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Brad DeLong on inequality
This is a good counterpoint to my column from last week. Excerpt:
Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial and justly wealthy. But only the first 5 percent of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it.
Thanks to Mike Mitchell for the pointer. (Addendum: Here is the full text.) Some of the rest is under the fold...
...On the global level, it is difficult to argue that inequality is one of the world's major political-economic problems. It is hard, at least for me, to envision alternative political arrangements or economic policies during the past 50 years that would have transferred any significant portion of the wealth of today's rich nations to today's poor nations. I can easily envision alternatives, such as Communist victories in post-World War II elections in Italy and France that would have impoverished nations now in the rich North.
I can also envision alternatives that would have enriched poor nations: Deng Xiaoping becoming China's leader in 1956 rather than 1976 would have done the job there. But alternatives that would have made the South richer at the price of reducing the wealth of the North would require a wholesale revolution in human psychology.
Nor should we worry a great deal that some people are richer than others. Some people work harder, apply their intelligence more skillfully or simply have been lucky enough to be in the right place at the right time. But I don't see how alternative political-economic arrangements could make individuals' relative wealth closely correspond to their relative moral or other merit. The problems that can be addressed are those of poverty and social insurance-of providing a safety net -- not of inequality.
But on the level of individual societies, I believe that inequality does loom as a serious political-economic problem. In the United States, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30 percent to 90 percent over the past three decades, as the economy's skill requirements have outstripped the educational system's ability to meet them. Because the required skills acquired through formal education have become relatively scarcer, the education premium has risen, underpinning a more uneven distribution of income and wealth.
Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: If anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot.
A greater effort to raise the average level of education in America would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find -- and thus worth more on the market.
Likewise, America's corporate CEOs and their near-peers earn 10 times more today than they did a generation ago. This is not because a CEO's work effort and negotiation and management skills are 10 times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value-added.
Similar patterns are found elsewhere. Within each country, the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations. It has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth, but only in an upward redistribution of wealth -- a successful right-wing class war.
Posted by Tyler Cowen on January 31, 2007 at 05:22 PM in Economics | Permalink
Comments
The whole argument against inequality seems to be based on the idea that wealth generation must be a zero-sum game. Yes, some societies have been designed to fund the rich at the expense of the poor by keeping them virtually enslaved, but by and large, they are the third-world countries that have failed to advance the wellbeing of their poorest people.
Posted by: Jonathan Biggar at Jan 31, 2007 5:43:19 PM
"Tainted money. Taint yours tait mine."
Posted by: huggy at Jan 31, 2007 5:51:07 PM
Likewise, America's corporate CEOs and their near-peers earn 10 times more today than they did a generation ago. This is not because a CEO's work effort and negotiation and management skills are 10 times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value-added.
Search and replace "CEO" with "actor" or "sports star". Equally true, but somehow less of an issue for liberasls....
Posted by: Jody at Jan 31, 2007 5:58:20 PM
I think the link you provided is wrong. The link you provided is not a good counterpoint.
Posted by: rick at Jan 31, 2007 6:04:38 PM
Err Jonathan Biggar... Can you read? Did you even TRY LOOKING UNDER THE FOLD?
Posted by: michael vassar at Jan 31, 2007 6:04:56 PM
So what does that come out to, about $1/head?
Whoopee....
Posted by: Sandy P at Jan 31, 2007 6:05:23 PM
"The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it."
I don't know. I am not a big supporter of various "psychological" reaasoning behind transforming money into happiness etc. But once we have started that, let's go further. Do you really value money that you get for nothing as much as money you have earned through your work, applying your abilities? One reason why I am against using such transfers excessively is because they make people lose sense of value, making them think that things are "for free". Such transfers are often used much less efficiently than money you have really earned. Then, although the marginal utility of wealth of a rich person is lower than the marginal utility of wealth of a person who receives the transfer, it may be that the total utility gain is negative, simply because the recipient of the transfer wastes the money inefficiently.
I know many such cases from personal experience in my country (surely, it is anecdotal evidence, but quite abundant). I don't know whether there has been any research on that in the U.S. If there is any, I would like to see it.
Posted by: pinus at Jan 31, 2007 6:11:27 PM
"The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it."
