth and compare it with the 25 years starting in 1981.

Suppose this does cause some individuals to become less motivated at the top to work that extra amount. But if there is demand for that economic activity, surely there will be other individuals coming from an income level slightly lower that will be motivated to fill in that demand.

uwe meller

Having spent the past six years in Mexico, it appears that inequality in itself is not bad, but, in my opinion, it creates high crime rates which are certainly evident in the USA, Mexico, Brazil and Russia. The problem here in Mexico is the lack of opportunity. Unless Mexico provides economic opportunities for its population it will continue to be a second hand country with alarmingly high crime rate.

uwe meller

I would also like to suggest that M. Becker lives and works in a sterile environment far removed from those who live a life of inequality. His post sounds like there are a few unequal folks who may live around the corner, but of course this isn't true, there are millions in the USA alone. Perhaps if he read the book, "Deer Hunting with Jesus," he would have a much better idea of the reality of inequality.

publiclobbyist

Brilliant insight, Simon LaFue, and your thesis is supported by the many entrepreneurs that came from the lower echelons of American society--many of whom have far surpassed those formally at the top: Jobs, Gates, etc. However, those who throw Buffet into the mix are wrong as I see no innovation coming from plain old Yankee horse sense and patience applied to the zero-sum game of Wall Street, and, furthermore, when the inevitable crash comes, Buffet will be hard-pressed to dump any of his stocks at a profit.

To Becker-Posner I ask, were the sluggard Chinese that you spoke of , given an opportunity to make salaries even remotely approaching those of the people at the top? If the answer is, as I suspect, in the negative, why should they break their backs for Mr. Comfy Cozy, the supposed grand innovator at the top--would either of you?

urban legend

Good inequality is when there is no poverty and those at the very bottom can readily pay for (1) all necessities, including an owned home of an adequate size, (2) health insurance, (3) additional savings beyond Social Security for retirement; (4) a decent restaurant once or twice a week, and a very nice restaurant a few times a year; (5) a nice vacation every year, including a foreign vacation at 2-star hotels once every few years; and (6) a college education for the kids, with enough left over after the foregoing to sacrifice some of the above and save enough for most of the cost of a private college.

Once we get there, Britney can buy all the gold faucets for her condos in Nice and Mykonos she wants.

Utopia, I guess, except are there not places where it's mostly been reached?

Funny, isn't it, how advocates of the globalization and education rationale simply ignore the destruction of the ability of employees everywhere in the private sector to negotiate terms and conditions of employment instead of letting management dictate those terms. And while more work for less is squeezed out of the rank-and-file, what about corporate management incomes exploding as the standard became "aligning" executive compensation with growth of "shareholder value" -- i.e., creating an inherent conflict of interest that undermines the executive's primary fiduciary obligation to the corporate entity rather than the biggest shareholders?

John

In this week's NYTimes Tyler Cowen points out that

"The income numbers for Americans reflect this slowdown in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted median income in the United States more than doubled. But in the 31 years from 1973 to 2004, it rose only 22 percent. And, over the last decade, it actually declined."

IOW, the evidence is overwhelming that increased income inequality is directly and overwhelming linked to and is the enemy of growth and prosperity.

Becker, as always, disregards the facts.

Joseph Mazzilli

I too enjoyed LaFue's comment. Becker might want to look at some of the northern European countries, where high current taxes even out the inequality extremes and still leave eveyone room to pursue their dreams. He might also consider how some of the inequality in the USA is due to "stacking the deck" by powerful corporations and their corrupt political cohorts, especially in the financial and energy industries. And finally, his example of the Chinese factory workers, while partially debunked in LaFue's and others' comments, does not necessarily support his unspoken premise that EXTREME inequality is necessary, as opposed to a more benign degree of it.

Jack

Urban -- Well we have reached the Utopia of a per capita income just over $33,000. So there should be lots of your neighbors with incomes of 132,000 per family of four.

BTW ........... wouldn't your model of most folks having a decent home, H/C, and luxuriating in a fine restaurant now and then, create a lot of jobs? Even competition for labor? and god forbid, "wage inflation" in the lower ranks?

Jack

John, As I'm sure you know, one of the basic principle of econ is that of the propensity to spend dropping sharply as income rises. I doubt one, with eyes to see, would even have to open a text book to see the truth of the principle. We've all seen how fast an income tax refund is spent in a young, typically lower income family, while a much larger refund or windfall might be ignored or banked by those who have most of their material needs met.

And what ARE they doing today? Foreign travel? Buying villas elsewhere?

