Deserving and Undeserving Inequality–Becker

 

During the past 25 years, inequality in the world has greatly declined mainly because of the rapid growth in incomes in large poorer nations, especially China, India, and Brazil. This led to enormous declines in worldwide poverty as hundreds of millions of families were pulled above poverty thresholds, such as having to live on $1 or $2 dollars a day. At the same time, however, inequality between families grew rapidly within many countries, especially the United States and other Anglo-Saxon countries, China, and India. Although attitudes to inequality differ across cultures and countries (see, for example Alesina, Di Tella, and MacCulloch, “Inequality and Happiness: are Europeans and Americans different?”), in every society these attitudes depend on whether the inequality is considered to improve efficiency and to be deserving – the difference between “good” and “bad” inequality.

The great majority of people in different cultures do not object to someone who has made lots of money when they have superior abilities and talents, and they work hard at producing what are considered useful goods or services. Actors like Tom Hanks or Jennifer Aniston earn millions of dollars per film, yet they are admired as stars rather than condemned for being millionaires because films are a popular form of entertainment. Bill Gates, Steve Jobs, and others who became billionaires by creating innovative companies that provide highly valuable goods and services to millions of individuals are widely admired as the business equivalents of rock stars rather than attacked for their great wealth. Leading transplant and other doctors who become successful and very wealthy through extensive education and superior skills are recognized for their valuable contributions to extending the lives of very sick individuals, and few object to their high earnings.

On the other hand, when hedge fund managers become rich by using arbitrage activities to narrow the spreads in interest rates and other prices between different regions (most hedge funds do not only engage in arbitrage) they produce useful services, but the value of what they do is not so apparent as the businessmen who make successful products. It is still harder for many to understand the usefulness of “speculators” who do well financially by successfully shorting shares of companies or commodities, such as oil, because they believe correctly that their prices will fall in the future. Their activities add value by smoothing out the prices of these shares and commodities over time, but few people like individuals who bring bad news, or who profit from anticipating bad news.

Other forms of behavior are objectionable because they both add to inequality and lower economic efficiency. These are the most dangerous sources of inequality, and they create negative attitudes toward the wealthy, and even at times social unrest. One illustration is the arbitrary use of government power to give or take away wealth. Some individuals become very wealthy because of the political favors they receive, while others lose much of their wealth because of unjust governmental treatment. Examples include Carlos Slim and the Russian oligarchs who gained big economic advantages by receiving monopoly positions in industries like telecommunications when they were privatized, and the officials of Fannie Mae and Freddie Mac who became wealthy by using their political connections to acquire a dominant position in the US residential mortgage market. A highly publicized recent example is the Indian businessmen who obtained special privileges in telecommunications and other industries because of corrupt government officials.

Arbitrary taking of property through eminent domain and other government power without proper compensation is a major source of discontent. Chinese farmers objected, and some even rioted, when governments took their land to build infrastructure or factories. Governments in the United States sometimes use eminent domain powers to take the land and housing of families in order to build public and private redevelopment projects. In these and related examples, people object partly to the forced transfers of property to governments, and partly to inadequate compensation to small property owners, at least inadequate in the eyes of those losing their properties and their neighbors.

Since earnings is the biggest contributor to income for the great majority of families, the considerable inequality in earnings has been extensively dissected. During the past several decades, technological advances that favored highly skilled workers raised the earnings of college graduates by a lot relative to those with lesser education in the United States, Great Britain, China, India, and many other countries. This sharply higher relative earnings of the more educated has been accepted for the most part since it contributes to greater productivity. Criticized are the various obstacles that prevent able boys and girls from acquiring a college education, such as broken and poor families, and inadequate schools. These obstacles lead to bad and inefficient inequality that sometimes causes frustration and discontent among those affected.

Attractive public policies encourage the good earnings inequality and attack the bad inequality through laws, taxes and subsidies, and in other ways. For example, charter schools, vouchers, merit pay for good teachers, Head Start programs, and student loans help more able students from disadvantaged backgrounds enter and finish college.