Anyone who does not understand, or refuses to acknowledge, the impossibility of interpersonal utility comparisons has no business calling himself an "economist."
Posted by: KipEsquire at Jan 31, 2007 6:12:44 PM
Does that include distributing it to, say, drug addicts or compulsive gamblers? And by the way, let's say there are around 300 million Americans and Bill Gates is worth 10 billion dollars. Do the math.
Posted by: LisaMarie at Jan 31, 2007 6:20:08 PM
My jaw drops. Clearly none of Gates, Allen, or Ballmer thinks that the billions they've already is all they need to reward them entrepreneurship, because they're all working mighty hard to earn more billions in new ventures rather than resting on the laurels of the wealth they've already created for society in consumer surplus. A Mark Cuban has enough money to toss a dozen fancy sportscars off of a cliff every day for the rest of his life just for the giggles of seeing the crash, yet is continuing to seek to create more wealth.
Is DeLong's argument that inventive people don't care about the money, and would continue to seek to innovate if a Beatles-Taxman 95% marginal tax rate were imposed on them? One then wonders why these innovations have happened in America rather than in North Korea or Cuba or Iran or Soviet Russia: is it just manifest destiny, or perhaps could it be that the incentives helped?
I have to hope that Brad DeLong really wrote something much more subtle and sophisticated, and that a Miami Herald editor misunderstood him and obliterated his point to create this monstrosity of an essay, because if an Ph.D.-trained economist so many standard deviations above the average citizen can suffer from such poor reasoning, I despair for any hope of intelligent public policy.
Posted by: Ted Frank at Jan 31, 2007 6:27:05 PM
Anyone who refuses to admit the mere possibility of interpersonal utility comparisons probably doesn't have all that much idea what they're talking about. (Or is using words in a way that makes the claim trivially true, but almost entirely uninteresting.)
Posted by: conchis at Jan 31, 2007 6:37:10 PM
Jonathan: there are a broad range of possible positions on the sources of inequality between the "zero-sum game" approach that you criticize, and the "actually existing inequalities are uniquely Pareto optimal" approach that you seem to favor. Even in non-slave economies, there are thousands of structural possibilities that would lead to different distributions of wealth and other important resources (for example, health care, education, and political power).
Posted by: argle at Jan 31, 2007 6:38:51 PM
I just love how he came up with an exact amount of wealth needed by Gates, et al. 5%, on the nose. If you leave then with 6%, they'll be fat and lazy. But God help you, if you take 96% of their wealth away, forget it. They might just leave and take their innovations somewhere else...
Posted by: Robb at Jan 31, 2007 6:39:41 PM
sorry, but the analysis is just inane. as noted above, various billionaires quite clearly are motivated by extra billions so they can become top of the heap, buy sillier things, whatever. but here's the thing -- we know from every failed communist experiment that people are motivated by what they can gain. we have NO evidence that after a certain amount of money or fame or etc. the incentive disappears or is negligible. instead, more seems to generate desire for more (few billionaires just take a powder and buy an island in fiji, though that may seem like the obvious move to most of us). if taking away most incentives doomed communist economies, why isn't it obvious that taking away/limiting some incentives will be similarly harmful at the margins?
i also find these discussions amusing because, if you're paying any attention, it's obvious how much more incredibly wealthy almost all americans are than (e.g.) 30 years ago, "despite" reagan's tax cuts, the boom in the number of billionaires, etc. correlation isn't causation, but how can you say that the PCs in near every house, the color TVs everywhere, the cell phones everyone has are not increasing wealth?
Posted by: dj superflat at Jan 31, 2007 6:40:58 PM
put another way, de long surely believes in margins, why not here?
Posted by: dj superflat at Jan 31, 2007 6:46:00 PM
I notice he does not mention Warren Buffett, the world's richest man, in his admonition to distribute wealth. Buffett had a knack for taking a company and making it more valuable, thus making the country richer. Then, he gives away wealth to where he decides it should go. I for one trust him with his money over the government.
DeLong states that an inequitable society is an unjust society. Hardly. Taking from one that earned it or gave it away as they pleased and giving to to those who did not is unjust.
Posted by: Wesley at Jan 31, 2007 6:53:02 PM
LisaMarie, how do you morally justify limiting the redistribution to the US? The poorest US resident is substaintially better off than the world's median.
