Contrived and Natural Inequality—Posner

Becker makes an important point: inequality of income and wealth is not entirely a product of differences in IQ, in other talents, and in luck; it is also contrived, in the sense of being produced by private or public actions that do not promote overall economic welfare. He gives a number of persuasive examples. His emphasis is on public actions, though he mentions cartels, which are private. Of course it must also be recognized that public actions frequently reduce inequality of income rather than increasing it, examples being the social security retirement and disability programs, the Medicare and Medicaid programs, the earned income tax credit (i.e., negative income tax), and food stamps. Probably (in my opinion) the net effect of government is to reduce income inequality, but that is no reason to defend programs that increase it. And it must be borne in mind that some programs that purport to reduce inequality, such as the federal student loan program, may well increase it, by imposing debt burdens disproportionate to the value of the education that they finance. 

I address a slightly different question: if public actions that create unjustified inequality of income were eliminated, and private action such as price fixing by competing sellers that do so were also eliminated, would there still be a “problem” of inequality, in the sense of a valid basis for government intervention to reduce inequality? And is there a valid basis, therefore, for the programs (some mentioned above) that redistribute income from the better off to the worse off? 

I think the answer is “yes.” With the median family income in the United States today only about $50,000 a year, a great many families cannot afford decent food, housing, child care, and education for their children, and job training for themselves, and cannot afford to move to areas of greater job or educational opportunity for themselves or their children. The result is to reduce the productivity and income prospects of parents and children alike. Since well-off people in the United States are lightly taxed by international standards, it may be possible to increase overall economic welfare by a modest increase in tax and spending programs designed to lift the life prospects of the lower half of the income distribution without killing the incentives of either the taxpayers or the recipients of public largesse. Subsidizing health insurance and school tuition (as distinct from providing loan money for tuition) and early-childhood education are examples of programs of income distribution that may promote overall welfare. 

I don’t endorse the argument of the philosopher John Rawls that no one is entitled to a high income because even characteristics that we think internal rather than external to a person, like IQ and leadership skills and athletic skills and energy and good health, are ultimately the product of luck. Therefore, Rawls argued, no one should be allowed to keep more of his earnings than necessary to “incentivize” him to exert himself in a way that will maximize the social product. That treats people like the cells of an animal’s body, or the ants in an ant heap. Rather my point is that, to the extent reducing income inequality increases overall social welfare, there is a case for programs, financed by the well to do, that increase overall welfare by more than the cost of the programs. There is no reason to think that the cost would impose a crushing burden on the well to do, a result that would be objectionable quite apart from the costs in diminished incentives, and related costs such as tax avoidance and emigration.

Comments

[Thomas Rekdal]

Judge Posner says that he does not embrace the Rawlsian view that all wealth producing characteristics are wholly arbitrary from a moral point of view, but he does not indicate what grounds for resistance there can be, other than his own revulsion at treating people like "cells." He wants to find some middle ground between Rawlsian redistribution and libertarianism, a moderate position which would allow us to redress some, but not all of life's inequities, so long as it can be done in an economically efficient way.

But there is no middle position: Either we start from the position that individuals are entitled to the wealth they produce, and that the state exists only to promote public goods, which we all support more or less equally because we all share in them more or less equally; or we start from the idea that the state exists, sub specie aeternitatis, to impartially compensate for the inequities of life's lottery. The trouble with the latter view is that there is no impartial perspective; we are participants in the struggle for life, and the state is merely another instrument for rent-seeking advantage. Posner surely knows this as well as any man, and his comments here do not deal adequately with the problem.

[Joel N.]

Investing in broadband and treating it as a utility is one program that can go a long way towards helping those who: "cannot afford to move to areas of greater job or educational opportunity for themselves or their children". Among many other benefits, this infrastructure is a prerequisite for success in the 21st century.

More broadly, the primary challenge is in designing and implementing programs that reduce inequality, ensuring that they are effective and politically feasible, particularly in light of the undue influence of corporate interests on the legislative process.

That said, the idea that 'certain investments by the government help to reduce inequality' should not be controversial. In fact, when the economic circumstances of the less well-of off improve, the enterprising members of society are rewarded indirectly, with new potential customers.