Public policies can also help overcome inefficient sources of inequality in other types of income, although these policies often run into powerful political opposition. Privatization and other sales of government properties should be auctioned off, not given away to favored businessmen. Governments should be allowed to use eminent domain and similar laws to take property from individuals only in sharply constrained circumstances with very high benefit/cost ratios. Regulations should be based on rules rather than discretion, so that the regulators cannot easily get “captured” by the industries they are regulating, including capture through corruption of government officials.

I agree with the argument by Warren Buffet in a recent New York Times op-ed piece that it is neither fair nor efficient for highly wealthy individuals like himself to be paying a smaller fraction of their incomes in taxes than middle income and many lower income persons. However, the way that inequity is corrected can make an enormous difference to economic efficiency as well as to the degree of inequality. The best way to reduce these inequities is to substitute for the present tax mess an inclusive equal percentage tax on all incomes, where the income base would be greatly widened by eliminating deductions on mortgage interest payments, restraining the tax-deductibility of charitable contributions, and eliminating special subsidies, such as the generous ones to ethanol producers. With a flat broad equal percent tax on all incomes, capital gains and other sources of income that currently have special tax treatment should then be taxed at the same flat rate as earnings and other incomes.

Comments

[NEH]

Just one question beyond the always controversial issues surrounding taxation and the issues of a Regressive Tax Structure or a Progressive Tax Structure is the all important (at least at present) issue of Offshore Tax havens and present ability of the Super Wealthy, Business and Industry to hide funds and other assorted Capital Gains in Foreign Banks and other Offshore Financial Institutions? Or the use of International Electronic Fund Transfers around the Globe to hide wealth? In order to develop a truly Progressive Tax Structure, the Government and Governments of the World are going too have to get this phenomena under control. In other words, the International Banking and Financial Industry is going to have to be brought to Heel.

As a case in point, isn't UBS, that Swiss Banking and Finance Concern, currently under investigation for just this? And I do believe that this isn't even just the tip of the iceberg...

[Jimbino]

Imagine the government paying folks to produce more greenhouse gases, water pollution, deforestation and extinction of animal and plant species! But that's exactly what government does by promoting rampant breeding through its policies of tax exemptions and deductions,support of public education and welfare that mostly benefit the breeders.

I can only dream of a world where all the breeders pay for the negative externalities of their breeding and where the singles and childfree are rewarded for their foresight in abstaining from ruining the planet.

[Jim]

A VAT with accomodations to the poor is the fairest and most efficient tax. No deductions (tax expenditures), no black market and it is a wealth tax though not an income tax. Inequality is another matter and probably cannot be fixed without coercion which only makes everyone poor, unless of course that is what you desire. Even with a 180 degree revolution, the poor wind up rich and the rich wind up poor. Then what? Once again the answer to less diversion of wealth is a cultural value that makes the economy a tool of the society and not the other way around. The global economy is another example of good intentions gone wrong as the architects of global trade never considered the shift in employment and income in the United States, not to mention the mistaken assumption that a global (capitalistic) marketplace would inevitably lead to global democracy. Now we are faced with the spectre of forced redistribution of wealth and income in order to reset when resetting will cause more damage than leaving it alone and changing the entire educational system to accomodate the new reality.

[Kopfschlaeger]

Desert is irrelevant to the justice of any distribution. All we can count on th justify a distribution of wealth is procedural justice -- a fair system for distribution. We normally think that a procedurally regulated market place provides such a systen.

Deserving relates to the just return to some characteristic of the deserving person. But talents are distributed arbitrarily, as is good fortune. No one deserves these talents or the good luck. See Rawls, Theory of Justice. How, then, can one deserve a return to such an arbitrarily distributed (undeserved) characteristic or good fortune?

[Jimbino]

The problem with a VAT is that all those who have already paid income taxes will end up paying twice. Their only alternative would be to spend their already-taxed wealth in a country (not Europe!) that has minimal VAT. Actually, I'd like to know what those countries are, so I can start learning their language.

[Jim]

To Rawls advocates I would say Is it better that everyone be poor because human nature (and history) suggests that the more talented wish to be better rewarded and will not produce unless they are. The biblical precription that "The poor will always be with you and you may help them" suggests that the Judeo-Christian value set is desirable but voluntary. Haven't we been through this before. I love those who think that socialism has not worked because the right people were not running it. Ok. Let's spend another 20 or 50 years trying it again. Apparently humans have no historical memory.