Christopher Graves

The foundation of equality, both philosophically and historically, is the belief that humans were created in God's Image. John Locke, following a line of thought that had emerged in England in the Seventeenth Century, took up this basic belief and applied it to political, economic, and legal spheres. He argued that since people possess an intrinsic equality as an endowment from God, each person owns his own person. On Locke's account, no one can rightfully impose his will on another without the consent of the other person. On this view, there is a basic respect for each person that is demanded by the very nature of humanity.

Locke also took as basic that God gave the physical world that we inhabit to us humans along with our talents and motivations to develop nature. As each individual mixes his labor with raw nature, that person gains exclusive ownership of that resource. Here we see the theological and philosophical roots of private property. Each person's mind and body should be respected by all other humans regardless of any particular set of attributes that an individual might possess. Correspondingly, the property each person acquires in a fair way, either by mixing one's labor with previously unacquired land or resources or by an honest, voluntary transaction, should be equally respected by all.

If uneven distributions of wealth or income result from the process that I just outlined, then there is no injustice. In fact, as contemporary Lockean, Robert Nozick argued, liberty is dependent on this historical, non-patterned concept of social justice. If other individuals acting as individuals or acting in concert via the State forcibly take the fairly acquired property of others to achieve and maintain a specified distribution of wealth, including equality of result, then the rights of the individuals whose property is taken have been violated. This is so on Locke's view because each individual has been granted a Divine endowment of self-ownership coupled with a just and effective process of acquisition of wealth. Forcible redistribution of wealth necessarily involves one person or group of people unjustly imposing their will on others. Equality of result imposed by the State is inconsistent with the moral equality of all humans and the liberty that theological and moral equality provides.

As people freely engage one another, they evolve institutions and patterns of social interaction that are most advantageous. Slow gradual changes in these practices and institutions can be made over time as circumstances change, but once again, if some individual or group of individuals act to force people into specified patterns, including equality of result, then the rights of individuals are violated as well as losing the gains that can be made by the collective trial and error process of individuals trying different ways of living, producing, and interacting. Societies, cultures, and communities can develop over time in the most effective way if this free process of social evolution is allowed to take its course. Such a conservative process is described and defended in the writings of Edmund Burke. State imposed equality of result or even equality of opportunity disrupts this evolutionary process and strikes at the heart of a civilized society.

Alan P.

More equality means that my son who finds studying rather hard, can feel more comfortable becoming a bank teller, or some other non-exceptional professional, as more equality will ensure that his salary will not be that much lower than the salary of his classmates who do decide to take up college. It also means that I can quit producing things some years earlier and finally go fishing, and also means that my wife can continue to limit herself to working 10 hours a week and so have plenty of time for her yoga classes and other hobbies. So what if some minority has to pay more taxes to enable us to do the things we want to do?

Is it good for the country, the economy etc.? Well, for the most part, who cares? Equality benefits me and my family, so I vote for it. Why resort to complicated noble theories?

Amazon Basin

As a volunteer American worker in Manaus Brazil, I find the egalitarian hypocrisy of the American middle class nauseating.

In essence the American middle class with a household income of $60,000 per year (i.e. in the top 5% of the worldwide income distribution) is complaining that those at the top 1% have more. No talk of having income from the top 1% first going to the hundreds of millions of Brazilian, Chinese, Indian etc. families that live on $500/year (i.e. at the bottom 20% of the worldwide income distribution). No, they just want income from the worldwide top 1% to flow to them who are in the top 5%!. Brazilians, Chinese, Indians and others be damned, especially now that they are competitors. Or perhaps they want the above average Brazilians, Chinese and Indians (still in the lower 40% of worldwide income) to take care of their own poor so that the wealth of those at the top 1% flows unshared to the American middle class (worldwide top 5%) and not to those at the worldwide bottom 40%.

In other words, the American middle class, i.e. the top 5% of the wealthy worldwide want the wealth of the top 1% to flow primarily to them of all people, rather than those at the bottom 20,30,40% worldwide. Also, apparently they think that it is the job of those at the bottom 40%, i.e. those relatively well to do amongst Brazilians, Chinese and Indians to subsidize the bottom 20%, i.e. poor Brazilians, Chinese and Indians.

Please, American Middle Class, you can keep singing Kumbaya going to meetings that condemn Brazilians for burning their tropical forests, but please find some reason other than morality to back up your redistribution arguments.

