Income Inequality and Envy—Posner

The position one occupies in the distribution of income and health is largely a matter of luck—the luck of the genes, the social and economic standing of one’s parents, accidents of upbringing, the match between one’s abilities and demand for particular goods and services, and so forth—though there is an element of choice, since people are motivated by nonpecuniary as well as pecuniary factors. But that is more a matter of some people who could earn high incomes choosing a career less remunerative but more productive of nonpecuniary income. A person who lacks the ingredients of financial success can “choose” to become rich but won’t get anywhere. 

Utilitarians believe that, other things being equal, income equality maximizes utility because of the diminishing value of income—an extra $100 confers more utility on a beggar than on a millionaire. So utilitarians are apt to condone inequality only if it increases average incomes substantially—which doubtless it does, within limits at any rate, at least in a society not riven by envy. (In highly envious cultures, a person may start a fire that will destroy both his and his neighbor’s barn, provided his neighbor’s barn is worth than his and is not insured.) 

Hence Becker properly emphasizes the importance of distinguishing between economic inequality that promotes, and economic inequality that retards, the creation of social wealth. And in a commercial society such as that of the United States, a political-economic system that allows able people to make and keep large fortunes produces powerful incentives to create wealth. I call the wealth they create “social” because it benefits other than just the creator of the wealth. Successful producers of goods and services create consumer surplus and pay a disproportionate share of taxes. 

That is not to say that the income of wealthy people is carefully proportioned to their contribution to social wealth. A person who wins a fortune in a lottery does not increase the size of the economic pie, but merely gets a big slice for himself. But lotteries are an effective method of tax collection (they are voluntary taxes), and windfalls are an essential element of the method and therefore have a legitimate social function. 

These points are not familiar to the general public, so it is a puzzle why there is so little envy in our society. There is of course local envy—envy of a neighbor or coworker who one thinks has enjoyed undeserved good fortune—but that is different from envy of the rich as a class. Inequality has grown significantly in recent decades and has been magnified and dramatized by the continuing economic crisis; high un- and underemployment coexists with widely publicized lavish partying by billionaires. One reason for the lack of envy is that the only inequality that is noticed is inequality between middle and upper class people—the poor are invisible—and the middle class is well off by international and historical standards. Another reason is that there is already a good deal of redistribution of income and wealth through the entitlements programs, and further redistribution, involving significantly heavier taxes, is generally opposed, as no one knows whom the burden of the heavier taxes will actually fall on. Still another factor is the domination of campaign financing by the wealthy, which discourages legislators from left as well as right from waging “class warfare.” Also, America is a classless society in the sense that the wealthy do not flaunt a superiority of culture or manners (think of the vulgarity of a Donald Trump); they do not, typically, attend the very best prep schools and colleges; they are not, for the most part, rentiers, living off inherited wealth; they are not considered “better” than other people; they just have more money. And America remains an open society. Children of privilege have advantages, but the talented who start with no advantages face no obstacles to rising. 

Equality of opportunity, a salient American cultural characteristic, actually guarantees inequality of income, because an opportunity is just a chance. Equality of opportunity is related to individualism and competitiveness, which are also American traits, related to the diverse origins of its large population. Ties of community are loose, and altruism outside the family circle limited. 

Inequality could reach a point at which a relatively small group controlled such a large fraction of the nation’s wealth that a political movement could rally support for dispossessing them of their wealth. At present, however, such a movement does not exist.

Comments

[Jimbino]

"...the talented who start with no advantages face no obstacles to rising..." is of course not true at all.

A well-educated and enterprising young man will be taxed at over 60% marginal rate to support the marriage and breeding of young women and couples of his cohort, as represented by the exemptions, deductions, healthcare and welfare accorded them that he is not entitled to.

When faced with paying $100/hour for a plumber (who keeps $40 after taxes), he will have had to earn $225 for $40 worth of actual work. He is well advised to give up Law or IT and turn to doing his own plumbing, where he won't have to dress up, can drink beer on the job, and won't be subjected to drug testing or paying group healthcare premiums that support the breeders.