[mobile crusher]

In order to develop a truly Progressive Tax Structure, the Government and Governments of the World are going too have to get this phenomena under control.

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[Pradeep Despandee]

Americans are on an irresistible and irreversible path to decline.

Why irreversible and irresistible will be apparent from the comments that will follow below, which will serve as proof that little distinguishes the American voter from the average world voter any more -- and equality of mentality leads, inevitably, to equality of prosperity.

So with American voter mentality reverting to the worldwide norm of class-warfare and priority to redistribution over economic growth, the Average American is dismantling the very reasons for his historically aberrant and unparalleled prosperity and is thus now in the process of descending into worldwide economic averagedom.

If you always wondered what decline would feel like, well then, this is it. The decline may not be an actual descent, but merely stagnation or European style sub-par growth that will enable the rest of the world to catch up with the Average American-- but since prosperity is most often perceived in relative terms -- the end result will be convergence of the American standard of living to the worldwide average.

The main difference between American culture and the rest of the world had traditionally been the absence of class-warfare and a culture of self-reliance and self-determination. But exactly because the norm for humans is to envy and redistribute when they can (and in democracy they can) that American mentality proved impossible for the rest of the world to duplicate – because it was fundamentally incompatible with human nature – a temporary American cultural aberration. This aberrant mentality left America as the one serendipitously and historically lucky developed country with the strongest incentives to produce -- as the less productive were not insulated from the consequences of mediocrity -- and the productive kept their incentives to work intact, as they were able to work for themselves and their families as opposed to working for some distant unknowns who had to be insulated from the consequences of (often lifetime) mediocrity.

This American mentality, which so many countries have covertly envied, been flabbergasted by and tried but mostly failed to adopt, against the headwind of a naturally envious human nature, allowed the Average American – a person of mediocre abilities by world standards- to achieve unparalleled prosperity -- and a wealth level equal to 6 times the world average. The currently cranky American middle class remains at the enviable top 10% of worldwide wealth. But the problem seems to be that it used to be in the top 5%, while an ascending developing world and his own support for statist policies has diluted this advantage to being only in the top 10%. So how does the American middle class hope to regain the lost relative prosperity? Of course! By succumbing to the same democratic temptation that has traditionally left nearly every other country behind America : By declaring war on the top 1%.

So the top 10% has now finally declared war on the top 1% -- and that will bring down the entire edifice of prosperity that the Average American has become so accustomed to, taken for granted, and foolishly thought would last forever, owing to some mystical forces of destiny. Not so. America faces decline within 20 years. By historical timelines, the period through which Americans are now living is a period of very rapid American decline and truly only the beginning of a long and vicious cycle of decline -- as detrimental statist and redistributionist policies trigger ever more misery and thus ever more detrimental policies – an inescapable vicious cycle of decline.

But the dye has been cast as you say in America. The best outcome Americans can hope for now is a French style slower decline, down an anemic 1- 2% growth trendline, while 3 billion people in the world are growing at 5-8% -- drowning a once vibrant western world, now mired in blunted incentives to produce.

The policies now enacted in America, are on autopilot to drive your Nation into decline, like the new healthcare law you Americans voted yourselves, a law that invites voters to make lifetime decisions around the opportunity of having someone else pay their lifetime healthcare bills. It delivers a strong punch at the top producing citizens of your society who will be called upon to pay the bill and a below the belt punch to the productivity at the bottom by insulating voters from the consequences of mediocrity. That law alone coupled with the strong competition from an emerging world personifies the juggernaut facing American prosperity. These effects will erase the remaining thin margin of competitiveness you once enjoyed over the rest of the world.

Redistribution, statist policies and the state becoming the gatekeeper of wealth will have the predictable net effect of further disassociating wealth away from true production and competence towards skill in achieving political connections in an overall declining economy. As wealth becomes less and less correlated to merit and production, an ever greater sense of unfairness will set in amongst the electorate and an ever greater , seemingly now even more justifiable, urge to class-warfare will drive America deeper and deeper into decline – an inescapable vicious cycle.

