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Inequality and consistency
I agree with Will Wilkinson's point that real social inequality has (mostly) been falling for some time in the United States. Today many an upper middle class person is plausibly happier than many a billionaire. Yet most self-made billionaires work very hard to get to that position, which creates a possible tension between cardinal and "observed choice" or "ordinal" metrics of welfare. Why work so hard for so little? Presumably many of these billionaires really want to "be there," even if they are only marginally better off or in some cases worse off.
Here are a few possible implications, not all of which are (or can be) true:
1. Higher marginal tax rates aren't very unjust, because lower incomes don't make wealthy people much less worse off.
2. Higher marginal tax rates are very unjust, because they undo results that the wealthy have worked very hard for and cared very deeply about.
3. Work is fun for the (self-made) wealthy, so higher marginal tax rates won't much discourage their work effort.
4. Greater wealth is barely worth it for the wealthy, so higher marginal tax rates will very much discourage their work effort.
Will's paper convinces me that the distinction between ordinal and cardinal measures of human welfare is more important than ever. Conservatives often cite #2 and #4, or in other words they have an ordinal normative theory and a cardinal predictive theory. Liberals are more likely to cite #1 and #3, giving them a cardinal normative theory and an ordinal predictive theory. In neither case is there an outright contradiction, but arguably both groups end up holding an odd mix of positions.
It would be interesting to take each group aside and present them with the abstract questions of cardinal vs. ordinal understandings of well-being, yet without explaining to them the possible policy implications of their answers.
Posted by Tyler Cowen on July 18, 2009 at 04:46 AM in Philosophy | Permalink
Comments
Prof Rizzo,
The fact that the poor today are richer than the rich of yesteryear doesn't change the fact that the rich of today are richer than the poor of today, that there is still inequality today, and that it is a problem in the minds of some if not all. So, the question remains: can the state do anything about it?
Posted by: DG Lesvic at Jul 18, 2009 7:27:03 PM
i think income inequality is a double edged sword. sure,
income equality has gone up in nominal terms, but the value of what there is to buy not reflect that difference.
vs
the income of high income workers outstrips their productive value
the problem is with the nominal. if high income workers were sufficiently productive, the market would provide things for them to purchase in line with that. the fact that it hasn't means that they aren't sufficiently productive.
Posted by: babar at Jul 18, 2009 7:42:22 PM
Anonymous,
Perhaps this will help.
Are you trying to say that markets do not tend toward equilibrium, or not always toward equilibrium, that they may tend toward disequilibrium?
Posted by: DG Lesvic at Jul 18, 2009 7:53:26 PM
DG Lesvic: Well, markets tend towards an equilibrium (mostly), but they don't tend towards some some magical unique equilibrium which is the best of all possible worlds, just one which is Pareto optimal given the options available. Policy to encourage increased level of equality, although yeah it can prevent the market from functioning properly, can also simply direct the market towards a different equilibrium which is also Pareto efficient but may be favorable in other ways.
And if you stick the original topic of whether taxes should be more or less progressive, all taxes distort the market to some extent, (although obviously some are more distortive than others so that's an oversimplification) it becomes an even safer proposition: we are going to be interfering with the market anyway, so trying to aspire towards a slightly more egalitarian economy while we're at it might be turning lemons into lemonade.
Posted by: Anonymous at Jul 18, 2009 11:43:41 PM
Maybe some commenters here have a better memory than I, but I don't remember too many people worrying about inequality per se even ten years ago. My prior belief is that as real poverty (i.e., deprivation) has all but been eradicated in the U.S., "let's reduce poverty" has lost traction and it is no longer sufficient for the current generation of progressives to hitch their wagon to that star. "Let's get worked up about intranational household inequality" was launched as a trial balloon. It took a while, but this idea has gained traction with the current generation of progressive thinkers, if not the wider body politic.