Christopher Graves

Professor Becker comments, "[c]ontroversy over inequality arises mainly because some types of inequality are not easily classified as good or bad. For example, would an increase in the marginal income tax rate from 35% to 45% on individuals earning over $500,000 have much of an effect on how hard and how long they work, and their efforts to legally (and illegally) reduce the income they report to tax authorities? Those who support this kind of tax increase deny that it would have a big effect; while opponents are just as certain that it would significantly discourage effort. The evidence is far from conclusive, but studies by Edward Prescott, Richard Rogerson (see his “The Impact of Labor Taxes on Labor Supply”: an International Perspective”), and others of the relation among different countries between the amount of work and average tax rates on earnings is convincing that tax rates in general have strong negative effects on effort."

While I agree that incentives are an important concern, and I also agree that inequality of result is not necessarily a bad thing, I am not sure that we want to pursue policies on the primary basis of increasing time spent in labor in the marketplace by the upper classes. There is a social and personal benefit to leisure that we can easily overlook. Of course, people need rest and time with their family and friends, but the more gifted and intelligent also need to spend time in leisure activities that cultivate the mind, the soul, and the spirit. I am thinking here of the arts and humanities that have declined in quality over the past century as science and technology have dramatically improved. The improvements in technology could have produced greater leisure of the type I am writing of, but alas, for the most part, it has not. I suspect that the decline in the influence of hereditary aristocracies has contributed to this cultural decline.

With the loss of hereditary aristocracies, we seem to have lost a class dedicated to the preservation and cultivation of the manners, morals, and culture necessary for the inspiration for members of our society to explore and adopt a wider range of interests than comfort and banal entertainment. Contemporary Western republics have not seen the rise of a natural aristocracy in large enough numbers and influence to replace the older aristocracy so that they provide an example that sets the pace for those who are not as interested in the careful study of these pursuits, but can be influenced by example if they are given the right lead. Instead, we have largely turned our popular culture over to pre-teens, teens, very young adults, and the vultures who cater to the most vulgar impulses in these young people.

A frantic chase after more and more material gain should not be the myopic focus of those who are in a position to enjoy a greater balance to their lives. These folks would make a greater difference in the world, and to their own refinement, if they were to inspire others to higher purposes than simply making money to buy more and bigger things and to gain status.

John

Chris, it is hard to be more and elitist arrogant than when your write, "the more gifted and intelligent also need to spend time in leisure activities that cultivate the mind, the soul, and the spirit"

Chris, your right and Jesus was wrong


the poor don't have a mind, spirit, or especially a soul

when they take you to the Blade I hope you go face up

John

Chris,

If decline of cultural is due to the lack of a wealthy elite, how to you explain the last 35 years.

Incomes for the elite have gone through the roof yet, according to you, we have't had a decent piece of art or a great piece of music in a 100 years.

According to your theory, we should be rolling in the cotton of high culture by now

hafa government program

Our society has been divided in a way that has never been seen before in america.

Cristina

Thank you, Christopher Graves, for clearly explaining this critical issue of loss of manners, morals and culture in our society. I completely agree with you, and I hope the current order of things can be reversed, if only more people like you would voice their opinions.

Jack

Chris accurately philosophizes:

"Correspondingly, the property each person acquires in a fair way, either by mixing one's labor with previously unacquired land or resources or by an honest, voluntary transaction, should be equally respected by all."

JJJJJJJJ: Therein lies the rub. It's well known that unregulated capitalism will not apply the "laws" of supply and demand equally. Those supplying generic commodities and lesser skilled labor are "price takers" and the reason virtually all nations have some form of farm price supports, min wage, and/or subsidies to make to adjust for "market" flaws.

At the other end of the spectrum monopolists, oligops and those with strong franchises and guilds (ie docs, lawyers and CPA's for example) are price setters, as often are those who've purchased market advantages via our badly corrupted political machinery. The result, as we've endured for 30 years is soaring levels of inequality of both income and wealth. Now those holding the wealth and wielding inordinate political power want, and are getting away with passing on, often untaxed wealth, (such as original Walmart stock) sans even a reasonable inheritance tax.


"Forcible redistribution of wealth necessarily involves one person or group of people unjustly imposing their will on others. Equality of result imposed by the State is inconsistent with the moral equality of all humans and the liberty that theological and moral equality provides."

JJJJJJJ Few argue in favor of "equality of result" but we've just witnessed one of the worst redistributions of wealth in history, most egregiously in what was carved off by utterly corrupt banksters at the expense of working folk and great damage to the trust of the system working for those other than the "connecteds" "too big to fail" and others of the top 1%.