But why debate? The events are on autopilot, lets just re-read these comments 20 years from now once America’s transition to a French style Welfare non-competitive incentive to produce state is complete -- and lets judge then where America (and of course France) stand in relation to a once developing rest of the world. American prosperity will have dropped to only 2-3x world average, and the BRIC countries (Brasil, Russia, India China) will be an economy twice the size of America and Europe. The world will certainly feel very different to the Average American by then -- with Americans feeling increasingly average and also left to compete for resources against the BRIC country citizens not at the old 6 to 1 ratio but now on a 3 to 1 or even 2 to 1 ratio. The emerging world will simply bury you by virtue of its numbers, shortly after they bury France and the rest of Europe. The distress of all this pressure will then drive America towards even more class warfare, thus deepening the cycle of decline. That is basically what happened to Europe which is now stagnant on a sub-par 1-2% growth trendline – a lazy sitting duck on the crosshair of emerging BRIC competitiveness in all fields.

If the Average American could see the forest for the trees, they would see that the by having the top 10% most wealthy people on earth – the American middle class – declare war on the top 1% the entire edifice of American prosperity will unravel in the redistribution dis-incentives and the statism necessary to implement such redistribution. What else will support a standard of living 6x average? “Our central planning is better than theirs?” Laughable delusions of a declining nation eager to grab every little bit of delusional hope their politicians throw at them in a personally profitable descent into decline.

..now for proof of why America’s irreversible fate of decline is sealed let’s hear the “America should follow Europe” philosophy of economic decline… post your predictions for posterity …

[Mitchell K.]

Billionaire philanthropist Warren Buffett's proposal to increase taxes on the wealthy has some merit, but it is laughable for him to suggest in his op-ed that raising the capital gains tax would have no effect on investment behavior or job growth. I believe that Professor Becker correctly observes that raising taxes on wealthy investors could lead to undesired effects on the economy.

Buffett totally dismisses such criticism and insists that he should pay more in taxes. No one is stopping him from paying more. He could choose to accept less compensation from Berkshire Hathaway in the form of capital gains and dividends (where he roughly pays a 15% tax) and opt for a comparable yearly salary instead where he would pay a higher income tax rate (roughly 35%) as he claims to desire. Furthermore, he could choose to not declare his charitable contributions where he receives tax deductions. Why doesn't he?

If Warren Buffett paid more taxes without first declaring it in a New York Times op-ed or on Charlie Rose , it would defeat the primary reason for the tax proposals he made: convincing people that he is a great altruist.

[Jack]

Mitch-- You first paragraph is likely wrong. 2nd is ridiculous (and cheesy) as Buffet was wisely commenting on public policy. He has GIVEN plenty. Third...... Buffet has demonstrated his altruism in the billions.

He also reminded CA's (during his VERY brief minutes of trying to advise "Arnie") that their Prop 13 property tax scheme is one of the major things wrong with CA. (Details upon request)

[Jack]

Sen. Bernie Sanders Leaks Oil Trading Data: Americans Have A Right To Know Who Drove Up Gas Prices
Susie Madrak

Wow. This is amazing, and although the article doesn't confirm it, the data must reflect market manipulation or Bernie wouldn't have leaked it:

Oil trading data that exposed the extensive positions speculators held in the run-up to record high prices in 2008 were intentionally leaked by a U.S. senator, sparking broader concern about industry confidentiality as Congress moves on Wall Street reform.

Senator Bernie Sanders, a staunch critic of oil speculators, leaked the information to a major newspaper in a move that has unsettled both regulators and Wall Street alike.

In a June 16 e-mail reviewed by Reuters, a senior policy adviser to Sanders discusses how his office received private data with the names and positions of traders and forwarded it exclusively to a Wall Street Journal reporter.

The e-mail, which also attaches two files with the data, was sent to Public Citizen's Tyson Slocum asking him to review it and speak with the newspaper about his observations.

In a statement from Sanders provided to Reuters, Sanders said he felt the data needed to be publicly aired.

"The CFTC has kept this information hidden from the American public for nearly three years," he said. "This is an outrage. The American people have a right to know exactly who caused gas prices to skyrocket in 2008 and who is causing them to spike today."