Posted by: mobile at Jul 19, 2009 12:11:49 AM
Anonymous,
I don't know what you mean by equilibriium, but this is what I mean by it:
Neither relative oversupplies nor undersupplies but equilibrium between the supply of and demand for everything.
The market either tends toward it or it doesn't.
In simple language, please, which is it?
Posted by: DG Lesvic at Jul 19, 2009 12:44:39 AM
DG--I think the relevant concept here is market failure. You seem to favor an extreme form of efficient markets theory (way more that how to invest). Markets are not always just.
Regarding the comment about my earlier post favoring estate taxes, I think the problem is actually collecting those taxes. Entrepeneurs like Gates and Buffett donate their estates largely to charity. I actually think their efforts are way better than the efforts of our government with always a certain amount of the donations going to graft and friends.
So we need income taxes and other taxes. In a fair way. A certain amount of redistribution is justified in a Rawlesian form of justice. Too much is theft.
Posted by: Ward at Jul 19, 2009 12:59:25 AM
Ward,
I appreciate your response, but am not completely satisfied with it.
I asked a simple question:
The market either tends toward equilibrium or it doesn't.
Which is it?
Posted by: DG Lesvic at Jul 19, 2009 1:30:03 AM
Maybe some commenters here have a better memory than I, but I don't remember too many people worrying about inequality per se even ten years ago.
I was just thinking it was because the "poor," even if "richer" than they were a generation ago, are also more vulnerable.
The two income trap, falling demand for low skill workers, higher retirement and medical costs ... it adds up.
Posted by: odograph at Jul 19, 2009 8:56:48 AM
DG Lesvic,
I think you're assuming that there's only one such equilibrium. There are many possible equilibriums as you define equilibrium. Don't forget about income effects: if some of your wealth is transferred to me, that will change your demand for a lot of things, and possibly your labor supply as well. I probably don't do the same job as you nor would I change my demand in an equal and opposite manner, so that income effect changes what the equilibrium is.
As to the larger question of taxes, I wonder how the debate got trapped into the question of marginal rates, as if increasing progressivity is the only way to increase redistribution (e.g. does a flat tax not redistribute? Or if I really really care about redistribtuion, would that overturn the "zero marginal tax at the top" result for bounded productivity distributions?).
Posted by: ryan yin at Jul 19, 2009 10:46:54 AM
Theory aside, what does data tell us?
Posted by: Ihsuan at Jul 19, 2009 11:26:37 AM
Ryan Yin,
You wrote,
"There are many possible equilibriums as you define equilibrium."
I agree completely. For the world is constantly changing, and equilibrium with it; but, at any one point in time, there would just be one. So, the question remains:
Does the market tend toward it or not?
Ihsuan,
You wrote,
"Theory aside, what does data tell us?"
I don't know. I'm an economist, not an historian.
Posted by: DG Lesvic at Jul 19, 2009 12:06:03 PM
Just so you good folks here won't fall behind those at Will Wilkinson's, where all this started, here was my latest post there and what all this is leading to:
Taking from the rich to give to the poor doesn’t just draw money but manpower downward upon the hierarchy of production and the social scale. For there must be a line between rich and poor, and, at that line, but one penny of income separating them. So, when you take it from the one to give to the other, you reverse their positions. The poor become rich and the rich poor, attracting manpower from the former occupations of the one to those of the other.
To restore the manpower allocations it had preferred, the market must bid the net wages of the formerly rich back up and of the formerly poor back down. But, anticipating increasing rates of redistribution, and compensating not just for the current but for the greater anticipated rates, it bids the net wages of the formerly rich to even higher levels and of the poor to even lower levels than before, for differentials greater than before.
Which is why taking from the rich to give to the poor can not reduce but only increase inequality and “social injustice.”
Posted by: DG Lesvic at Jul 19, 2009 5:59:47 PM
Wilkinson’s article is that old conservative versus liberal argument about whether to have more government or a lot more government. It leads to contradictions and confusion. Thus, Cowen’s remark about his list of “implications”: “…but arguably both groups end up holding an odd mix of positions.” Cowen frames these positions as “very unjust” versus “not very unjust.”