[Cardozin']

But whom does 'social wealth' benefit? If one argues that the moral legitimacy of wealth acquisition is determined by the degree to which it raises all of the boats in the harbor, the only moral acquisitions of wealth will be those that proportionally benefit the wealthy, keeping the yachts well out of reach of the dinghies.

In the present system, private wealth acquisition is the only real method of transferring power. Wealth isn't a res ipsa loquitur proof of moral corruption, merely a reasonable basis for further investigation of any systemic biases in the means by which it was acquired.

[Yorg]

Indeed given the low utility of extra income, I wonder why any successful people keep working, especially when half the income already goes to taxes in high tax states. I made a few innovations in micro surgical tools and started a small company, which at its peak had 8 employees in California. But once my company’s worth hit about 3 mil, I accepted an offer for all intellectual property from a larger Swiss company and retired. I was 46. I now get plenty of satisfaction from life engaging in what Mr. Posner calls non-pecuniary activities.

[donne]

Good food for thought here...
If you want to be happy and rich, it's all up to you!

[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.

[MrTurtle]

@Jimbino enough of your breeder crap. Its offensive in the extreme.

@Posner "it is a puzzle why there is so little envy in our society" What evidence do you bring to bear to support this contention?

@Posner "One reason for the lack of envy is that the only inequality that is noticed is inequality between middle and upper class people—the poor are invisible—and the middle class is well off by international and historical standards." I do not see the reasoning here. Because "we" (by which I suppose you mean the middle and upper class, and perhaps the media) ignore the envy felt by poor people it must not exist? How does that follow? Ignoring the poor indeed!

@Posner "Also, America is a classless society in the sense that the wealthy do not flaunt a superiority of culture or manners (think of the vulgarity of a Donald Trump); they do not, typically, attend the very best prep schools and colleges; they are not, for the most part, rentiers, living off inherited wealth; they are not considered “better” than other people; they just have more money." Again, I must insist that you provide evidence to support this contention. What you have written certainly accords with a common US folk model of US society. On the contrary, I find US society rife with attitudes of cultural superiority by the middle class and upper class toward those lower on the socio-economic scale, even in places like Los Angeles on the west coast. True, it is not so rigid as that found in the Old World, but it nevertheless exists.

@Posner "Children of privilege have advantages, but the talented who start with no advantages face no obstacles to rising." Please, present some kind of evidence for this contention. On the face of it, I call it flat out absurd.

I respectfully urge you Mr. Posner to step outside the usual economics box, and start reading some anthropology, sociology, social psychology, and behavioral economics.

[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/

[Jack]

Ha! Turtle you've posed some good questions! And it HAS been a while since some media twit stuck a mike in front of one of those, often darker hued, but perhaps rural "whites" who live most of their lives in a world of 40% unemployment.

"Upward mobility??" We've fallen far and behind Germany as but one example.

Jimbino -- I think you overstate the tax thingy..... but point well taken. For (non-Hedgefund cap gains recipients) we struggle to pay off a home, education or amass a small nest egg against the perpetual winds of the income tax, while those who've inherited even a small estate or built unrealized capital gains have the option of paying income (or cap gains taxes) only on what income they need for "walking around". It's indeed a system designed for and by the wealthy. And made worse for many in jobless recession as savings are raided, perhaps at penalty, and would have to be replaced again with scarce after tax savings.

[Observer]

Posner again is just a pr flack for the wealthy and power

All distribution of income in the United States is a political decision.

The last 35 years of income redistribution to the wealthy has wrecked our society.

Go read today's McKinsey's report on why there are no jobs---it is because the middle class is gone and has no income.

[Observer]

From McKinsey Report:

Michael Spence, recipient of the 2001 Nobel Prize in Economics and author of The Next Convergence: The Future of Economic Growth in a Multispeed World (Farrar, Straus and Giroux, May 2011), sees structural changes in the economy that present major challenges to job creation. A loss of middle-class jobs in the tradable sector—mostly manufacturing—was offset largely by jobs in the non-tradable or service sector during the housing bubble, thanks to debt-fueled consumer spending. When that binge ended, many of those service jobs disappeared as well. Filling the void will be neither easy nor quick.