As for correcting the mess, I suppose one could wait for the system to finish itself off ala destructive depressions the early days of capitalism, followed by a "new deal" of some sort, or? a constructive reform and at least a token? clawing back of some of what was stolen. One thing we KNOW from both theory and history is that it won't work when too much of the wealth and income accrues only to a small percentage of our citizens.

"State imposed equality of result or even equality of opportunity disrupts this evolutionary process and strikes at the heart of a civilized society."

JJJJJJJJJ Hmmm........"evolutionary process?" "heart of civilization?" How so?

"Equality of opportunity" sounds a bit like the ideal; the way in which the Olympics comes close to selecting the best in the world, while our political system hardly seems to provide the best suited to the task. Neither does our inequitable system of education and economic system do well in developing and employing the best of our human resources.

I'd not even rule out the obvious head start of inherited wealth in the "equality of opportunity" model, as the inherited brilliance or entrepreneurship of some often has them steaming past many, perhaps less talented or less ambitious inheritors. It would seem that a sizable inheritance tax would convey to inheritors a message of "use it or lose it" if they don't productively invest it somewhat in the tradition of those who earned the fortune in the first place.

Jack

Alan: Now I end up in some considerable agreement with Chris on "incentives to work" and Becker's (perhaps many (American?) economists view of us as donkeys being devoted to spinning the grinding wheel ever faster. Your post is a good starting point:

More equality means that my son who finds studying rather hard, can feel more comfortable becoming a bank teller, or some other non-exceptional professional, as more equality will ensure that his salary will not be that much lower than the salary of his classmates who do decide to take up college. It also means that I can quit producing things some years earlier and finally go fishing, and also means that my wife can continue to limit herself to working 10 hours a week and so have plenty of time for her yoga classes and other hobbies. So what if some minority has to pay more taxes to enable us to do the things we want to do?

JJJJJJJJ Just for fun, let's consider a lazier America, somewhat as France has about the same productivity per hour, but "lazily" opts to work many fewer hours. What would happen?

First your son......... our society will need those "bank tellers" and perhaps he'd be happier not being on the "fast track" and there's ever the possibility of that which he's having a hard time studying today, either not being his passion, or that as he matures he'll find a good fit.

But in the broader sense and keeping in mind we've had an over supply of labor (though not in all disciplines) for a long time now, what happens if we've more "slackers?" At the top, say Gates had "gone fishing" or "gifting" earlier and no one quite filled his shoes? Perhaps the companies who sold browsers would still be around providing a broader competition, along with those providing word processing and other "office" products.

At a more typical level? Suppose Olive Garden or some of the many food franchises had been "slacker"; the demand for those products would be as strong in any case and the vacuum would be filled by others.

And lastly, you and your wife? Indeed! Time to ask what IS life about? If you quit "producing things" (much of which is in surplus and hard to sell today anyway) and "go fishing" with your wife doing more hobbies and yoga, you'll likely enjoy it (be happier) and you can see those activities create jobs for others in a nation that is VERY concerned about how to mop up, at least, 5% unemployment. Perhaps a good time for 5% who can manage it, to jump out of the rat race to make room for another rat?

Jack

Chris, was this ever the case?

"With the loss of hereditary aristocracies, we seem to have lost a class dedicated to the preservation and cultivation of the manners, morals, and culture necessary for the inspiration for members of our society to explore and adopt a wider range of interests than comfort and banal entertainment."

Coming from working class backgrounds it seems manners, morals, appreciation of the arts and science were passed on to my school mates and other friends. I've noticed and enjoyed gracious hospitality in many areas of our nation in folks more likely to have come from working or rural backgrounds. Can it be that those attributes came down from aristocratic lineage that survived immigration, wars, depression, dust bowls and other hardships?

Perhaps it's a sign of aging, but the same seems to be less true today with such a number of grads of desirable colleges and many in mid-career lacking grace and manners that I wonder if Emily Post or a semester of finishing school should be a part of remedial education. To be fair, it seems my cohort developed their manners and perhaps broad interests as five or more family members sat down at the dinner table to enjoy and often "made from scratch" dinner prepared by a stay at home mom, perhaps with help from one of the kids, and (this is really going to date me!) took turns making a contribution to the dinner conversation.

But! a lot of "wasted time" back then compared to Mom in the work place, and fast food grabbed in front of 3 big screens all on different channels with cell phones going off and text messages sent.

Ha! perhaps one answer to our high unemployment is for a number of us to go leave the workplace and go back to the days of yore of one wage earner. Ha! if government can get along with the loss of taxable income.

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