The leaked information has sparked concern at the Commodity Futures Trading Commission, which is legally prohibited from releasing confidential information that identifies trader positions and identities.

The leak also raises broader questions as U.S. regulators gear up to collect massive new amounts of private data from market players on everything from swaps and hedge funds to blueprints for how large financial firms can be liquidated. The breach of data could make Wall Street less reluctant to hand over sensitive information if they fear it is not appropriately safeguarded.

"This type of incident will have a chilling effect on derivatives trading in the U.S. because market participants will be reluctant to take the risk that their positions will be exposed to the public-and their competitors," John Damgard, president of the Futures Industry Association, said in a statement sent to Reuters.

Or to the Justice Department. But I wouldn't worry about that, Mr. Damgard. All you have to fear is the cold, hard light of day.

More soon.

[Jack]

Pradeep! Thanks for dropping by with yet another, wordy, reiteration of your "American sky is falling" prediction. While it is true that we've suffered through a decade of miserable policies and negligent oversight leading to the wholesale corruption of our, cancerously growing "financial sector" we are finally on the way back.

It's interesting how much these years resemble those of the first years of FDR when things looked even bleaker for America. While kids today think FDR was always hailed as a "New Deal" hero, truth is he had to deal with as much flack, rhetoric and resistance as is President Obama.

Oh, and ha! did you act on a the great opportunity to short America? After, Haha! gawd! S&P, they of the lucrative "TRIPLE A RATINGS FOR JUNK DERIVATIVES" scam had the temerity to haha! downgrade the US credit rating? Had they credibility it was an ideal time to cash in by shorting Treasuries, but! alas! those who shorted America again got clobbered as yields again fell. Well, do keep hammering away, though one does wonder how things in India and China will be if America, and of course, the even more "decadent" EU does stumble and even fewer American consumers CAN consider "going shopping". DO you have alternative markets that can absorb the magnitude of imports still being sold in the US?

[mujeres]

A major cause of economic inequality within modern market economies is the determination of wages by the market.
The main instrument which diminishes economic inequality, progressive taxation.

[Jim]

Jack,

Pradeep may go a little overboard but there is no question that there have been cultural changes since the days of FDR. If you look at the Pew research quiz at the site below, take the quiz and look at the stats, it would seem that being uninformed is an understatement for at least half of the folks and I suspect that for the group who would not be interested in attempting the quiz the score would even be worse. A leader cannot lead if the troops are ignorant of the reasons for the battle.

[Jim]

I forgot to include the Pew Research site. Here it is:

http://pewresearch.org/politicalquiz/quiz/index.php

[NEH]

Jim, I just took the "Pew Review" of News Events and scored in the upper 90th percentile. An "A" or 4 point in any course I've been in. As for the "troops", an old sergeant I once had the "pleasure" of knowing, told us "Cherries" all you need know is, "Find the enemy, engage the enemy, kill as many of them as you can before they do it to you, then move on. And Oh, btw, try and stay alive".
As for the realm of larger issues, wasn't our problem or concern... ;)

[Jim]

Well NEH, I don't know about you, but I won't go unless I know where we are going and how we are going to get there.

[NEH]

Jim, Never been in the Military have you? You usually don't find that out until you leave the Replacement Depot, get to the embarkation point, and finally arrive and sometimes not even then - "Where the "F" are we and what did we do to get HERE"! As for the Mission, see rule one above... ;)

[Jack]

Jim: Ha! At least I'm in the top 2% in something! Having mistakenly guessed that payments on the "supply sider's" D E B T outpaced Medicare costs, I missed one.

But I get your point. A democracy works best with an informed electorate, though in some sense I'm not too worried about that as most of the uninformed are also passive to the extent of not even taking their once every couple of years chance to vote the bastds out.

I'm FAR more worried about the process being taken over by corpies and even WORSE huge scale, insidious, well funded operatives such as ALEC; scary and UGLY!

http://www.sourcewatch.org/index.php?title=American_Legislative_Exchange_Council

NEH: Ha! I was drafted and went, mostly, unquestioningly, but after, ha! when it was too late, adopted Jim's reasoning and was a complete subversive in opposing both Gulf Small Lies and Gulf HUGE LIE and tried to convince young folk not to volunteer.

