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Left-wingers should be the real supply-siders
This post is pure provocation, take it as you will.
The left often stresses how wealthy people have superior opportunities in life. They can save more, avoid debt, buy better educations, they have a better chance to start a company, and so on. Furthermore this is seen as unfair. Right?
To put the point in simple quantitative terms, equity yields an average of about seven percent, while holding debt claims yields a bit over one percent. Most poor people don't hold much equity, or for that matter they tend to take out debt rather than hold it. Smart rich people stock their portfolios with equity quite heavily. So on average rich people get richer. That is even more unfair. Right?
OK, to oversimplifiy the numbers just a bit, rich people earn -- at least -- six to seven times more on their money than do poor people. Many of the poor earn negative rates of return.
The contemporary left often seeks to remedy this unfairness, but in the meantime it is true true true. Right?
So for each extra dollar we leave with rich people, the economy earns six or seven times more in net terms -- at least -- than if that dollar had been given to the poor.
"The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point.
Now trickle-down effects from rich people are possibly quite slight. If a rich person creates a dollar's worth of investment, the consumer surplus and wage-boosting effects from those investments won't be more than 25 cents on the dollar, right? That means poor people get...
Well, it depends upon your assumptions. But how do you feel about this claim?
"I favor redistribution from the rich to the poor. It will make the poor better off for a few decades, but no more. After that point, the poor are worse off, forever, and by more each year."
Um...oops.
The more you emphasize the unfair differences between the capabilities of the rich and the poor, the more easily you fall into this trap. Redistribution is good for the poor only in the short run, and we haven't even considered the traditional negative incentive effects on the rich.
Supply-side economics doesn't have to be about assuming unrealistically large elasticities of substitution on the part of the wealthy. The real supply side story is about how different social classes use resources in different ways and to achieve different rates of return.
Right?
Posted by Tyler Cowen on April 2, 2007 at 06:34 AM in Economics | Permalink
Comments
Right!
Posted by: Ned at Apr 2, 2007 7:31:39 AM
""The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point."
If the rich people's economy has doubled six times, it's 64 times larger, isn't it?
Posted by: Mike Spenis at Apr 2, 2007 7:45:11 AM
Perhaps by receiving redistributed money, the poor will stop being poor? This may then change their behavior if their behavior is caused by being poor and not the other way around.
Posted by: Rob at Apr 2, 2007 7:55:17 AM
John Rawls would have to agree, though this would be a repugnant conclusion for him. In other words, the difference principle leads to...a 20% flat tax...and a MacArthur Genius Grant to Richard Epstein.
Posted by: Rue Des Quatre Vents at Apr 2, 2007 7:56:30 AM
I'll second what Mike Spenis said...
Doesn't this sort of thinking assume there is no mobility between classes? Isn't there at least some chance that dollars redistributed to a poor person will allow that person to climb out of poverty? And if so, they might eventually earn six to seven times more on all their money, not just on the dollar that was redistributed to them.
In other words, who says the relative numbers of rich and poor people are constant over time? Various folks might argue about the likelihood, but it seems at least theoretically possible that redistribution might have some effect on the number of poor in the future, and wouldn't it benefit the overall economy quite a bit to decrease the number of people earning a low or negative rate of return?
An economy in which everyone is earning returns of seven percent, pie-in-the-sky fantasy though it may be, is certainly a stronger economy than one in which only half the people are earning seven percent.
Posted by: judgement at Apr 2, 2007 7:58:31 AM
"I favor redistribution from the rich to the poor. It will make the poor better off for a few decades, but no more. After that point, the poor are worse off, forever, and by more each year."
Ah, but that's only if you assume that what makes the poor better off is the absolute level of wealth. Having recognized that focusing on absolute levels is a losing political strategy given economic growth over the long term, lefties now focus on relative levels and claim that status and 'positional goods' are really what matter to people. So the poor are made better off not when their incomes rise and they can afford more goods and services (which lefties tend refer to, with disdain, as 'fast food and cheap gadgets from China')-- no, they are made better off when the gap between themselves and the rich shrinks, regardless of how many iPods, cell phones, flat-screen TVs, restaurant meals, and vacations to Cancun the lower classes can afford. According to the left, the all important economic game is status, and it really is zero sum. The absolute level of wealth of a society (above a fairly low basic level) is unimportant.
Shorter version -- the Russian peasant in the joke who wishes for his neighbor's cow to die understands the importance of status and positional goods ;)
Posted by: Slocum at Apr 2, 2007 8:00:55 AM
The evidence suggests that the share of income accruing to the bottom quintile stays constant as the economy grows. See Dollar, D and A Kraay (2002) ‘Growth is good for the poor’, Journal of Economic Growth, vol 7, no 3, pp 195–225 at http://ideas.repec.org/p/wbk/wbrwps/2587.html. That makes your argument even stronger.