The degree of injustice of either of these positions is apparently dependent on the hedonic psychology of the imposers and beneficiaries of these taxes versus the hedonic psychology of the victims and payers. Since it is impossible to measure the hedonic psychology of the beneficiaries versus the victims it is impossible to know the degree of injustice. But it is possible to know whether it is just or unjust.
While I sympathize with Mario Rizzo who doesn’t believe “tax rates should have anything to do with hedonic psychology”, it might be useful to use them as a guide. It is after all generally agreed that we all have a right to the “pursuit of happiness” but no right to its achievement. If we had a right to its achievement we could force others to give us happiness. And forcing others to give us happiness is surely unjust.
Posted by: Brian at Jul 19, 2009 6:08:13 PM
DG Lesvic,
Think about a Edgeworth box example. There's a whole contract curve with an uncountably infinite number of equilibria. Which one the market "wants" is a function of initial endowments. Which one do you think is the only one?
Posted by: ryan yin at Jul 19, 2009 7:14:48 PM
ryan,
Though I don't understand all of the details of your question, I think I know what you're getting at.
As you see it, if I understand you correctly, there would be one equilibrium between the supply of and demand for potatoes, and another between the supply of and demand for carrots, and, so on, through the whole array of fungible goods on the market, with an "uncountably infinite number of equilibria."
But the maximum satisfaction of the consumers depends upon one equilibrium, between the supply of and demand for carrots and potatoes and everything else, such that no demand of theirs is left unsatisfied because the factors of production needed for it were allocated instead to the satisfaction of a lesser demand.
Posted by: DG Lesvic at Jul 19, 2009 9:46:38 PM
Though I don't understand all of the details of your question, I think I know what you're getting at.
You´re an ´economist´ and dont understand the details of an simple Edgeworth box?
Posted by: JSK at Jul 20, 2009 3:28:49 AM
It is my logic that is on trial here, not myself, and your attack upon me rather than the logic vindicates it.
My mother thanks you, my father thanks you, and my logic thanks you.
Posted by: DG Lesvic at Jul 20, 2009 5:44:49 AM
Trying to determine the extent to which high marginal tax rates reduce the happiness of high income earners seems a silly and subjective exercise. High marginal tax rates should be opposed for two reasons:
1. action by the majority in confiscating disproportionately from the minority is an outrageous assault on propoerty rights;
2. redistribution from the most productive to the least productive will reduce the economic welfare of the nation as a whole.
Posted by: John Dewey at Jul 20, 2009 6:10:22 AM
My sense is that at the top brackets, it's (almost) all about the ordinal, and at the bottom, it's all about the cardinal. As this sense has grown more certain, I have become more liberal.
People at the top (especially in the top 1%) use money in large part to keep score in a very competitive way. I don't think athletes, say tennis players, would work any less hard if you automatically deducted 30%, 40% or 50% of their points during a match - they're not trying for a specific cardinal target, they're trying to have more points than the other guy.
Posted by: Geoffrey at Jul 20, 2009 8:37:23 AM
John Dewey,
Redistribution does not just make the nation as whole poorer, but the poor as a whole poorer, and, as I explained above, can not reduce but only increase inequality and “social injustice.”
Geoffrey,
If a higher wage was due to competition for the services of a specially talented individual, you might tax him without losing his services. But the beneficiaries of the tax must still suffer the same competition for their privileged position, though not from the taxed individual himself. The consequence, though indirect, is the same. The poor will be poorer than before.
