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

[Jack]

Thomas: AND from Becker: "undeserved wage inequality". Gobs.

[Matt]

"[I]n 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."

A point about the incentives. It seems to me that there are "diminishing marginal returns" on the incentives created. If average assets are $100,000, but society permits one to accumulate $100,000,000, I can see a strong incentive to increase assets. How much does that incentive change if the asset "cap" is bumped up 100X? 1000X? More?

At some point the additional wealth doesn't matter. Consider that those whom Buffet calls the "super-rich" often donate large amounts of their personal wealth. Imagine that instead of permitting them to acquire and then donate, we just taxed their income at 100% above a "cap" and distributed the wealth according to collective policy. If they are giving the money away already, how could it change their incentive to create wealth?

I think this suggests that we should only permit a certain degree of income inequality. There's no social value to radical inequality.

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