Posted by: Grumpy Old Economist at Apr 2, 2007 8:00:59 AM
I'm sure many would argue that once people have enough food and shelter, wealth is only important relative to your neighbors. The higher the difference in wealth within a population, the greater the unhappiness of the people. To the extent that this can be achieved without people feeling their freedoms are restricted by the state, I would probably agree.
Posted by: James at Apr 2, 2007 8:05:59 AM
I suspect the politics of envy - and the focus on relative levels of poverty by people outside a small group of left wing intellectuals - only gains appeal when both absolute inequality increases and when social mobility slows down.
Posted by: Chris Stiles at Apr 2, 2007 8:15:16 AM
"The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point.
The rich people's economy has gone up 64 times in 60 years, as Mike Spenis pointed out above.
The poor people's economy has doubled once in 60 years.
So the difference is 32 times the original difference, not 6 times or 64 times.
Posted by: billswift at Apr 2, 2007 8:20:19 AM
Judgement:
No one ever got out of poverty through governmental programs of wealth redistribution.
I have heard of plenty of folks who financed a business or education through debt - credit cards, loans, and the like, but it seems as if we would have heard of someone taking that welfare check and starting a business with it...
Posted by: anne at Apr 2, 2007 8:22:43 AM
Grumpy Old Economist, a single paper is hardly enough to conclude that "the evidence suggests" something.
The Dollar and Kraay paper is an international study, so the econometric result that growth is distribution-neutral is an average result for all the countries in the world, and not necessarily applicable to the US economy, especially since it's quite obvious that in real terms, growth in the US has not been distribution-neutral.
For a good critique and discussion of the D&K conclusion, try "Looking beyond Averages" by Martin Ravallion. He notes that growth in the income share of the poorest 20% usually depends on the starting level of inequality.
http://ideas.repec.org/p/wbk/wbrwps/2558.html
Posted by: Matthew Collin at Apr 2, 2007 8:44:01 AM
One response (and, incidentally, the one that Rawls would probably give) would focus on the political effects of such inequality. That is, how can one buttress the increased inequality from having a negative effect on other possible political reforms?
This is nothing like a full argument, but it strikes me as something like what a left response might be.
The bad thing about this site is the almost total lack of differences of opinion.
Posted by: ryan at Apr 2, 2007 8:49:35 AM
Anne:
"No one ever" is a pretty strong statement... I'm not saying it happens every day, just that it's possible.
Someone doesn't need to start a business with their welfare check - how about just buying their kids breakfast so the kids are able to pay attention in school and are less likely to drop out and become thugs?
There may well be more better ways to spend government money than on wealth redistribution, but that doesn't imply that every single dollar spent on welfare is a dollar down the drain.
Posted by: judgement at Apr 2, 2007 8:49:54 AM
The argument depends on the assumption that economic growth depends on the growth of tangable assents not on the health and educational level of people (workers). This is contrary to the evidence that wages (marginal productivity of labor) are very dependent on education, and that ill health lowers income. The non-rich spend a large fraction of their income on their childern who will be the work force in 20 years. This is also investment.
Posted by: joan at Apr 2, 2007 8:58:40 AM
One must make the assumption that simply acquiring more income (w/o earning it) changes behavior; many poor people habitually cling to behaviors that keep them poor. Suddenly rich by freakish chance - from lottery winnings on ill advised long-term ticket buying - the lucky poor find themselves poor again in a few short years.
Finally, draconian redistribution of wealth just delays the inevitable - the rich shelter their money and take it out of circulation protecting it from government confiscation. The poor benefit when the rich can freely make more money without being penalized. When was the last time you saw a poor man hire another poor man and pay him well? Rich people pay others to paint their homes, landscape their yards, in addition to other jobs that others do for themselves.
As a an elementary school teacher, I would gladly accept the rich getting richer so that they can buy bigger homes and pay more property tax to fund a higher than usual rise in my salary.
Posted by: Mike at Apr 2, 2007 9:01:34 AM
Well duh.
Posted by: josh at Apr 2, 2007 9:23:08 AM
When I see a bit of disingenuous economic slight-of-hand like this, I usually think to myself, "What would Prof. Cowen say?"
In this case, I have to think, "What would Prof. Cowen say, if he were being sincere?"
I think he's being insincere because the logic of this argument leads to regressive taxation. And while Prof. Tabarrok may be comfortable with that conclusion, Prof. Cowen is on record as saying that ideal tax policy is at least slightly progressive.
I suspect that the real Prof. Cowen, not the provocateur who posted this, is skeptical that tax policy, at the current margin, can have a very large effect on growth. At the current margin, the growth rate is almost purely a function of technological advances, and that's something that tax policy cannot effect (again, at the current margin).
Posted by: The Other Brock at Apr 2, 2007 9:25:21 AM
There is also a right-wing argument for redistribution. Assume you are a right-winger who believes that greed is good and that making the rich richer is your #1 goal. Also assume that free markets, free trade, and low taxes are good for growth.