[Rod TheBod]

Since well-off people in the United States are lightly taxed by international standards, it may be possible to increase overall economic welfare by a modest increase in tax and spending programs...

Throw in all fed, state, and local taxes; and we're taxed as much as anybody. Plus, our lovely deficits are a type of tax. Spending public money to make people better off is chasing an ever receding horizon.

...designed to lift the life prospects of the lower half of the income distribution...

It would help here if we limited immigration. Much of the hand wringing over the falling wealth of the lower half can be accounted by considering immigrants flooding here to hoover up that cohorts prospects.

[Skepticismwins]

I'm not sure why we would assume that distribution of income that currently exists would remain the same should public and private acts that produced unjustified inequality be eliminated.

Also, there is a difference between programs designed to reduce inequality and those directed at reducing specific harms from inequality. It is one thing to subsidize health insurance (in which the money goes to the insurer) and another to increase the overall income of the poor.

[Christopher Graves]

It is blatantly contradictory to argue for re-distributing wealth to increase "overall economic welfare" (viz., utilitarianism) and then to decry Rawls' Difference Principle on the grounds that it does not take individuals seriously. I agree that Rawls is guilty as charged on this score. I have made that argument myself elsewhere, but to turn around and trade-off one person's well-being against another to attain a higher level of "overall economic welfare" by taking one person's property and giving it to another is to do just what Judge Posner rejects in Rawls' version of social justice. Remember, Rawls correctly pointed out that the main problem with utilitarianism is that it "does not take seriously the distinction between persons." Theory of Justice, p. 24.

[Thomas Rekdal]

Re: the point Christopher Graves raises. Yes, exactly. Judge Posner needs to address this question at some stage. (The death of Dworkin might not be the right moment, but at some time.)

[Terry Bennett]

Not every bargain need be a grand bargain. There's a quote floating around, attributed to everyone from Ben Franklin to Dick Cheney, to the effect that those willing to trade freedom for security don't deserve either one. I don't care who said it - it's a crock. The decision to have a government at all, indeed even the formation of any contract, is exactly a surrender of some amount of freedom in exchange for some amount of security, i.e., I give up my freedom to not mow your lawn in exchange for the security of knowing you're going to give me $5. When you enter a contract you are "bound", which is the opposite of free, and yet people enter contracts every day in order to bind, or "secure", the other party.

The signatories to the Mayflower Compact didn't know who was going to blossom and who would wither in the new colony. Today, we don't know which members of the next generation will need the protections of a society's covenants, and which will be seen in retrospect to have been perfectly capable throughout life of standing without such protections. People who buy insurance don't know if they are going to need it, or at least they shouldn't.

I am willing to trade some - but nowhere near all - of my freedom in exchange for some small measure of security. I foreswear my freedom to kill you in exchange for the security that you will not kill me. I think there's a sweet spot somewhere along that road, wherein we each have both the necessary security and the desired freedom to function and flourish. Current American society has swung far past the optimum, at least as regards economic matters, giving too much security (on paper anyway) and taking away too much freedom. We are just beginning to pay the price for this naive miscalculation.

[Eric Rasmusen]

If my calculations are right, making household money income completely equal would make it $70,000 or everyone instead of unequal with a median of $52,000. http://quickfacts.census.gov/qfd/states/00000.html

That might actually make income more unequal in a different sense, though. Lower-income households tend to be smaller (young, divorced, or old enough that the children have grown up or the spouse died). Thus, it could be that making household income more equal could make per capita income less equal. I wonder if anyone has thought about that?

Of course, these calculations ignore any effect that equalizing income would have in reducing total income.

Something else that is bothersome but hard to figure in is that equalizing income would reduce saving and investment, since rich people save far more. Indeed, my guess is that households with incomes of $70,000 invest almost nothing except (big exceptions) in housing and pension funds. This would reduce growth. Whether one person's investment has externalities for other people is a difficult question. Still, I'd like to see someone estimate the effect on investment and growth of equalizing income, ignoring the incentive effects and just assuming that people would all shift to the savings percentage of people now at the median income level.