[Jim]

Yes, I was in the military during Vietnam and mostly went along unless the opportunity came along to tweek a nose or two. But my comments about leadership were meant for organizational and/or political leadership. The military usually gives little choice.

[NEH]

Jack, In my day, it was either get on the bus to Canada, or get on the bus to Fort Riley. I got on the wrong bus... VVAW by chance? ;)

[Jack]

NEH ---

Not quite. By the time Kissinger-Nixon were blatantly extending the clearly unwinnable (what would a "win" have looked like? N and S Korea? ) I was immersed in learning how computers worked or in Alaska.

By some luck, poor vision saved me from the infantry, and something to do with being held at Ft Ord for a top secret clearance as my AIT class headed, largely for Vietnam, I ended up in the intriguing city of Seoul, Korea.

[Jack]

Becker gets off to a great start in defining "undeserving inequality" but completely falls off his horse as in the third paragraph he leans over much too far, to, as Fitzgerald once accused Hemingway, "to help those a rung above".

"On the other hand, when hedge fund managers become rich by using arbitrage activities to narrow the spreads in interest rates and other prices between different regions (most hedge funds do not only engage in arbitrage) they produce useful services, but the value of what they do is not so apparent as the businessmen who make successful products. It is still harder for many to understand the usefulness of “speculators” who do well financially by successfully shorting shares of companies or commodities, such as oil, because they believe correctly that their prices will fall in the future. Their activities add value by smoothing out the prices of these shares and commodities over time, but few people like individuals who bring bad news, or who profit from anticipating bad news.

.......... Last year while most (real) businesses were struggling and/or laying off employees 28 hedge fund managers carved off $25 billion among themselves. And they created with such rare genius that they all "earned" amounts in the same range, what? In a market in which if they didn't exist, billions of shares are traded daily, "narrower spreads?" Or the "price discovery" that has sent oil prices soaring? And all of a sudden in DEEP recession commodities have doubled in value?

If only we hadn't lived long enough to remember when conglomerization was going to produce miracles, and then judicious "spinning off" and leveraged finance, LTV? and deregulated S&L's being "freed of cumbersome regulation" and shedding "outdated Glass-Steagal" that our lumbering giants could "compete" with "their" lumbering giants, with the "geniuses" designing foolproof derivatives (that none dare admit to understanding today) that would spread the risk so widely they couldn't possibly fail.

And did Chrysler, after being trounced because it responded to the last phony "oil crisis" with the smaller "K" cars but rescued by Federal lending and Iococca hitting one out of the park with the new and very profitable "mini-van" benefit by being bought and parted out by Daimler, and further carved up by "private equity geniuses" with its gutted carcass again being Federally rescued and sold off to Fiat?

Then to top it off those working at real jobs and PAYING the agreed upon rate of income taxes for the services we consume, look up to see these swells heading off to bank their gleanings after chipping in, as did the 400 wealthiest families, paying only 15% as "capital gains??"

Wait..... don't we all, each and every one, "create" a capital gain? The assembled car being worth more than the boxes of parts? And shared risk? The factory worker's "chute" being two week's pay and a spot in a long unemployment line?

Well, after suspecting too few understand shorting and earning a profit when stock prices have been overly inflated, Becker climbs back on his horse, but without mention of concerted shortie, and longie, attacks. But then as a devout Chi School adherent he likely believes that oil going from the 20's, well past the costs of finding and developing more supply to $100, $140, and back to $80 are just the finely tuned market mechanisms of price discovery.

He has some company too.....as one of the econ-babbling bimbettes recently opined -- "The price discovery of the past (meaning prior to 75% of the trades becoming that of outside speculators nee manipulators) was flawed with "The Market" not reflecting the risks of shortages". Indeed.

........... and rides well until the last, where with full knowledge of the soaring income disparity, that unlike past recessions, has continued to widen and threatens our very nation and what we thought was our social contract, suggests the finest "solution" to be that of the flat tax.

[Jack]

I'd urge all to read Dan Beck's super well written and thought out excerpt of his new book "Pinched" and perhaps comment on it here.

http://www.theatlantic.com/magazine/archive/2011/09/can-the-middle-class-be-saved/8600/