Posted by: DG Lesvic at Jul 20, 2009 8:58:55 AM
If one is concerned about happiness, one should realize that some portion of the rich may have a problem with obsessive wealth gathering. Just like we think that the kid with the ice cream cone is probably happy but the kid who downs a gallon of ice cream a day probably has a problem... or the guy who sneaks off with a cute gal for a quicky at lunch is a lucky SOB, but when we find out he does this four times a day always with different girls, he's perhaps a sad SOB... the person who is obsessed with getting enough money may have no level of money that would actually bring him happiness. For such a person (however useful for society they happen to be) the raise of the marginal tax rate would be a source of voiced complaint but have no actual effect on his happiness, as that end of the rainbow he's chasing is still just as far off.
If it turns out that there is a happiness gap, and if ultimately it is discovered that the middle class are -generally- happier than the very rich, it seems that the only fair thing to do is happiness redistribution. Middle class people should be required, whenever the opportunity arises, to tickle the rich.
Posted by: Nat G. at Jul 20, 2009 9:33:42 AM
Hmmm. Seems no one is willing to debate cardinal vs. ordinal in this thread.
Let me see if I get this right: Money/wealth is cardinal, but happiness/welfare is/seems to be ordinal. That's why money may have a falling marginal utility. 1000 $ buys less satisfaction to a billionaire, than to someone earning 20K a year.
Income, on the other hand, may have rising marginal costs. It takes an extraordinarily greater toll to earn, say 1 mio. USD a years, compared to earning 900.000 USD. Why then work hard to get rich(er)? Because people act as if welfare were cardinal?
I don't believe that is so. It's not 20 times harder to earn earn 1 mio. than to earn 100K. I'm not even sure it is 10 times as hard. In fact, I suspect the opposite. Above (and perhaps below) certain levels, it becomes easier to earn more. Bill Gates would have it so much easier earning a mio. more than I would.
This may to some degree explain why people keep on amassing wealth - even if the welfare it buys is truly marginal. It's just not so hard to do, so it doesn't matter much that the gold loses it's luster the more you get.
Where does that leave the taxation discussion? Well, if we're confining ourselves to the issues of justice and incentivizing (and forgetting about rights and efficiency, e.g.) I think we have a clear case FOR a progressive tax on the (super)wealthy:
1) It's no so hard to earn that extra dole - so the (ordinal) cost to the rich will be relatively smaller, so it will disincentivize less than for middle classes.
2) It's not worth as much either (in welfare terms). So they lose relatively little.
Fits nicely, doesn't it?
Posted by: Sebastian Franck at Jul 20, 2009 9:49:47 AM
I think that those who have indicated that the various statements might be more or less true for various individual are very much on the right track. And that the joker who thinks that it is unjust for the more intelligent to be allowed to achieve more wealth on the basis of their intelligence is dangerous.
I categorically reject the premise that inequity implies injustice, as I am not a Marxist. I am outraged that anyone would presume to seriously argue about the happiness effects of mess theft on people who have demonstrated their utility to society a hundred times over those doing the speculating. Be honest and stage your bloody revolution.
About the only informative observation in this thread has been just how pervasive tax distortions are. But even then, the attitude of, "Well, since we're going to distort the economy (do more damage than we planned) anyway, we might as well have fun (do even more)" is again outrageous. Since any tax is going to be distortive, we need to see forms which are less to become more distortive over time. Specifically, we need to focus on minimizing rent seeking.
Sales tax keeps looking better all the time, although I do wonder where the yacht business went.
Posted by: Right Wing-nut at Jul 20, 2009 9:50:33 AM
DG Lesvic: "If a higher wage was due to competition for the services of a specially talented individual, you might tax him without losing his services."
Of course, for many if not most high income earners, the income has resulted from an ability to attain higher than normal returns from invested capital - generally, the entreprenuer's capital. Those higher returns accrue to those persons most productive at providing goods and services consumers desire. When the nation confiscates more of the income of those most productive at using capital, the nation will realize a lower return on capital assets.
A healthy economy requires that capital remain in the hands of those most productive at employing that capital. Regardless of whether the capitalist or entrepreneur continues to work as hard as before, removing resources from him harms economic growth.
Posted by: John Dewey at Jul 20, 2009 9:59:53 AM
