If Growing Inequality Is a “Serious Problem,” Please Explain Why

[Collin Li]

http://www.cato-at-liberty.org/2006/12/07/if-growing-inequality-is-a-serious-problem-please-explain-why

Via Greg Mankiw comes this suggestion of Yale economist Robert Shiller reported in Tax Notes Today:

    The IRS should be instructed to automatically adjust tax rates to keep economic inequality from getting worse, according to a new proposal outlined by Robert Shiller, a Yale University economics professor.

    “We have a serious problem, and it’s a problem of growing inequality,” Shiller said on December 6 at a Library of Congress discussion in Washington. Shiller developed the proposal with Len Burman, director of the Tax Policy Center, and the two are planning to write a book on the idea.

    “We need a standard or principle of income inequality. We don’t have one now,” he said. Inequality provides motivation to work harder and benefits hard work, he said, so “we do want some inequality, but we don’t have any clear idea about where we’re going and what is appropriate.”

    The standard, which Shiller calls “inequality indexation” of the tax system, would instruct the IRS to adjust brackets and rates whenever inequality worsened beyond an agreed-on level.

The question that leaps to mind is: why?

An interesting article that challenges society's implied value of equality. It could make your blood boil, or you might just agree. Discuss here.

[brendan]

http://www.cis.org.au/policy/autumn04/autumn04-1.htm

I would simply add that there is all the difference in the world between treating people equally and actually trying to make them equal.

It's not exactly clear why government force should be used to actually try to make people equal. In fact it sounds more like a dystopian nightmare to me.

[brendan]

http://www.american.com/archive/2007/may-june-magazine-contents/the-upside-of-income-inequality/
"Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavor­able development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human cap­ital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital....

For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same indi­viduals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect."


http://www.becker-posner-blog.com/archives/2006/04/why_rising_inco.html
Why Rising Income Inequality in the United States Should Be a Nonissue by Richard PosnerRichard Posner is currently a judge on the United States Court of Appeals for the Seventh Circuit and a lecturer at the University of Chicago Law School.

"As society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying inequality--which is very great--between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck. Public policies designed to reduce income inequality, such as highly progressive income taxation and middle-class subsidies, are likely to reduce the aggregate wealth of society...

The "problem" of income inequality should not be confused with the problem of poverty. The first, I have argued, is, at least in the United States at present, a pseudo-problem. Poverty is a genuine social problem, because by definition it signifies a lack of the resources necessary for a decent life. It is only tenuously if at all related to income inequality, since one could have zero poverty in a society in which the gap between the income of the worst-off members of society was huge--imagine if the poorest person in America earned $100,000 a year and the wealthiest $1 billion.

The more competitive and meritocratic a society, the more intractable the problem of poverty. The reason is that in such a society the poor tend to be people who are not productive because they simply do not have the abilities that are in demand by employers. It is unlikely that everybody (other than the severely disabled) can be trained up to a level at which there is a demand for his or her labor, and so there is likely to be an irreducible amount of poverty even in a wealthy society such as ours, unless we provide generous welfare benefits--which will discourage work."

What about equality of happiness?
http://www.nytimes.com/2007/01/25/business/25scene.html?ex=1327381200&en=47c55edd9529cae7&ei=5090&partner=rssuserland&emc=rss
"Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations. (See the symposium in Journal of Happiness Studies, December 2005.) American society offers good opportunities for people to be happy, even if not everyone becomes rich...
The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people.

What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated."

[BA22]

Aren't around 12 million americans below the poverty line?

Hardly seems an overstatement really

I'm not so sure inequality and poverty can be so easily seperated. If all people are equal and inequality really is a "pseudo problem", they why are only some poeple in poverty, and others not.

[Collin Li]

People are not equal. People should be treated equally by the law, not treated unequally so that they are made to be equal.