[Michael]

Using the Rich to support the poor is just what lazy no account individuals want. GIVE ME Free housing, free food, Free liquor, Free cloths so I can sit back a watch the world go around ME!! The entire world will collapse with mentality like that. The people in Europe have been under Socialism so long they expect everything should be Free. The American dream was to come to America and build a life dependent only on how bad you want it, it can be done but too many years have gone by since President Wilson started the Welfare system to keep the poor in their place. After nearly 100 years have passed and too many welfare babies have grown to have more welfare babies who had more welfare babies and now we are so over burden with those who expect to NOT have to work and get everything FREE. DOWN WITH SOCIALISM AND UP WITH CAPITALISM.

[Observer]

An excellent article from Forbes about how stupid our "capitalists" have been

http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/

[TANSTAAFL]

Posner writes that "it is a puzzle why there is so little envy in our society." He may define the term "envy" in a very narrow and unorthodox fashion, but such abuse of the English tongue seems unlikely, given Posner's demonstrated literary talents. Nor is it plausible that Posner fails to recognize the venerable marketing pitch of the political party that President Obama heads. So what can Posner mean when he denies the existence of widespread envy in America?

[Pure Collagen Skin Care]

When you adjust for all the factors that can be dollar denominated, the marketplace will provide incentives for private sector employees to move to public sector, and public sector employees to move to the private sector, until the pay is equivalent for the total package of pay, benefits, risk and opportunity received.

[Jack]

Tanstaffl: Then there are those of us, perhaps of a mechanical bent, who know that engines don't work for long if all the oil is up in the valve covers while the crankcase is empty.

And......... more economically speaking? Becker well knows that a $100 or marginal income means a LOT more to those of lower incomes and impossibly tight budgets, than one of his tax benefited, billion/year hedge fund managers.

BTW....... I'd bet that WERE a purely objective study possible, that many of the lower incomes add more value per dollar of income than do our hedge fund operators and other WS "financiers".

Pretty tough though to extract the subjective; I've heard a high income doc say "What price saving lives?" But w/o those much lower paid (and often very productive) in the food chain the doc would be spending much of his time growing a truck garden or hunting for game.

Lastly, Becker and most for the last 30 years trust "The Market" to fix all inequities despite scads of evidence to the contrary, and the, well known, economic principles of those supplying generic commodities and lower skilled labor having NO individual market power and thus being bid down by, fewer, more organized, buyers to below the costs of production.

Indeed, the min wage law, and virtually all transfer programs that help working folks "make ends (almost) meet" ARE due to wages having been beaten down below the cost of production.

Somehow -- it's (ha! for the most part) obvious to all that if business requires a vehicle, machine or building that the business must pay for the cost and maintenance of them.

The human -- now reduced to purely another productive element (to fill in until the business can afford the machinery to replace him) also has a cost of production; the price of a basic standard of independent living. (A recent study in moderately priced Oklahoma found that to be $18/hr including something for medical insurance.)

But "what if he doesn't produce that much in added value - (ha! capital gains?)" What if the company delivery truck doesn't produce enough income for its care and maintenance? The choices are obvious, but ludicrous, deliver by scooter? on foot? sub it out? have the company's founder do it as a cost saving measure?

It's much the same for human factors of production. IF we were honest, enough so not to take advantage of the well known powerlessness of the individual, each would be due something close to a living income.

"Where does it come from?" Once while working in fairly high paid industrial sales position, for reasons know ONLY to corporate bean counters, our receptionist who filled some sort of "unbudgeted position" had to be a "temp." (ha! in which she was paid by the "Kelly girl" outfit which had its own overhead costs with the company paying more than were the position permanent.

As anyone in sales well knows there was a LOT of difference between the best and worst "phone answerers". Those calling companies have likely noticed as well.

Our sales meetings often emphasized the crucial nature of the sales function with the manager reminding us that, as was the case, he have to lay off good production people were we not to meet our goals. The low paid, ever changing "temp" who was the company's first contact? Not in the meetings nor otherwise trained of the importance of her job.