-dk
Posted by: Dick King at Jan 31, 2007 7:09:25 PM
What does Delong need more than 50.000 dollars a year for that could POSSIBLY be more worth than buying food and
medecines for starving children in Africa?
So? What is he waiting for? Forcing him to give away everything above 50. grand will increase Gross World hapiness.
He will surely better off, especially if we constrain him from eating so much candy, judging from some picturess.
(Irony aside, one thing that confuses people like DeLong is that they have a limited view of consumption. Yes.
you can't consume even luxery items for much more than 1 billion, but you can consume influence, corporate building,
in Gate and Buffes case charity, in Soros case socialism)
Posted by: Tino at Jan 31, 2007 7:45:21 PM
Beyond a certain point, the only thing the next billion dollars is good for is status among peers: having more money than the next billionaire.
If it were possible to tax all the billionaires equally on a flat tax basis, then taxation would not destroy their incentive; all the billionaires are still on a level playing field, and still desire to have more status than each other.
The trouble is that the world has more than one tax regime, and because the billionaires want to be richer than each other, they will, insofar as it is possible, try to be in polities where they are taxed less.
Posted by: Cyrus at Jan 31, 2007 8:18:04 PM
Ok, suppose we took $30 billion from Bill Gates and gave it equally to every American. It would be about $100 to every man, woman, and child. Surely it does not stretch the imagination to think that most of the recipients would spend it frivolously. We would essentially be shifting the money from investing in Microsoft stock to spending it on trinkets. Or put another way, we would be shifting future national wealth to present national wealth. As far as I can figure, that is the only possible outcome.
Of course, DeLong doesn't suggest we do that, nor does he make any specific wealth transfer proposals. In fact, the beginning of his article seems to suggest that he understands that wealth transfers tend not to work well. Yet, he persists in making the case for it. Is it a reflex? Does he lie awake at night worrying that someone, somewhere is getting more than the "5%" that he or she deserves? Economists, of all people, should not persist in the alchemy of seeking utopia via wealth transfer. To believe that it can be done ignores the first truth of economics: the world does not work the way we wish it would.
Posted by: Allan Niemerg at Jan 31, 2007 8:29:42 PM
How about this way :
Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are wealthy and **justly brilliant**. But only the first 15 percent of their *brilliance* can be justified as essential for entrepreneurship and enterprise. The next 85 percent of their *brilliance* would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to use any portion of it.
Is Delong talking about wealth redistribution merely because its technically possible ?
Posted by: Sharath at Jan 31, 2007 8:47:52 PM
Did we all read the same text? DeLong is not calling for the redistribution of 95% of Gates's wealth. He's saying that we should improve the education system. There is probably an implicit transfer in that he would advocate progressive taxation do this.
I have no idea whether he has a good idea about to improve education. But he isn't proposing that transfer $100 from Bill Gates to each of us.
Posted by: Bill Gardner at Jan 31, 2007 8:48:44 PM
I'm all for improving the education system, but the constraint on educational improvement is not that Bill Gates or I get to keep too much of our own money.
Posted by: Ted at Jan 31, 2007 8:55:39 PM
Uh, yes, I read the whole post, including the "under the fold" part. There's no particular justification for DeLong's proposal to take income from Gates et al, so I have to presume it's the usual liberal one: that they don't deserve it for some reason, and others do.
I can't come up with any other reason for them believing this other than that they believe the rich stole it from the poor.
Posted by: Jonathan Biggar at Jan 31, 2007 9:22:55 PM
Search and replace "CEO" with "actor" or "sports star". Equally true, but somehow less of an issue for liberasls...
Well, it's much less of an issue for me, anyway. That's because I believe that the incomes of athletes and entertainers are vastly more market-based than those of CEO's. In other words, if someone wants to pay Julia Roberts $20 million to be in a movie that's because they believe she will generate at least that in profits, and the person paying the $20 million is the one whose money is at stake.
With CEO's the people setting the pay scale do not have so much of their money at stake. They are directors, which is to say they hold well-paid sinecures at the pleasure of the management whose salaries they set. Doesn't seem like the same thing at all.
Posted by: Bernard Yomtov at Jan 31, 2007 9:26:25 PM