[BA22]

Yes, but unregulated society would not be equal either, i realise that mot of the natrual world is "survival of the fittest", but even though our resources are scarce, we still have the means to ensure that those less fortunate have a means to exist. Call it inefficiency if you want, call minimum wage counter productive to the poor, but it is better than doing nothing and watching a noticeable proportion of our society attempt to compete and fail without the assistance they need. If laws effectively make people unequal in attempt to make them equal, then so be it. Some of these people may lack intiative and be ultimately undesrving of this treatment, but many are not, and despite government intervention, must still rely on the goodness and charity of others to survive. Whilst i have reservations on the idea that this is a growing problem, given that historically inequality has been much worse, these are still people, they can't help themselves, and few other individuals will help them. This might be unsubstantiated emotional rhetoric, but i don't care.

[Collin Li]

call minimum wage counter productive to the poor, but it is better than doing nothing and watching a noticeable proportion of our society attempt to compete and fail without the assistance they need. If laws effectively make people unequal in attempt to make them equal, then so be it.

This is what I call ruthless compassion. This is like how Mike Huckabee said that the Americans have to stay in the Iraq War for honour, rather than for any particular goal. We cannot afford to continue propping up these government interventions to save face, or to pander to the people to appear 'compassionate.' We need to educate the people and let them know that these policies aren't working to help the poor. The poor people are hurting, and it's because the government is getting in their way.

Some of these people may lack intiative and be ultimately undesrving of this treatment, but many are not, and despite government intervention, must still rely on the goodness and charity of others to survive.

Well why don't we leave it up to the goodness and charity of others? If we leave the market free, we would both agree that the pure economic output of the nation would be boosted. You agree that government intervention causes inefficiency. If we had a larger economic pie, there would be more to go around. Inequality is only tenuously linked to poverty, poverty would probably decrease while inequality is increasing, but the final outcome is that there is more wealth and less poverty, and thus there is a better ability of voluntary charity to meet the needs of the needy.

[Eriny]

Well, other than 'compassion'...

Pure meritocracy is incoherent because, without redistri-bution, one generation's suc-cessful individuals would become the next generation's embedded caste, hoarding the wealth they had accumulated. Social justice demands that high incomes and large concentrations of wealth be spread more widely, in order to recognise the contribution made by all sections of the community to building the nation's wealth.

http://www.newstatesman.com/200506270022

There is a study (I can't seem to find the actual document, so my source is wiki, lol). Anyway, it said that there is an ideal level of income redistribution in order to have the best possible level of economic growth. When the gini coefficient is high, it negatively impacts growth due to "incentive traps, erosion of social cohesion, social conflicts, [and] uncertain property rights", but if it's too low then that's bad too because of "incentive traps, free-riding, labour shirking, [and] high supervision costs".

Also, 'equality' isn't really what this is about, it's 'equity'. They're different.

[Collin Li]

The term I prefer is equality: http://en.wikipedia.org/wiki/Economic_inequality
I avoid equity because it is often associated with finance, but here is the economic meaning: http://en.wikipedia.org/wiki/Equity_%28economics%29

The empirical evidence for this Gini coefficient relationship is particularly strong in the socialist European countries, but it is not so in the United States, where they have a much freer market. This is to be expected, because if there is a free-market that has sustained under a representative democracy, then it means that people are less averse to competition, and there is a smaller degree of flirting with the politics of envy. Meanwhile, in the countries that have redistributionist policy, it is less acceptable to have a large degree of economic inequality, and thus in those regions, such factors such as "social cohesion" may cause a decrease in economic output.

It is short-sighted for societies to think that relative income is more important than absolute real income (relative to the value of money). This macroeconomic problem would cease in the long-run, as society's values change over time and realise that severing ties with society is only at your own cost (disincentive). Thus, there would be no relationship between social cohesion and inequality (or lack of redistribution) as long as redistribution was gradually phased out.

[brendan]

minimum wage counter productive to the poor, but it is better than doing nothing

Wait a minute. If the objective is to assist the poor, how can it be that doing something that is counter-productive is better than doing nothing. If by definition it is counter-productive, then you would be better off not doing anything! If I was poor man, and you were doing things with the intention of helping me, but all you did was make me worse off each time, then safe to say that i would probably tell you to piss off.