Very well compensated top management from another state? A visit, a token meeting to justify the travel and off to Alaska's world class fishing spots.

[Jack]

The President's Bold Jobs Bill (Maybe)

The president is sounding like a fighter these days. He even says he'll be proposing a jobs bill in September -- and if Republicans don't go along he'll fight for it through Election Day (or beyond).

That's a start. But read the small print and all he's talked about so far is extending the payroll tax cut and unemployment benefits (good, but small potatoes), ratifying the Colombia and South Korea free trade agreements (not necessarily a job-creating move), and creating an infrastructure bank.

An infrastructure bank might be helpful, depending on its size.

Which is the real question hovering over the entire putative jobs bill -- its size.

Some of the president's political advisors have been pushing for small-bore initiatives that they believe might have a chance of getting through the Republican just-say-no House. They also figure policy miniatures won't give aspiring GOP candidates more ammunition to tar Obama as a big-government liberal.

But the president is sounding as if he's rejected their advice.

That's good policy and good politics.

Good policy because any jobs bill has to be big enough to give the economy the boost it needs to get out of the gravitational pull of the Great Recession.

Right now all the old booster rockets are gone. The original stimulus is over. The Fed's "quantitative easing" is over.

Combine the budget cuts state and local governments continue to make with the slowdown in consumer spending, the reluctance of businesses to expand or hire, and the magnitude of unemployment and under-employment, and you need a big new booster rocket. I'd estimate the shortfall in aggregate demand to be $300 billion to $500 billion this year alone.

A bold jobs plan is also good politics. With more than 25 million Americans looking for full-time jobs, the wages of people with jobs falling, and an economy on the verge of a double dip, the President has to come out fighting on the side of average people.

Besides, Republicans won't go along with any jobs initiative he proposes -- even a tiny one. Better they reject one that could make a real difference than one that's pitifully small and symbolic.

If Republicans reject it, Obama can build his 2012 campaign around that fight. Maybe he'll even call Republicans on their big lie that smaller government leads to more jobs.

What would a bold jobs bill look like? Here are the ten components I'd recommend (apologies to those of you who have read some of these before):

1. Exempt first $20K of income from payroll taxes for two years. Make up shortfall by raising ceiling on income subject to payroll taxes.

2. Recreate the WPA and Civilian Conservation Corps to put long-term unemployed directly to work.

3. Create an infrastructure bank authorized to borrow $300 billion a year to repair and upgrade the nation's roads, bridges, ports, airports, school buildings, and water and sewer systems.

4. Amend bankruptcy laws to allow distressed homeowners to declare bankruptcy on their primary residence, so they can reorganize their mortgage loans.

5. Allow distressed homeowners to sell a portion of their mortgages to the FHA, which would take a proportionate share of any upside gains when the homes are sold.

6. Provide tax incentive to employers who create net new jobs ($2,500 deduction for every net new job created).

7. Make low-interest loans to cash-starved states and cities, so they don't have to lay off teachers, fire fighters, police officers, and reduce other critical public services.

8. Provide partial unemployment benefits to people who have lost part-time jobs.

9. Enlarge and expand the Earned Income Tax Credit - a wage subsidy for low-wage work.

10. Impose a "severance fee" on any large business that lays off an American worker and outsources the job abroad.

Some of these won't cost the federal government money. Others will be costly in the short term but lead to faster growth.

Remember: Faster growth means a more manageable debt in the long term. Which means the President could tie this (or any other jobs bill of similar magnitude) to an even more ambitious long-term debt-reduction plan than he's already proposed.

A bold jobs bill is good politics and good policy. Let's wait to see what the President actually proposes.

Does anyone here still think panic stricken budget cutting and piling more government workers and private enterprise contractors on on the unemployment rolls with 25 million other full time job seekers, along with extending the, unaffordable when implemented, Bush tax cuts for the wealthy is going to work? For the benefit of most folks? and the acutely unemployed? Why?