But assume also that you pay attention to history. You'll notice that income inequality frequently leads to the election of politicians committed not just to redistribution but to absurdly hamfisted and counterproductive ways of achieving redistribution. Not just farm subsidies and union rules, but nationalization of industries, trade protections for the least productive industries, wage and price control boards, and, in some countries, military coups. and that's not to mention that income inequality can lead to higher security costs for the rich by increasing crime and rioting.
A good, rich-people-loving right-winger will therefore support a sufficient level of redistribution to preserve popular support for property rights and limited government. Furthermore, most large US corporations understand this, and that is why they often raise wages to preempt the formation of unions and why they embrace affirmative action.
In other words, the welfare state is the price Europe pays for not being Communist. And Chavez and Morales are the price Latin America pays for excessively fast economic liberalization.
Posted by: DK at Apr 2, 2007 9:32:43 AM
Well, these are moral hand-wavy arguments, which are important to some degree, but the most important thing is whether the evidence backs Tyler up. I assume he didn't pull those numbers out of nowhere... but for example, the argument critically depends on how much income gains at the top trickle down.
Also, as someone else mentioned (rather derisively), the gap between rich and poor is also important. If an entire class of rich people can afford 1000x what poor people can, you may get a lack of interaction between rich and poor-- the poor people don't fit into the rich people's world. I think this lack of interaction is dangerous-- it undermines people's shared consciousness as Americans. On the other hand, encouraged interaction of some kind (like, heavily incentivize rich people to come in and help set up businesses or something) may directly address the problem in ways that income redistribution only does indirectly.
I would prefer it if more rich people felt that they had a moral obligation to help poor people improve their economic and overall well-being. This could be something as simple as volunteer work, or something more like management consulting for the corner shops.
To me, a really stratified economy yields a more stratified society, which is a bad thing. This is true even if in the counterfactual (income redist), the poor have less absolute income.
Posted by: mk at Apr 2, 2007 9:40:03 AM
So let me see if I get this right, you are claiming that the past few years where the top few percentile of income get virtually all the gains and the great bulk of the middle class experience stagnating real incomes is the optimal economic outcome. While an era like the 1960s when everyone, including the wealthy and the middle class both experienced rapid real economic gains is a suboptimal economic environment.
That sounds about like I would expect from someone who always claims that anything that improve the returns to labor always makes the working poor worse off.
According to the WSJ even the top officials in the Republican party are coming to the realization that this is poor policy.
Posted by: spencer at Apr 2, 2007 10:04:12 AM
Does this take into account that the "trickle down" doesn't just apply to income? Rich people's buying power provides new valuable goods and services, which I guess is benefit in the form of consumer surplus. If the rich people's economy cures cancer, a poor person benefits almost exactly as much as the rich.
If I were a poor person, even if my pay never increased in real terms, I'd be happy that rich people were investing and making new technology available. (That assumes, of course, that the rate of inflation used for the calculation didn't take all this into account.)
Posted by: Phil at Apr 2, 2007 10:13:48 AM
Does anyone believe in redistribution of wealth, as a pure goal, anymore? I'm not a left-winger, but I think that stuff went out with the Berlin wall.
I think the more interesting arguments, the ones I've had sympathy with as a conservative, revolve around giving everyone a fair start in life, and an adequate safety net along the way.
We want (I think!) good enough public education (&etc.) to ensure mobility, and to prevent rigid wealth stratification.
We don't want one's ending lot in life to have been a birth-lottery from the beginning.
Posted by: odograph at Apr 2, 2007 10:14:53 AM
"I would prefer it if more rich people felt that they had a moral obligation to help poor people improve their economic and overall well-being. This could be something as simple as volunteer work, or something more like management consulting for the corner shops."
Unfortunately, I feel this is easier said than done. I just see vast social discrepancies and misunderstandings impeding any good intentions of the rich trying to help the poor. I mean, who likes to feel like they are being patronized? This idea of moral superiority over the poor will only intensify the social division between the wealthy and the poor. No one likes to be helped by someone who feels that they are better than thou and ergo, going to, out of their gracious heart, help you out. I am not saying that is how the rich feel (well at least all of them) but that maybe, just maybe, that is how the poor will take this “moral obligation to help poor people.”
Posted by: Brooke at Apr 2, 2007 10:17:25 AM
I'm sincerely confused. Is this post a late April Fools joke? When people hold debt the returns *to them* are only 1% on average, but the debt that they hold is necessarily invested by someone. There is no reason to expect the returns to the economy from holding debt to exceed those from holding equity. Your proposal would result in more money flowing into equity from debt, an equity bubble, increased equity volatility in the long term, and potentially the eventual elimination of the equity premium, nothing more.
Posted by: michael vassar at Apr 2, 2007 10:22:30 AM