If laws effectively make people unequal in attempt to make them equal, then so be it.

If the goal was to actually try to make people equal through the use of government force, then how can one say to be achieving that goal if one is to enact laws that do the complete opposite. It makes no sense.

There is nothing wrong with helping the poor, in fact, I would encourage it, and I would say that we ought to be compassionate to the poor, but on two conditions:
(1) you must do it using your own resources, your own money - not your neighbor's money extracted from him by force.
(2) do no harm - this sounds pretty obvious, but its pretty important in my view. Out of all things, harming the poor would have to be the lowest act, even if it is done with the best of intentions.

[Eriny]

I believe that it is short-sighted for societies to think that relative income is more important than absolute real income (relative to the value of money). I think that this macroeconomic problem would cease in the long-run, as society's values change over time, with the help of people like brendan and I who help to educate on the merits of a free society. As someone who is concerned with individual liberty, I prioritise the defence of freedom over the defence of maximum outcomes. Although microeconomic theory has always supported the freedom fighter in showing that there are maximum outcomes associated with a free society, even if this were not the case (as it can be with some empirical studies) I would still be in defence of individual liberty.

I do not believe in a need for some wise men in some bureaucracy to tinker with our economy in order to maximise it's growth rate. We should ultimately be seeking a free society first, rather than setting our eyes on maximum economic output. It only helps our cause that microeconomics projects that a free society will naturally lead to the maximum possible economic output. But as for the minor macroeconomic short-run reductions, what is the point of a fast growing economy if you are not free from the coercive arms of the government?

Freedom and liberty for whom though? It seems to me that it's just "freedom for those who can afford it", while the rich will have it, poorer people cannot obtain it because they don't have access to the resources necessary for them to be able to achieve what they want in life.

[brendan]

Freedom and liberty for whom though? It seems to me that it's just "freedom for those who can afford it", while the rich will have it, poorer people cannot obtain it because they don't have access to the resources necessary for them to be able to achieve what they want in life.

Would you agree that freedom is the ‘ability to do what I want’ or the power to satisfy our wishes?

[jamesdrv]

I agree with Eriny (perhaps because we both did VCE Economics...); equity in the distribution of income is what presides as the main focus of the government, not income equality. To seek equality would erode efficiency and dissolve all motivation, and so a natural level of inequality is perfectly acceptable. However, equity is important in ensuring access to basic goods and services and the opportunity for everyone to earn an income, thus avoiding absolute poverty (which Australia has done almost completely).

There are some issues where the efficiency of the free market should be rejected in favour of government intervention to ensure "social harmony". People are often born into poverty and without government intervention and support, have very little chance of improving their situation. To propose we should leave the re-distribution of wealth to "voluntary charity" seems entirely unrealistic and perhaps lacking any form of empathy for the less fortunate.

[brendan]

equity

What is it? Can you define it?

[Collin Li]

Freedom and liberty for whom though? It seems to me that it's just "freedom for those who can afford it", while the rich will have it, poorer people cannot obtain it because they don't have access to the resources necessary for them to be able to achieve what they want in life.

I have changed the focus of my post, as I have edited it and I did not realise it was active here. I will still respond though:

Freedom and liberty for individuals. Of course there will be people who cannot afford things, but there is no better alternative. People do not have an inherent right to whatever they want. They only have a right to work for it, and try to achieve it, through voluntary and mutual means. This is the only humanitarian solution. For the truly needy who may never be able to earn enough, they must rely on the goodwill and charity of others, and that is the nature of life.

The problem is that once we coerce the wealthy to fund the poor, it drives out the wealthy and it creates an incentive trap for the poor to remain reliant on other people's hard earned resources. This cannot be sustained without substantially affecting the economic output of the entire society, hence producing more poverty than before. There will always be poverty and no solution will completely rid of it, but a free society can help the economic pie expand to it's maximum, and so people will have more surpluses so that voluntary contributions will be more effective in reaching the poor.