[MrTurtle]

no envy. http://www.npr.org/templates/story/story.php?storyId=128946102

[TANSTAAFL]

From the grave, Lenin, Stalin, Mao, Pol Pot, and their like envy Jack's "bold jobs bill."

History instructs that such ideas, when implemented, lead to the mass enslavement of workers in gulags. History further instructs that the proponents of such ideas imagine themselves on the guard towers holding the guns.

[jerson]

He may define the term "envy" in a very narrow and unorthodox fashion, but such abuse of the English tongue seems unlikely, given Posner's demonstrated literary talents. Nor is it plausible that Posner fails to recognize the venerable marketing pitch of the political party that President Obama heads

Strength alone knows conflict, weakness is below even defeat, and is born vanquished.

http://www.vivipainting.com/

[jerseys]

Income Inequality is Exists everywhere ！！

[Jack]

Tans?? Oh? And what are the roots of our current deep, long and intractable recession? And........ WHAT do you think of some 25 million being hopelessly out of work? What do YOU think about society telling those huge numbers that we've no place to apply their talents and energies?

Further? there being NO evidence of ANY sort of shortage of product or service -- suppose it is the "new normal" NOT to "need" but 80% of our work force?? With per capita productivity increases being higher than GDP increases "THE Market" is pointing to just my supposition. What's your cure? Cut taxes for the rich which appears to have accomplished zip for 10 years?

Do you understand what Reich is trying to do?

#1. PUT a few discretionary dollars in the hands of those most strapped and MOST likely to spend.

#2. As in the last Depression following similar rates of consolidation of wealth and income in the hands of the very few..... there WERE many jobs that needed to be done ------ as is the case today. Would YOU rather pay unemployment to folks to sit on a bench and LOOK at what needs to be done? or pay a bit more and HAVE something afterwards. (Exercise: Think of WPA projects near you that we still use and enjoy)

#3 Try to consider what an infrastructure bank means. Here in Anchorage all sorts of "conservatives" are trying every which way to turn the PORK for one of Don Young's "Bridges to Nowhere" into reality by ladling out MORE pork from our state coffers. The biz plan for the thing is a TOTAL loser. Would a "bank" be more likely to insist on projects of highest return on investment being done first? I'd hope so. PORK ladled by powerful Committee Chairmen as Young was... is simply a trading game of "my pork vote for yours". We CAN do better.

#4. Did YOU know that those of multiple homes CAN declare bankruptcy and have mortgages rejiggered on non-principle residence? Further? what good to empty MORE homes? So thieves have a handy place to mine copper? Hangouts for the increasing number of homeless?

Try some of the rest on your own.

Perhaps the income disparity graph will be helpful:

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

Is Reich trying to knock some of the overripe fruit from the top of the tree down to those not having tall ladders? Sure....... has to be done one way or another. Your "enslavement" scenario is precisely wrong. "Enslavement" IS when those doing the work are NOT participating in the gains. Exactly the case of our last three decades.

[Mike]

"they do not, typically, attend the very best prep schools and colleges"

Colleges of course do make some effort to make themselves accessible to those with lower income, but this is much less common for prep schools. Generally speaking, these are institutions for the rich (with the occasional exception for a gifted student on scholarship).

[R.A.]

"The position one occupies in the distribution of income and health is largely a matter of luck—the luck of the genes, the social and economic standing of one’s parents, accidents of upbringing, the match between one’s abilities and demand for particular goods and services, and so forth—though there is an element of choice, since people are motivated by nonpecuniary as well as pecuniary factors. "

If you're going to count both genes and upbringing as "luck," what else is there?

[Thomas Rekdal]

R.A.: What is left after genes and upbringing? Personal effort, which is only partially explained by upbringing, as far as we can tell. Perhaps evolutionary biology will eventually explain away even that, but so long as people respond to incentives there will always be a strong argument for accepting large doses of inequality. And so long as most determinants of individual success are arbitrary from a moral point, there will always be a strong argument for hefty taxation.

These are old considerations, of course, but I think Posner summarizes them well in a brief compass.

[True Religion Jeans Sale]

Hmm that's very interessting but actually i have a hard time understanding it... wonder what others have to say..